Chapter 1 - MC, P, R

R1.1: What does assurance mean in financial reporting context? Who are the three parties relevant to an assurance engagement?

An independent professional provides service to improve or verify the quality of the financial or nonfinancial information from the company involved in the audit. The three parties involved in an Audit are the auditor (or prativitioner), the users (investors, creditors, and regulators), and the company being audited.

2. What is the difference between reasonable assurance and absolute assurance?

Reasonable assurance is what auditors provide when they express their opinion in their report. Auditors provide reasonable assurance also because of the limitation of time and cost. If auditors were to provide absolute assurance they would be certifying that the target of their audit is correct. For example if it was a financial statement audit that was being conducted, then the Auditor would be declaring that the statements were true, and 100% correct.

4. What factors should Ron consider when selecting an accounting firm to complete the McLellan's Shoes audit?

Since McLellan's Shoes is a small private business Ron could go to a local CPA to have them perform the audit, but since Chip Master's is a larger corporation it might be in Ron's best interest to have a larger regional firm in his state perform the audit.

R1.8: Compare and contrast the functions of a state board of accountancy and of NASBA.

State board of accountancy members are also members of NASBA, the state board of accountancy would determining if you meet CPA license requirements and then issuing your licenses. To sit for the CPA exam you go through NASBA's website, and NASBA serves as a support for the members of the state board of accountancy; providing educational and ethical development for each other. While the state board of accountancy provides guidance to future and current CPA's.

R1.2: An assurance engagement involves evaluation or measurement of subject matter against criteria. What criteria are used in a financial statement audit?

When conducting an audit the objective is to ensure that the information provided is fairly accommodating an applicable financial reporting framework. This applicable financial reporting framework is the criteria that the subject matter (information) is being evaluated against. Examples of the framework include Generally Accepted Accounting Principles (GAAP), and International Financial Reporting Standards (IFRS).

Which of the following organizations issues auditing standards for the audits of public companies? a. PCAOB. b. SEC. c. ASB. d. COSO.

a. PCAOB.

An assurance service that determines whether the entity has conformed with regulations, rules or processes is a (an): a. compliance audit. b. financial statement audit. c. internal audit. d. operational audit.

a. compliance audit.

Management is responsible for which of the following? a. Preparing financial statements in accordance with the appropriate auditing standards. b. Designing, implementing, and maintaining internal control relevant to the preparation of the financial statements. c. Using professional skepticism in the preparation of the financial statements. d. Issuing an opinion on whether the financial statements are presented fairly in accordance with the appropriate financial reporting framework.

b. Designing, implementing, and maintaining internal control relevant to the preparation of the financial statements.

Operational (performance) audits are useful because they: a. include a comprehensive audit. b. are concerned with the economy, efficiency, and effectiveness of an organization's activities. c. involve gathering evidence to determine whether the entity under review has followed the rules, policies, procedures, laws, or regulations with which they must conform. d. ensure companies pay appropriate taxes.

b. are concerned with the economy, efficiency, and effectiveness of an organization's activities.

Auditors of publicly traded companies are required to perform a(an) _______ for their clients. a. compliance audit b. integrated audit c. internal audit d. operational audit

b. integrated audit

The audit expectation gap occurs when: a. auditors perform their duties appropriately and satisfy users' demands. b. user beliefs do not align with what professional standards and regulations expect of auditors. c. inspections of audits ensure that auditing standards have been applied correctly and the standards are at the level that satisfy users' demands. d. the public is well educated about auditing.

b. user beliefs do not align with what professional standards and regulations expect of auditors.

What is the appropriate date for an audit report? a. The date the auditors were hired. b. The date of the balance sheet. c. The conclusion of the gathering of evidence for the audit. d. The date required by regulators.

c. The conclusion of the gathering of evidence for the audit.

Which of the following is not a characteristic of an assurance service? a. The engagement is conducted by an independent professional. b. The service lends credibility to information. c. The subject matter is limited to financial information. d. The service is useful for decision makers.

c. The subject matter is limited to financial information.

