1. What is the role of the Public Company Accounting Oversight Board?
2. What roles are played by the American Institute of Certified Public Accountants for its members?
3. Describe the relations among international auditing standards, AICPA auditing standards, and PCAOB auditing standards.
DISCUSSION QUESTIONS AND PROBLEMS
1-16 (OBJECTIVE 1-5) The list below indicates various audit, attestation, and other engagements involving auditors.
1. A report on the effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes–Oxley Act.
2. An examination report on whether a company’s statement of greenhouse gas emissions is presented in conformity with standards issued by the World Business Council for Sustainable Development and the World Resources Institute.
3. An auditor’s report on whether the financial statements are fairly presented in accordance with International Financial Reporting Standards.
4. An engagement to help a company structure a merger transaction to minimize the taxes of the combined entities.
5. A report stating whether the company has complied with restrictive covenants related to officer compensation and payment of dividends contained in a bank loan agreement.
6. A report on the effectiveness of internal controls at a company that provides payroll processing for other companies.
7. A review report that provides limited assurance about whether financial statements are fairly stated in accordance with U.S. GAAP.
8. An evaluation of the voting process and certification of the outcome for Rolling Stone Magazine’s “Greatest Singer of All Time” poll.
9. A report indicating whether a governmental entity has complied with certain government regulations.
10. A report about management’s assertion on the effectiveness of controls over the availability, reliability, integrity, and maintainability of its accounting information system.
11. An evaluation of the effectiveness of key measures used to assess an entity’s success in achieving specific targets linked to an entity’s strategic plan and vision.
a. Explain the relationships among audit services, attestation services, and other assurance and nonassurance services provided by CPAs.
b. For each of the services listed above, indicate the type of service from the list that follows.
(1) An audit of historical financial statements
(2) An attestation service other than an audit service
(3) An assurance or nonassurance service that is not an attestation service
1-15 (OBJECTIVES 1-5, 1-6) The following questions deal with assurance services and types of audits. Choose the best response.
a. Which of the following is considered an assurance engagement?
(1) Bookkeeping
(2) Preparation
(3) Compilation
(4) Audit
b. Which of the following engagements is most likely to be considered an operational audit?
(1) The auditor determines whether the organization is following provisions of laws and regulations.
(3) The auditor evaluates the organization’s efficiency in processing payments.
(4) The auditor assists the client in preparation of financial statements.
c. In a financial statement audit, the auditor obtains a reasonable level of assurance about whether the financial statements are free of material misstatement in order to express an opinion. In order to obtain reasonable assurance, the auditor must
(1) have prior experience in the industry in which the audit client operates.
(2) examine all documents available that support the financial statements.
(3) obtain sufficient audit evidence.
(4) test controls around significant transaction cycles.
MULTIPLE CHOICE QUESTIONS FROM CPA EXAMINATIONS
1-13 (OBJECTIVES 1-1, 1-3, 1-5) The following questions deal with audits by CPA firms.
Choose the best response.
a. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
(1) The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.
(2) It is management’s responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements.
(3) It is difficult to prepare financial statements that fairly present a company’s financial position, operations, and cash flows without the expertise of an independent auditor.
(4) It is a customary courtesy that all stockholders of a company receive an independent report on management’s stewardship of the affairs of the business.
(1) A consulting service engagement to provide computer-processing advice to a client
(2) The preparation of financial statements from a client’s financial records
(3) An income tax engagement to prepare federal and state tax returns
(4) An engagement to report on compliance with statutory requirements
c. Which of the following attributes is likely to be unique to the audit work of CPAs as compared to the work performed by practitioners of other professions?
(1) Independence
(2) Competence
(3) Due professional care
(4) Complex body of knowledge
1-14 (OBJECTIVES 1-6, 1-7) The following questions deal with types of audits and auditors.
Choose the best response.
a. Operational audits generally have been conducted by internal auditors and governmental audit agencies but may be performed by certified public accountants. A primary purpose of an operational audit is to provide
(1) a means of assurance that internal accounting controls are functioning as planned.
(2) the results of internal examinations of financial and accounting matters to a company’s top-level management.
(3) a measure of management performance in meeting organizational goals.
(4) aid to the independent auditor who is conducting the audit of the financial statements.
b. Which of the following best describes the operational audit?
(1) It requires the constant review by internal auditors of the administrative controls as they relate to the operations of the company.
(2) It concentrates on implementing financial and accounting control in a newly organized company.
(3) It focuses on verifying the fair presentation of a company’s results of operations.
(4) It concentrates on seeking aspects of operations in which waste could be reduced by the introduction of controls.
c. Compliance auditing often extends beyond audits leading to the expression of opinions on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and
(1) adherence to specific rules or procedures.
(2) accuracy.
(3) evaluation.
(4) internal control.
REVIEW QUESTIONS
1-1 (OBJECTIVE 1-1) What are the information and established criteria for the audit of Jones Company’s tax return by an internal revenue agent? What are they for the audit of Jones Company’s financial statements by a CPA firm?
1-2 (OBJECTIVE 1-2) In the conduct of audits of financial statements, it would be a serious breach of responsibility if the auditor did not thoroughly understand accounting. However, many competent accountants do not have an understanding of the auditing process. What causes this difference?
1-3 (OBJECTIVE 1-3) Discuss changes in accounting and business operations over the last decade that have increased the need for independent audits.
1-4 (OBJECTIVE 1-3) Distinguish among the following three factors impacting a loan interest rate: risk-free interest rate, business risk, and information risk. Which one or ones does the auditor reduce by performing an audit?
1-5 (OBJECTIVE 1-4) Identify the three main ways information risk can be reduced. What are the advantages and disadvantages of each?
1-6 (OBJECTIVE 1-4) Explain how the increased use of fair value accounting might increase information risk.
1-7 (OBJECTIVE 1-5) Explain audit services, attestation services, and assurance services, and give examples of each.
1-8 (OBJECTIVE 1-5) Why might an organization seek the assurance of a CPA about information presented in the organization’s corporate sustainability report?
1-9 (OBJECTIVES 1-1, 1-7) Describe the nature of the evidence the internal revenue agent will use in the audit of Jones Company’s tax return.
1-10 (OBJECTIVES 1-6, 1-7) List five examples of specific operational audits that can be conducted by an internal auditor in a manufacturing company.
1-11 (OBJECTIVES 1-5, 1-6) What knowledge does the auditor need about the client’s business in an audit of historical financial statements? Explain how this knowledge may be useful in performing other assurance or consulting services for the client.
1-12 (OBJECTIVE 1-8) Identify the four parts of the Uniform CPA Examination.
1. What are the similarities and differences among the three main types of audits.
2. What are the major differences in the scope of the audit responsibilities for CPAs, GAO auditors, IRS agents, and internal auditors?
Differentiate the three main types of audits.
CPAs perform three primary types of audits, as illustrated with examples in Table 1-2:
1. Operational audit
2. Compliance audit
3. Financial statement audit
Describe assurance services and distinguish audit services from other assurance and non assurance services provided by CPAs.
LEARNING OBJECTIVES
After studying this chapter, you should be able to
1-1 Describe auditing.
1-2 Distinguish between auditing and accounting.
1-3 Explain the importance of auditing in reducing information risk.
1-4 List the causes of information risk, and explain how this risk can be reduced.
1-5 Describe assurance services and distinguish audit services from other assurance and non assurance services provided by CPAs.
1-6 Differentiate the three main types of audits.
1-7 Identify the primary types of auditors.
1-8 Describe the requirements for becoming a CPA.
Respond with 250 words
Instructions:
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