ACC 538 Chapter 11
Which of the following is the responsibility of an audit committee?
all answers are correct
The Fourth Directive of the European Commission:
requires that the auditor's report include whether the financial statements present a "true and fair view."
What reason can be given for the importance of internal auditing in multinational corporations?
A growing demand for risk management skills possessed by internal auditors
What are the main differences between internal auditing and external auditing within an MNC?
A major difference between internal and external auditing is that they have different functions. The primary function of internal auditing is to examine, evaluate, and monitor the adequacy and effectiveness of the accounting and internal control system, whereas the primary function of external auditing is to express an opinion on the financial statements. Another difference is that the internal auditor is a person within the organization, whereas the external auditor is an independent person outside the organization. Finally, the role of the internal auditor is determined by management, and its scope and objective vary depending on the size and structure of the firm and the requirements of its management; none of these is true for the external auditor. Management does not determine the role of the external auditor. In some countries, such as Germany, the role of the external auditor is defined in the statute. In most countries, it is defined in professional standards. International Standards of Auditing issued by the IFAC also clearly define the role of auditing.
What is the meaning of the term audit expectation gap?
All answers are correct
In Germany, who do external auditors consider as their clients?
All of the above
What is the primary role of external auditing in multinational corporations?
Assuring that financial statement information is high quality
Describe the many aspects of the audit expectation gap.
Audit expectation gap arises mainly as a result of the difference between the expectations of the financial statement users and auditors themselves regarding the nature of auditors' responsibilities, for example, regarding the question of, "Are auditors responsible for detecting fraud?" There can be many aspects of audit expectation gap, such as normative gap, interpretative gap, information gap, and performance gap. The difference between what market participants believe an audit should be and the requirements according to the applicable audit standards, and laws and regulations can be called a normative Gap; the different interpretations of audit standards, laws and regulations among stakeholders and market participants with regard to the existing auditing requirements can be called interpretative gap; when stakeholders and market participants want more information than what is actually provided through the audit report, the situation can be described as information gap; and the difference between actual auditor performance and the requirements of the audit standards, laws and regulations, or the level of performance expected by users of financial statements, can be described as performance gap.
What is audit quality? What determines audit quality in a given country?
Audit quality is the probability that an error or irregularity is detected and reported. The audit quality in a given country is determined mainly by three factors: the level of competence of the auditor, the level of independence of the auditor, and the nature of the liability regime. The level of competence of the auditor in carrying out the work necessary to reach an opinion determines the detection probability. The level of independence of the auditor determines the reporting probability. In other words, the higher the level of independence, the greater the probability that a detected material error or irregularity will be reported. A strong liability regime will provide incentives for auditors to be independent and produce high quality audits.
Why should MNCs be concerned about auditing issues?
Auditing issues should be of concern to any firm that seeks funds from the capital market, because auditing improves the quality and reliability of the financial information made available to the market, and helps secure investor confidence. This is of particular importance to MNCs as they usually raise funds from capital markets in different countries. Hence, they have to be able to satisfy the needs of a variety of international investors. Failure to do so would jeopardize their efforts to succeed in an increasingly competitive global business environment. Further, since MNCs are involved in the audit of non-domestic subsidiary companies, international auditing issues are of interest to them.
Which of the following is a strategy adopted internationally to limit the auditor's liability?
Changing the ownership structure of audit firms
If an auditor breaks a contractual obligation, such as failing to complete an audit within the time frame specified in the engagement letter, what kind of liability does the auditor face?
Civil liability
What term is used to describe the relationships between a company's management, its board, shareholders, and other stakeholders that create a structure through which the objectives of the company are set, attained, and monitored?
Corporate governance
What is the link between auditing and corporate governance?
Corporate governance encompasses the mechanisms related to the manner in which an organization is managed for its long-term success, including moral and ethical considerations. Auditing (both external and internal) can be regarded as a direct input towards implementation of corporate governance mechanisms, as it ensures the fairness of the information provided to the market.
Who is considered to be the client for external auditors in the United Kingdom?
Corporate shareholders
In what countries would one expect auditing standards to evolve based on the needs perceived by the auditing profession?
Countries that follow common law
Which of the following is NOT a factor influencing the probability that an auditor will detect an accounting error?
Financial reporting requirements
An auditor may be subject to criminal liability under which of the following situations?
He/she willingly participates in defrauding the company's stockholders.
What are some of the strategies adopted internationally to limit the auditor's liability?