All of the following are reasons why users would demand an audit of financial statements except: a. complexity. b. remoteness. c. cost. d. reliability.

c. cost.

The function of internal audit is determined by: a. the external auditor. b. the IIA. c. those charged with governance and management. b. the government.

c. those charged with governance and management.

Auditors can only provide reasonable assurance that the financial statements are presented fairly because: a. sampling techniques are used to gather evidence. b. some items in the financial statements are subjective. c. an audit must be completed in a reasonable amount of time. d. All of these answer choices are correct.

d. All of these answer choices are correct.

The role of COSO is to: a. establish financial accounting and reporting standards. b. establish auditing standards for private companies. c. prepare and grade the CPA exam. d. provide guidance in the area of internal control and risk management.

d. provide guidance in the area of internal control and risk management.

R1.10: Discuss the similarities and differences in the auditor's reports for a public company client and a private company client.

For a private company audits of financial statements and internal controls for financial recording are not required, but if conducted the auditor should follow statements of auditing standards set by the audition standards board. For a public company it is required to have annual audits of both financial statements and internal controls, and they are typically done at the same time which is called an integrated audit. For an audit conducted for a private company the accounting firm that the auditor works with has to be registered with the PCAOB and follow the auditing standards. The audit reports differ as well, with the public report the auditor is required to go into more detail about the separate responsibilities and the audit opinion of the ICFR. In the private report the auditor simplifies the duties within separate paragraphs, and within the managers paragraph they explain the ICFR since the private company is not required to have this audit. Within both the private and public company audits it is expected that the audits follow a sort of framework, and the overall goal is to improve the credibility and reliability of the financial statements and internal control.

3. Why would Chip ask that Ron have the financial statements for McLellan's Shoes audited rather than reviewed?

Having statements audited can give Chip Master's the reasonable assurance that they needs when making their decision on whether to buy McLellan's Shoe's. Audits provide independent credibility to financial statements that owners would not be able to provide. Since Ron is involved in a private business, it would also provide assurance that the financial statements are prepared correctly since these statements can be complex to someone without the proper knowledge and background.

R1.7: Describe the relationship between SEC and PCAOB.

In regards to audits they both have a mission to protect investors, while the SEC expands their mission to keep markets fair and efficient, and assist in increasing owned capital within companies. The SEC first required financial statements to be audited, later it was then required for the statements to be audited annually, and in 2002 the SEC passed the SOX Act that created the PCAOB to oversee public audits. PCAOB increased the credibility and reliability of financial statements by requiring that the audit work be reviewed for proper procedure when following auditing standards.

R1.5: Why would investors in a company demand an audit of financial statements?

Investors are likely looking for the ability of the company to pay dividends, and look at their own possible return of investment. Within the conceptual framework for financial reporting it is assumed that businesses are a going concern unless stated otherwise; investors are likely to be making sure that the business will be a going concern for the foreseeable future.

1. What are the main differences between a financial statement audit, a compliance audit, and an operational audit?

The main difference between these audits is what is being audited. A financial statement audit is an audit of the financial statements and giving the user reasonable assurance that the statements have no material misstatement by comparing them to established criteria like GAAP. A compliance audit is an audit to ensure that the person or company under review is following policies and laws. An operational audit reviews the operational activities of a company and their effectiveness.

R1.6: Compare and contrast the responsibilities of preparers and auditors regarding a financial statement audit.

The preparers (managers) are responsible to construct the financial statements while following the applicable financial reporting framework, while the auditors are responsible to follow the auditing standards while conducting an audit. Managers are also responsible for designing and implementing the internal control, and they need to provide the auditors any records that are considered relevant to complete the audit. The Auditors need to have an attitude of professional skepticism and judgement; meaning they need to be able to support their opinion with independent evidence, and decide when they have enough evidence to support their opinion.