Auditing Ch. 2

Discuss why the GAAS and the SAS are consid- ered minimum standards of performance for auditors.

The GAAS are 10 generally accepted auditing standards issued by the ASB. The PCAOB adopted these standards in 2003 and requires that auditors uphold them. The ASB also issued SAS (Statements on Auditing Standards) which together with GAAS make up the minimum standards of performance for auditors. These rules create a standard that auditors must live up to and help ensure audit quality and reliability.

Which type of audit and auditor best fit the following scenario: Evaluate the policies and procedures of the Food and Drug Administration in terms of bringing new drugs to market.

operational or compliance; government

Which type of audit and auditor best fit the following scenario: Evaluate the feasibility of forecasted rental income for a planned low-income public housing project.

operational or compliance; government, external or internal

Which type of audit and auditor best fit the following scenario: Evaluate a company's computer services department in terms of the efficient and effective use of corporate resources.

operational; internal

List the three categories of GAAS.

1. General Standards 2. Standards of Field Work 3. Standards of Reporting

The Public Company Accounting Oversight Board a. Is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies. b. Is a quasi-governmental organization that has legal authority to set accounting standards for public companies. c. Is a quasi-governmental organization that has a policy to ignore public comment and input in the process of setting auditing standards. d. Is a quasi-governmental organization that is independent of the SEC in setting

A

Which of the following is not a part of the role of internal auditors? a. Assisting the external auditors. b. Providing reports on the reliability of financial statements to investors and creditors. c. Consulting activities. d. Operational audits.

B

Which of the following is correct regarding the types of audits over which the ASB and the PCAOB, respectively, have standard-setting authority in the United States? a. ASB: Nonpublic company audits, PCAOB: Nonpublic company audits b. ASB: Public company audits, PCAOB: Public company audits c. ASB: Nonpublic company audits, PCAOB: Public company audits d. ASB: Public company audits, PCAOB: Nonpublic company audits

C

Which of the following statements best describes management's and the exter- nal auditor's respective levels of responsibility for a public company's financial statements? a. Management and the external auditor share equal responsibility for the fairness of the entity's financial statements in accordance with GAAP. b. Neither management nor the external auditor has significant responsibility for the fairness of the entity's financial statements in accordance with GAAP. c. Management has the primary responsibility to ensure that the company's finan- cial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement. d. Management has the primary responsibility to ensure that the company's finan- cial statements are prepared in accordance with GAAP, and the auditor provides a guarantee that the statements are free of material misstatement.

C

Briefly discuss the key events that led up to the Sarbanes-Oxley Act of 2002 and the creation of the PCAOB.

In October 2001, Enron was investigated by the SEC. The investigation discovered that Enron's financial records for the past several years were very deceptive. Enron's auditor, Arthur Andersen was caught up in this scandal as they failed to identify the incorrect accounting. People speculated that they had not caught this due to the large amounts of money they were paid for their consulting services. This scandal caused Arthur Andersen to go under. Following this incident, several other scandals involving many other companies were uncovered. These scandals caused investors to lose their confidence in the stock market and caused a lack of faith in the entire accounting and audit system within the US. After these incidents, Congress passed the Sarbanes-Oxley Act and formed the PCAOB to restore confidence.

Compare and contrast management's responsibility for the entity's financial state- ments with the auditor's responsibilities for detecting errors and fraud in the finan- cial statements.

Management is responsible for maintaining effective internal control and for ensuring the fairness of the company's financial statements. It is management's job to make sure financial statements accurately represent the company's financial position. Auditors on the other hand are responsible to provide reasonable assurance with respect to errors, fraud and illegal acts. It is not the auditor's job to detect ALL errors, fraud and illegal acts. The two are similar in that they both play a key role in the company's financial well-being as management works to provide accurate information and auditors work to provide investors confidence.

Why is independence such an important standard for auditors? How does auditor independence relate to the agency relationship between owners and managers discussed in Chapter 1?

The agency relationship relates to the relationship between managers and owners. Owners don't want to simply trust managers. Thus, having an independent party review the financials provides more accountability and trust. If an auditors is not independent, parties will place little or no value on the audit. Thus independence is extremely important because it provides validity to the entire profession.

Which type of audit and auditor best fit the following scenario: Audit the partnership tax return of a real estate development company.

compliance; government

Which type of audit and auditor best fit the following scenario: Review the payment procedures of the accounts payable department for a large manufacturer.

audit of internal control, compliance, operational; internal or external

General Standards

deal with the auditor's qualifications and the quality of his/her work

Which type of audit and auditor best fit the following scenario: Examine the financial records of a division of a corporation to determine if any accounting irregularities have occurred.

financial statement audit, forensic; external, forensic, or internal auditor

Which type of audit and auditor best fit the following scenario: Determine the fair presentation of Ajax Chemical's balance sheet, income state- ment, and statement of cash flows.

financial statement audit; external auditor

Which type of audit and auditor best fit the following scenario: Investigate the possibility of payroll fraud in a labor union pension fund.

forensic; forensic

Standards of Reporting

relates to the actual audit report issued

Standards of Field Work

relates to the actual conduct of the audit