Sample Questions
Question 1
Easy
A review of financial statements under SSARS does *not* provide:
Solution
B is correct.
A review of a nonissuer's financial statements is designed to obtain limited assurance, not reasonable assurance. The accountant applies inquiry and analytical procedures, which are substantially less extensive than audit procedures, and reports a conclusion on whether any material modifications are needed rather than an opinion on the statements. Reasonable assurance is the audit standard and rests on risk assessment, tests of details and, when relied upon, tests of controls, so a review cannot supply it. The other three options each describe something a review does provide: limited assurance framed as a conclusion on material modifications, a basis of inquiry and analytical procedures, and an assurance level well below that of an audit. The governing guidance is AR-C 90, Review of Financial Statements.
A review of a nonissuer's financial statements is designed to obtain limited assurance, not reasonable assurance. The accountant applies inquiry and analytical procedures, which are substantially less extensive than audit procedures, and reports a conclusion on whether any material modifications are needed rather than an opinion on the statements. Reasonable assurance is the audit standard and rests on risk assessment, tests of details and, when relied upon, tests of controls, so a review cannot supply it. The other three options each describe something a review does provide: limited assurance framed as a conclusion on material modifications, a basis of inquiry and analytical procedures, and an assurance level well below that of an audit. The governing guidance is AR-C 90, Review of Financial Statements.
Question 2
Medium
In a firm's quality management risk assessment process, the firm is *least likely* to:
Solution
D is correct.
The risk assessment process belongs to the firm. The firm establishes the quality objectives specified by SQMS No. 1 and any additional objectives needed, identifies and assesses the quality risks that could adversely affect those objectives, and designs and implements responses. It does that with its own professional judgment, and it revisits the assessment when conditions change. Peer review is external, periodic, and after the fact; it evaluates the system that the firm has already designed and operated, and no standard conditions acceptance of a new engagement on Peer Review Board approval of the firm's risk assessment. The other three statements describe what the process does require. SQMS No. 1, A Firm's System of Quality Management.
The risk assessment process belongs to the firm. The firm establishes the quality objectives specified by SQMS No. 1 and any additional objectives needed, identifies and assesses the quality risks that could adversely affect those objectives, and designs and implements responses. It does that with its own professional judgment, and it revisits the assessment when conditions change. Peer review is external, periodic, and after the fact; it evaluates the system that the firm has already designed and operated, and no standard conditions acceptance of a new engagement on Peer Review Board approval of the firm's risk assessment. The other three statements describe what the process does require. SQMS No. 1, A Firm's System of Quality Management.
Question 3
Hard
An audit engagement letter refers to inherent audit limitations. Each of the following statements is consistent with that reference *except*:
Solution
C is correct. The reference to the inherent limitations of an audit explains the nature of the assurance the engagement can provide; it does not shift or waive the auditor's responsibility. An auditor who fails to plan and perform the engagement with due care in accordance with GAAS remains accountable for that failure, so the letter cannot relieve the auditor of liability for undetected errors. The other three statements describe genuine inherent limitations: the audit provides reasonable rather than absolute assurance, some material misstatements may remain undetected even in a properly performed audit, and audit evidence is generally persuasive rather than conclusive because of the nature of financial reporting, the nature of audit procedures, and the need to complete the audit within a reasonable time at a reasonable cost. AU-C 210, Terms of Engagement, includes these limitations among matters the auditor may explain in the engagement letter.
