Question

In a compilation engagement, _______.

A. An internal auditor reviews the client firm's filings with the Securities and Exchange Commission (SEC) for compliance and accuracy.
B. The CPA will assist management in the presentation of financial statements and will provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework.
C. The CPA will assist management in the presentation of financial statements but will not provide assurance as to whether the financial statements are presented fairly in accordance with the applicable financial reporting framework.
D. The current and prior auditors will jointly determine the fairness and conformity of a client's financial statements.

Answer 1

The correct answer for a CPA's role in a compilation engagement is Option C, where the CPA assists in presenting financial statements but provides no assurance on fairness. Compilation engagements and audits differ significantly in their scope and assurance level. The Lehman Brothers case exemplifies a failure in corporate governance to ensure accurate financial information.

Step-by-step explanation:

In a compilation engagement, the correct answer is C. The CPA will assist management in the presentation of financial statements but will not assure as to whether the financial statements are presented fairly by the applicable financial reporting framework.

Unlike an audit, a compilation does not involve obtaining an understanding of the entity's internal control or assessing fraud risk, nor does it entail testing accounting records through inspection, observation, confirmation, or examination of source documents.

The board of directors and auditing firm are key components of corporate governance, which is expected to ensure the integrity of financial reporting. However, as illustrated by the failure in corporate governance in the case of Lehman Brothers, these institutions can sometimes fall short of providing accurate financial information to investors.