Tutorial (2)
Chapter 2: The Audit Standards’ Setting Process
Review Questions:
1) Distinguish between auditing standards and generally accepted accounting principles
Auditing standards represent the combination of the four principles which are:
1. Purpose of an audit.
2. Responsibilities.
3. Performance.
4. Reporting.
Generally accepted accounting principles are specific rules for accounting for transactions occurring in a business enterprise.
2) List the four major types of services CPAs perform.
a) Audit and assurance services.
b) Accounting and bookkeeping services.
c) Tax services.
d) Management consulting services.
Multiple Choice Questions:
1. You have been engaged to audit the financial statements of a U.S. public company. Which of the following statements is correct?
a)
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The auditor is not responsible for detecting fraud that does not lead to a material misstatement.
Therefore, the auditor performs auditing procedures to obtain reasonable assurance about whether the statements are presented fairly.
d) Given the CPA firm is auditing financial statements. Why would they need to understand anything about the clients' business?
A thorough understanding of the client’s business is critical to assessing the risk of material misstatements in the financial statements when planning the audit.
Each entity faces several risks unique to the nature of its business and industry: The types of operations, the extent of regulation, how the organization obtains capital to fund its business model.
e) What does the auditor do in an audit other than verify the mathematical accuracy of the numbers in the financial statements?
The auditor is responsible for obtaining sufficient appropriate audit evidence about whether the financial statements are free of material misstatements. In addition to understanding whether the amounts reported in the financial statements are mathematically
To begin the audit, a review of previous 2 years of financial statements, provided by current or previous auditors for any unusual business transactions relating to revenue.
The auditor must remember that all information collected during the audit needs to be sufficient enough to further the audit process. The information must not only possess the two qualities, relevance and reliability, but it should also test various assertions. For instance, in the audit of Walmart, the auditor should make an attempt to acquire information such as financial statements from the company’s bank, as opposed to acquiring the statements from Walmart’s management. Taking such crucial information from Walmart’s management will put the reliability of that information into question. It is possible that management may manipulate the financial statements, so that they are more appealing to the public and investors. Management may do things
Also he may conduct bank reconciliations on pertinent accounts to make sure no discrepancies or misstatements are found. The auditor should also perform vertical and horizontal analysis for the income statements and balance sheets by the use of ratios.
Compare the primary auditor objectives in auditing historical financial statements to auditing internal controls over financial reporting. Identify at least two (2) objectives that are the most significant in reducing the risk of reporting errors or misstatements in financial statements. Provide a rationale for your response.
Preliminary analysis to understand the client‘s business and risk - Understanding the auditee’s business, environment, and risks
Evaluating the Reasonableness of the Accounting Estimates, and Determining Misstatements: the auditor shall evaluate, based on the audit evidence, whether the accounting estimates in the financial statements are either
A review and an audit report are both a form of an attestation engagement. A Review, however, is less in scope so it provides a moderate level of assurance on the financial statements. It is considered a “sniff” of an audit, which comparatively provides reasonable assurance that no material misstatements occurred. Since a review deals with a limited scope, it does not provide the basis for expressing an opinion on the presentation of the
2. Auditors are required to consider evidence obtained and accumulated throughout the audit and make an overall evaluation as to whether substantial doubt exists with respect to the ability of the client
The auditor’s responsibility is not to evaluate a client’s business model but to have a sufficient understanding of the entity. An auditor needs a sound and comprehensive understanding of the client’s business and industry to develop valid expectations about financial-statement assertions.
B) I think the auditors should have equal responsibility for detecting material misstatements due to error and fraud. It’s their job to make sure the financial statements are as accurate as possible. Although it may be hard to check all the information from a company it’s the responsibility of the auditor to sign off that everything is in check.
The auditor must obtain an understanding of the entity and its environment, including internal controls, so that they can identify and assess the risks of material misstatement on financial statements due to fraud or error and design and perform further audit procedures.
The purpose of an audit is to enhance of confidence in the financial statements. An auditors opinion validates this purpose.
The auditor’s responsibilities are to audit annual financial statements and internal controls over financial reporting, and reports from the 10-Q quarterly reports. The auditor must also advice on new accounting pronouncements, and consolidating financial statements. (Intel Proxy Statement 2011, 48)
An important function of the accounting field is to provide external users of financial statements with assurance that the financial information being presented is both reliable and accurate. This basic function of accounting is so important that there is an entire field of experts, called auditors, dedicated to assuring its proper performance. Throughout history there have been many instances in which the basic equilibrium between an institution and current/potential investor has been threatened due to a lack of accountability and trust between the two parties. This issue has been the catalyst for many discussions regarding the proper procedures a firm should follow in order to provide
A company prepares financial statement to provide information about its financial position and performance. This information is in turn used by a wide range of stakeholders (such as investors, banks, customers, suppliers etc) in making economic decisions with respect to respective economic interest in the company. Typically, in terms of ownership by investment in shares of the company, shareholders though own the company but do not manage it. Therefore, the shareholder and other such stakeholders to get comfort in taking sound decision need independent assurance from the auditors that the financial statements reflect true and fair view of the company affairs in all material respects. Hence, in order to enhance the level of