Chapter 1

Question 1

1-2: Define assurance services. What are the two distinct types?

Answer 1

Professional services that enhance the quality of info, or its context, for decision making.

1) those that increase the reliability of information
2) those that involve putting information in a form or context that facilitates decision making

Question 2

1-3: What is the most common type of attest engagement? What is most frequently being “asserted” by mgmt on this type of engagement?

Answer 2

A financial statement audit is MOST COMMON attest engagement.
Overall, mgmt assertions, MOST FREQUENT is that the financial statements follow GAAP

Question 3

1-4: What is the principal use/significance of an audit report to a large corp w/ securities listed on a stock exchange?
to a small family-owned biz?

Answer 3

Large Corp: Stock Exchange Rules and the SEC require it to 1) provide an audit report w/ the annual financial statements furnished to its stockholders 2) engage the auditors to provide an opinion on its internal control. NEED to - maintain investor confidence in the financials and internal control, CPA report adds credibility.

Small Biz: elects to have an audit, to use for a bank loan.

Question 4

1-7: Contrast Business Risk and Info Risk. Which is most directly affected by auditors?

Answer 4

Biz Risk: the investment will be impaired b/c a company invested is unable to meet is financial obligations due to econ. conditions/poor mgmt decisions.
Info Risk: the info used to assess biz risk is NOT accurate.
Auditors can reduce info risk, but limited effect on biz risk.

Question 5

1-10: Part 1 - Compliance Audit

Answer 5

A compliance audit is an audit to determine whether financial reports or other assertions are in compliance with established criteria. The necessary ingredients are verifiable data and the existence of standards established by an authoritative body.

Question 6

1-10: Part 2 - Operational Audit

Answer 6

An operational audit, on the other hand, is a review of a department or other unit of a business or governmental organization to measure the effectiveness and efficiency of operations. Internal auditors often perform operational audits as do auditors employed by the Government Accountability Office (GAO) of the federal government.

Question 7

1-16: Part 1 - Securities Exchange Commission Role

Answer 7

The Securities and Exchange Commission (SEC) is an agency of the federal government and is responsible for administering a number of acts, including the Securities Act of 1933 and the Securities Exchange Act of 1934. In meeting this responsibility, the SEC reviews financial statements of companies offering securities for sale to the public. It is particularly concerned with requiring full disclosure of financial information and with preventing misrepresentation. Through the Public Company Accounting Oversight Board, the SEC now oversees public accounting firms that audit public companies. Included in this oversight process includes development of auditing, independence, and quality control standards; inspection of performance; and enforcement of the standards.

Question 8

1-16: Part 2 - AICPA Role

Answer 8

The AICPA is the national organization of certified public accountants. It has long been a leader in accounting and auditing research, in publication of authoritative accounting and auditing pronouncements and studies, and in promoting high professional standards of practice.

Question 9

1-17: Other professional services offered by public accounting firms

Answer 9

other forms of attestation, tax work, consulting services, litigation support services, fraud investigation services, personal financial planning and accounting services. And Consulting Services

Question 10

1-26: Sarbanes-Oxley Act created the Public Accounting Oversight Board. Responsibilities?

Answer 10

oversee and discipline public accounting firms that audit public companies.

(1) Establishing or adopting auditing, quality control, and ethic standards,
(2) Registering public accounting firms,
(3) Performing inspections of the practices of registered firms,
(4) Conducting investigations and disciplinary proceedings of registered firms, and
(5) Sanctioning registered firms.

Question 11

1-28: a. what best describes the relationship btwn assurance services and attest services?

Answer 11

Both sets of standards require independence

Question 12

1-28:b. What has primary responsibility for the fiarness of the representations made in financial statements?

Answer 12

The Client’s mgmt responsible for what’s in the Financial Statements (independent auditors are concerned with GAAS)

Question 13

1-28: c. the most important benefit of having an annual audit by a public accounting firm is?

Answer 13

provide assurance to investors and other outsider that the financial statements arereliable

Question 14

1-28: d. Not a responsibility of the PCAOB

Answer 14

does not review financial reports filed with the SEC, but is possible

Question 15

1-28: e.which organization has the responsibility to perform inspections of auditors of public companies?

Answer 15

Public Company Accounting Oversight Board by Sarbanes-Oxley of 2002

Question 16

1-28: f. Gov’tal auditing, in addition to including audits of financial statements, ofthen includes audits of efficiency, effectiveness, and…?

Answer 16

Compliance

Question 17

1-28: g. in general, internal auditors’ independence will be greatest when they report directly to the…?

Answer 17

Audit committee of the board of directors, to ensure the auditor can act independently

Question 18

1-28: h. What did NOT precipitate the passage of the Sarbanes-Oxley Act of 2002 to regulate public accounting firms?

Answer 18

Ethical scandals at the AICPA

Question 19

1-28: i. what org. establishes acct standards for U.S. gov’t agencies?

Answer 19

Federal Accounting Standards Advisory Board

Question 20

1-28: j. forensic audits…?

Answer 20

are usually performed when fraud has been found or is suspected.

Question 21

1-28: k. What best describes the purpose of the auditors’ consideration of internal control in a financial statement audit for a nonpublic company?

Answer 21

to determine the nature, timing, and extent of audit testing

Question 22

1-28: l. an example of a compliance audit?

Answer 22

an audit of a company’s policies and procedures for adhering to environmental laws and regulations

Question 23

1-33: Agreed-upon procedures engagement

Answer 23

an attest engagement in which the CPAs agree to perform procedures for a specified party and issue a report that is restricted to use by that party

Question 24

1-33: Review

Answer 24

an engagement designed to express limited assurance relating to subject matter or an assertion

Question 25

1-33 Attest Engagement

Answer 25

an engagement in which the CPAs issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g. mgmt)

Question 26

1-33: Audit of financial statements

Answer 26

an examination designed to provide an opinion that is the CPA’s highest level of assurance that the financial statements follow GAAP, or another acceptable basis of acct

Question 27

1-33: Integrated audit

Answer 27

as required by the SO Act and the PCAOB, an audit that includes providing assurance on both the financial statements and internal control over financial reporting

Question 28

1-33: Assurance Services:

Answer 28

professional services that enhance the quality of info or its context, for decision makers

Question 29

1-33: Examination

Answer 29

an attest engagement designed to provide the highest level of assurance that CPAs provide on an assertion