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business
auditing

Questions and Answers of Auditing

In what ways does the court system serve as a major regulatory body for the public accounting profession? Does the court system have a role in setting either accounting or auditing standards? Explain.
Multiple Choice Questions1. In determining the primary responsibility of the external auditor for the audit of a company’s financial statements, the auditor owes primary allegiance to a. The
Multiple Choice Questions1. The GAO is responsible for all of the following except:a. Developing standards for audits of federal agencies.b. Developing standards for audits of state agencies.c.
It has been stated that auditing must be neutral because audited financial statements must serve the needs of a wide variety of users. If the auditor were to favor one group, such as existing
The Rasmus Company manufactures small gas engines for use on lawnmowers and other power equipment. Most of its manufacturing has historically been in the Midwest, but it has recently opened plants in
Quello Golf Distributors is a relatively small, privately-held golf distributing company handling several product lines including Ping, Callaway, and Taylor-Made in the Midwest. It sells directly to
Do you agree or disagree with the following statements? Explain your rationale.a. A primary purpose of an audit is to ensure that all fraud that might be significant to a user is detected and
It is stated in the chapter that understanding a client’s business is important to the conduct of an audit.Requireda. Explain how an understanding of a business and the business environment would
Assume an e-commerce company that sells to electronic consumers, e.g., Amazon.com, E-Toys, or eBay, wants to obtain assurance services from a CPA firm that:a. All goods are shipped in a timely
The internal audit profession has grown rapidly in the past decade and has developed its own certification program. Many companies are developing policies to recruit new personnel into internal audit
Briefly describe the roles and responsibilities of the following professional organizations in developing and maintaining auditing standards and monitoring the quality of the various auditing
You are aware that most of the first courses in auditing focus on public accounting rather than internal auditing. Yet your professor states that most of the concepts related to audit approach and
You and a colleague are carrying on a heated discussion. The colleague makes a number of statements about the public accounting profession that you believe are in error. Welcoming an opportunity for
Internal audits can generally be classified as (1) Operational audits, (2) Compliance audits, or (3) Financial audits.Requireda. For each of the following audit procedures, briefly indicate which of
Ramsay Mfg. Co. has an active internal audit department that has a major objective to ensure compliance with company policies and to identify ways in which an organization can improve its operational
In their review of the public accounting profession, Lou Harris and Associates warn that an audit report too often is viewed as a "certificate of health" for a company. The report states:The most
The large public accounting firms no longer provide consulting services for audit clients. However, many public accounting firms that do not audit public companies continue to provide such services
In a report to Congress entitled:"Superfund: A More Vigorous and Better Managed Enforcement Program Is Needed," the GAO made the following observations:Because cost recovery has been considered a low
Define the term "corporate governance" and identify the key parties involved in effective corporate governance.
Identify the parties that, at least in some part, failed to meet their corporate governance objectives in the past decade.
In what ways was the board of directors responsible for corporate governance failures?
In what ways was the auditing profession partially responsible for corporate governance failures?
What role did the use of stock options play in the failures of corporate governance?
Arthur Levitt criticizes companies for using "cookie jar reserves" to help manage earnings. What are "cookie jar reserves" and how might they be used to manage corporate earnings?
What was the Public Oversight Board's (POB) primary criticism of the audit profession?
What was the Sarbanes-Oxley Act designed to accomplish? What were the major factors that led Congress to develop the Sarbanes Oxley Act?
What is the PCAOB and what is its authority?
What studies were conducted by the GAO and SEC as part of the Sarbanes-Oxley Act? What were the general conclusions of their studies? What are the implications of their studies for the auditing
The Sarbanes-Oxley Act contains certification requirements of management. What are the certification requirements and what are the penalties for false certifications?
What requirements of the Sarbanes-Oxley Act are intended to strengthen the independence of the external auditor?
In which ways did Sarbanes-Oxley change oversight of the auditing profession? Distinguish between the audit firms that audit public companies and the audit firms that audit private companies.
What is whistle blowing? What are the whistle blowing provisions of the Sarbanes-Oxley Act?
A company issues financial statements. Whose statements are they: management's, the audit committee's, or the auditor's? Explain and discuss why the ownership issue is important.
What is an audit committee? What critical role does the audit committee play in corporate governance?