In the U.K., changing the ownership structure of an auditing firm from partnership to a limited liability company is used as a strategy for limiting the auditor's liability. Further, U.K. auditors often include disclaimers of liability in their audit opinions to protect themselves from unintended liability. In the U.S., limited liability partnerships are often used to protect the personal wealth of "innocent" partners from legal action. Changing the ownership structure of auditing firms is also used in Germany. Historically, the use of a statutory cap (an explicit limit on the auditor's maximum exposure to legal liability damages) has been common in Germany, mainly on the grounds that it would relieve the auditor of a major worry of the possibility of unlimited liability, and limit the premiums of liability insurance.
Which of the following groups is responsible for developing international auditing standards?
International Auditing and Assurance Standards Board (IAASB)
What are the main benefits of international harmonization of auditing standards?
International harmonization of auditing standards is expected to: Enhance the credibility of the information provided through corporate financial reports. Assure the international capital markets that one set of criteria has been applied consistently across the parent and subsidiary companies. Facilitate a more efficient and effective allocation of resources in international capital markets. Enable audit firms to increase the efficiency and effectiveness of the audit process globally.
Who may bring civil litigation against an auditor?
It depends on a country's laws governing auditor liability
What is an audit committee?
It is a subset of a corporate board of directors with oversight of the auditing function.
What is the position of the U.S. Securities and Exchange Commission (SEC) with respect to internal auditing?
It requires all companies, including foreign enterprises, listed on U.S. stock exchanges to have an internal audit function.
What does the Foreign Corrupt Practices Act have to do with accounting?
It requires that appropriate internal control systems be maintained by publicly traded U.S. companies.
Which of the following is a main function of internal auditing in multinational corporations?
Monitoring risks and assessing their effect on the company
In what area is external auditing consistent internationally?
None of the above
What are the main factors that complicate the issue of auditor independence?
One factor that complicates the issue of auditor independence is the auditor appointment process. In order to ensure independence from management, the auditor is expected to be appointed by the shareholders of the company. However, in reality, it is the management of the company that actually selects the auditor after negotiating fees and other arrangements, and the auditor's contractual arrangement is with the company management, not with the individual shareholders.
What reason has been given to explain the lack of well-developed auditing professions in less developed economies?
Since creditors and investors are not major players in these economies, there is little need for audited financial statements.
Why is litigation against external auditors, which is very common in the United States, virtually unknown in Japan?
Such litigation is inconsistent with Japanese values of interpersonal harmony.
What is the PCAOB? What is its role in audit regulation?
The Public Company Accounting Oversight Board (PCAOB) was established in 2002 as an important part of the efforts aimed at restoring investor confidence in the aftermath of the financial scandals involving major companies and accounting firms in the U.S. The PCAOB has been given extensive powers to tighten the regulation of many aspects of accounting and financial reporting. In the area of auditing the PCAOB has the power to: Establish or adopt auditing standards, quality control standards, and ethical rules in relation to the conduct of audits of public companies, Inspect audit firms, require co-operation with quality control reviews and disciplinary proceedings, Impose disciplinary sanctions against accounting firms and individual members, and Regulate both the U.S. and non-U.S. accounting firms that audit the financial statements of companies listed on the NYSE, by requiring them to become members.
Which of the following is NOT a key driver of audit quality based on the 2008 U.K. FRC publication "The Audit Quality Framework"?
The composition of a company's audit committee
What is the oversight role of an audit committee?
The oversight role of an audit committee involves ensuring that quality accounting policies, internal controls, and independent and objective outside auditors are in place to deter fraud, anticipate financial risks, and promote accurate, high quality, and timely disclosure of financial and other material information to the board, to the public markets, and to shareholders [Source: Blue Ribbon Committee (1999, p.20)]. In many Anglo-Saxon countries, it is commonly accepted that the external auditor works for and is accountable to the audit committee and board of directors. This is different in many Continental European countries, such as Germany and France, where the auditor works for the supervisory board.
What determines the primary role of external auditing in a particular country?
The primary role of external auditing in a particular country is determined mainly by the corporate governance structure of that country. For example, in the Anglo-Saxon countries, which have one board of directors, the auditor's primary role is to report to the shareholders of the company, whereas in some Continental European countries, which have two boards, a management board and a supervisory board, the auditor's primary role can be different. For example, the duties of the supervisory board as set out in the German Commercial Code cover supervision of the management of the company in all branches of its administration, which includes auditing the income statement, the balance sheet, and the application of profits suggested, by management. Accordingly, the German auditor's primary role historically has been to report to the supervisory board, not to the shareholders of the company.
Why is international harmonization of auditing standards important?
To assure international capital markets that auditing has been consistent across companies.
What is the role of internal auditing?
To provide assurance and consulting services to improve an organization's operations