CPA Exam — AUDForming Conclusions and ReportingMedium
An auditor is performing an engagement to review the financial statements of a non-public entity. Which of the following procedures is typically performed during a review engagement?
- AObserving the physical inventory count at year-end.
- BConfirming accounts receivable by direct communication with customers.
- CInquiring of management about unusual or complex transactions.
- DPerforming tests of controls to evaluate the operating effectiveness of internal controls.
Show answer & explanationAnswer & explanation
Correct answer: C. Inquiring of management about unusual or complex transactions.
Review engagements primarily involve inquiry and analytical procedures. Inquiring of management about unusual or complex transactions is a standard procedure to obtain an understanding of the financial statements and identify potential misstatements.
Why the other options are wrong
- A. Observing inventory is an audit procedure, providing a high level of assurance on existence, not part of a review.
- B. Confirming accounts receivable is an audit procedure, providing a high level of assurance, not typically performed in a review.
- D. Tests of controls are audit procedures designed to evaluate internal control effectiveness, not routine for a review.
Review Engagement Procedures
Review engagements primarily consist of inquiry and analytical procedures to provide limited assurance on financial statements.
- Mainly inquiry and analytical procedures
- Less extensive than an audit
- Provides limited (negative) assurance
Memory trick: Reviews ASK and ANALYZE, but don't deeply TEST.