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Role of Public Accountant in American Economy Chapter 1
Terms in this set (34)
In late 2001 through 2002, the accounting profession faced a "crisis of credibility." Describe the events that led up to this crisis.
Define assurance services. What are tw0 distinct types?
What is the most common type of attest engagement? What is most frequently being "asserted by management on this type of engagement?
What is the principal use and sifnificance of an audit report to a large corporation with securities listed on a stock exchange? To a small family owned-enterprise?
Describe several business situations that would create a need for a report by an independent public accountant concerning the fairness of a companies financial statements.
Banks, factories, stores, non governmental and governmental companies, non profits...
Explain the following statement: One contribution of the independent auditor is to lend credibility to financial statements.
...Reliable accounting and financial reporting aid society in allocating resources in an efficient manner. The contribution of the independent auditor, guided and trained, to provide credibility to information for decision making by third parties. Audits provide organizations with more credible financial statements to allow users to have more assurance that those statements do not materially depart from GAAP.
The overall risk of the investment in a business includes both business risk and information risk.Which one is most directly affected by the auditors?
Information risk is mostly directly affected by the auditors...Information risk is the risk that the information used to assess business risk is not accurate. Information risk includes the possibility that the financial statements might contain material departures from GAAP.
Contrast the objectives of the auditing at the beginning of this century with the objectives of auditing today.
In the beginning of the century The primary objective was to detect errors and frauds, audits often included a study of all, or almost all, record transactions....
First half of the 20th century emphasis was placed on whether financial statements giva a full and fair picture of financial position, operating results, and changes in financial position.
Beginning in the 1960s, the detection of large-scale fraud assumed a larger role in the audit process.
In the late 1980s and early 1990s audited reports on compliance and internal control were required.
What does an operational audit attempt to measure? Does an operational audit involve more or fewer objective judgments than a compliance audit or an audit of financial statements? Explain. To whom is the report usually directed after a completion of an operational audit?
An operational audit is a study of a specific unit of an organization for the purpose of measuring its performance. Evaluations are made in terms of its effectiveness, that is, its success in meeting its stated goals and responsibilities and objectives are less than compliance audits or F.S. audits.. The operational audit tends to require more subjective judgment....The reports are usually directed to top management
Distinguish between a compliance audit and a operational audit.
A compliance audit measures the compliance of the organization with some established criteria (e.g. laws and regulations, or internal control policies and procedures)
An Operational Audit is an analysis of a department or other unit of a business or governmental organization to measure the effectiveness and efficiency of operations.
Is an independent status possible or desirable for internal auditors as compared with the independence of a public accounting firm? Explain.
Internal auditors should be independent of other department heads which makes it necessary to report only to the BOD or the company President or another high-level executive. They cannot be considered independent of the company because they are still employed by the company
Spacecraft, inc., is a large corporation that is audited regularly by a public accounting firm but also maintains an internal auditing staff. Explain briefly how the relationship of the public accounting firm to Spacecraft differs from the relationship of the internal audit staff to Spacecraft.
Internal auditors are not independent, they are employees of the company they work for. Public accounting firms must be independent in order to perform the attestation service.
Internal auditors focus is on internal control and/or operations efficiency. Public accounting firms are normally focused on the fair presentation of each item on the financial statements.
Describe briefly the function of the GAO.
General Accounting Office develops accounting standards for the U.S. government.
List two of the important contributions to auditing literature by the AICPA.
Statements on Auditing Standards
Statements on Standards for Attestation Engagements
What is meant by a peer review in public accounting?
A peer review involves a critical review of one public accounting firm's practices by another public accounting firm.
How does the role of the SEC differ from that of the AICPA?
The primary function of the SEC is to protect investors and the public by requiring full disclosure of financial information by companies offering securities for sale to the public. A second objective is to prevent misrepresentation, deceit, or other fraud in the sale of securities.
The AICPA roles are on
1. Establishing standards and rules to guide CPAs in their conduct of professional services.
2. Carrying on a program of research and publication.
3. Promoting continuing professional education.
4. Contributing to the profession's self-regulation.
Apart from auditing what other professional services are offered by public accounting firms?
Other types of professional services offered by public accounting firms:
Tax services - compliance and planning
Consulting Services - to improve the effectiveness and efficiency of their clients operations.
Accounting and Review Services
Litigation Support services - expert witnesses
Fraud Investigation Services
Personal Financial Planning
What are the advantages of organizing a public accounting firm as a partnership rather than a sole proprietorship?
When two or more CPAs join forces, the opportunity for specialization is increased, and the scope of services offered to clients may be expanded.
Providing an opportunity to become part owner of the business is an important factor in the public accounting firms ability to attract and retain competent personnel.
How does a professional corporation differ from a traditional corporation?
Professional corporations differ from traditional corporations in a number of respects.
All shareholders and directors of a professional corporation must be engaged in the practice of public accounting.
Share holders and directors of the professional corporation may be held personally liable for the corporation's actions, although they may choose to carry liability insurance to cover damages caused by negligent actions.
Public accounting firms are sometimes grouped into categories of local firms, regional firms, national firms, and international firms. Briefly explain the characteristics of each. Include in your answer the types of services stressed in each group.
See LO 8
Describe the various levels or positions of accounting personnel in a large public accounting firm.
See LO 8
List three of the more important responsibilities of a partner in a public accounting firm.
Partners on an engagement is ultimately responsible for adequate planning, supervision, and execution of the audit. They are also responsible for maintaining primary contacts with clients. An important aspect of partners' active participation in various business and civic organizations is the prestige and recognition that may come to their firms.
What is the International
auditing and Assurance Standards Board? What is the purpose of its pronouncements? Do these pronouncements establish standards that override a member nation's auditing standards?
The International Auditing and Assurance Standards Board establishes establish International standards on Auditing, International Standards on Quality control and standards for other assurance and related services. The pronouncements of these standards do not override the national auditing standards of its members. Rather they are meant to foster the development of consistent worldwide professional standards.
Which of best describes the relationship between assurance services and attest services?
Both attest and assurance services require independence.
Who has primary responsibility for the fairness of the representations made in financial statements?
The most important benefit of having an annual audit by a public accounting firm is to
provide assurance to investors and other outsiders that the financial statements are reliable
Does the PCAOB have the responsibility of reviewing financial reports filed with the SEC.
Which organization has the responsibility to perform inspections of auditors of public companies?
Governmental auditing, in addition to including audits of F.S., oten includes audits of efficiency, effectiveness, and:
In general, internal auditors' independence will be greatest when they report directly to the:
Audit committee of the board of directors
Did ethical scandals of the AICPA precipitate the passage of the Sarbanes-Oxley Act of 2002 to regulate public accounting firms?
What are forensic audits?
Forensic audits are usually performed in situations in which fraud has been found or suspected.
What best describes the purpose of the auditors' consideration of internal control in a financial statement audit for a nonpublic company?
To determine the nature, timing, and extent of audit testing
What is an example of a compliance audit?
An audit of a company's policies and procedures for adhering to environmental laws and regulations.