CPA Exam — AUDEthics, Professional Responsibilities, and General PrinciplesMedium
A CPA firm is engaged to perform a review of a non-issuer's financial statements. During the engagement, the firm discovers that a significant portion of the client's revenue is recognized based on management's subjective estimates without adequate supporting documentation or objective criteria. What is the most appropriate action for the CPA firm to take?
- ADisclose the issue in an explanatory paragraph, but still issue an unmodified review report.
- BWithdraw from the engagement due to the inability to obtain limited assurance.
- CRequest management to provide additional objective criteria or adjust the revenue recognition.
- DIssue a qualified review report, stating the lack of sufficient objective evidence for revenue.
Show answer & explanationAnswer & explanation
Correct answer: C. Request management to provide additional objective criteria or adjust the revenue recognition.
In a review engagement, the CPA seeks to obtain limited assurance. If significant accounting issues arise, the firm should first attempt to resolve them with management. Requesting additional information or adjustments is the appropriate initial step to try and obtain the necessary comfort.
Why the other options are wrong
- A. An unmodified report would be inappropriate if there's a significant unresolved issue affecting the financial statements.
- B. Withdrawal is a serious step and should only be considered if resolution with management is impossible and the firm cannot obtain limited assurance.
- D. Issuing a modified report is a last resort; the firm should first try to resolve the issue with management.
Review Engagement Procedures
A review engagement provides limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework.
- Primarily involves inquiry and analytical procedures.
- Less extensive than an audit.
- Requires the accountant to be independent.
Memory trick: When 'reviewed' facts are not quite clear, address them with management, my dear.