An audit committee should be composed of outside directors. Define "outside directors" within the context of an audit committee. How does the existence of an audit committee affect the auditor's
What oversight responsibilities does an audit committee have? Explain the difference between an "oversight responsibility" and a "primary responsibility." Illustrate using an example regarding the
Explain the difference between the audit committee's responsibilities regarding the external auditor and the audit committee's relationship to the internal audit and regulatory audit functions.
Are non-public companies, such as a small business, required to have audit committees that represent outside stakeholders such as banks or other lending institutions? Distinguish between small
What are the audit committee's responsibilities regarding financial reporting and internal control reporting?
Identify the specific items that must be communicated by the external auditor to the audit committee on every engagement.
What responsibility does the audit committee have regarding the provision of non-audit services to a company, its management, or members of its audit committee? Explain.
Why is the governance structure of an organization important to the external auditor? What are the implications to the auditor if a company has not made a commitment to good governance practices?
How would an auditor go about assessing the quality of an organization's corporate governance? In formulating your answer, consider the possibility that a company may have a good governance structure
What are the three major categories of audit standards? What are the purposes served by each category of the standards?
Explain the concept of "due professional care" and how it might be used in a court case regarding the conduct of an audit. How does an independent third party evaluate whether or not an auditor met
What are the major procedures an audit firm can implement to help ensure that audits are conducted in accordance with due professional care?
What is the independence standard? Why is it important that users perceive auditors to be independent? Can an auditor be independent in fact, but not in appearance? Explain.
What four objectives are the reporting standards designed to accomplish?
Identify the roles of each of the following parties in audit standard setting:• PCAOB• AICPA• GAO• International Auditing Standards Committee• Internal Auditing Standards Board
How does the development of an audit program for a client follow audit standards and the principles of good corporate governance?
What are the major planning steps that should be performed in developing an audit program?
Define the term "materiality" and describe how an auditor would go about determining materiality to be used in the planning of an audit of an organization's financial statements.
What is the relationship of audit procedures to assertions that are embodied in financial statement representations?
What procedures should an auditor use to determine that all items that are debited to a fixed asset account in the current year represent purchases of property that is now owned by the company and is
Multiple Choice Questions1. All of the following are parts of corporate governance except: a. Oversight of management by the board of directors.b. Established processes to provide accountability to
One component of good corporate governance is a code of ethics that has been developed for a company. For example, Enron had one of the most complete codes of ethics in corporate America.Requireda.
One of the criticisms of corporate America in the last decade has been that there was a failure in corporate governance.Requireda. Define the term "corporate governance" and identify the major
Public accounting serves an important role in corporate governance.Requireda. Describe the role that external auditing fills in promoting good corporate governance.b. In what ways might the public
In a major speech, Arthur Levitt, former chairman of the SEC, chided auditors for failures in four areas:• Allowing companies to use "cookie jar reserves" used by firms to manage earnings.•
The Sarbanes-Oxley Act of 2002 has been described as the most far-reaching legislation affecting business since the passage of the 1933 Securities Act.Requireda. Identify the portions of the
The Sarbanes-Oxley Act dramatically changes the responsibilities of top management.Requireda. Briefly indicate how Sarbanes-Oxley changes the responsibilities of top management.b. How has the
Audit committees are taking on added responsibilities after Sarbanes-Oxley.Requireda. Describe the changes in audit committee membership and duties that were mandated by the Sarbanes-Oxley Act of
Audit committees are mandatory for all public companies. The AICPA and IIA have endorsed the formation of audit committees (or their equivalent) for most organizations, including governmental
The development of the Public Company Accounting Oversight Board (PCAOB) was one of the most significant portions of the Sarbanes-Oxley Act of 2002.Requireda. What is the main rationale that led
The PCAOB has the authority to set audit standards for all audits of public companies. The AICPA continues to set audit standards for non-public companies through its auditing standards
Ray, the owner of a small company, asked Holmes, CPA, to conduct an audit of the company's records. Ray told Holmes that the audit must be completed in time to submit audited financial statements to
The ten generally accepted auditing standards (GAAS) provide the foundation for the conduct of audits.Requireda. Define the standard of "due professional care" and indicate how a court might decide
Materiality is an important audit concept because audits must be designed to detect "material" misstatements.Requireda. Define materiality and describe how it is used in both accounting and
Audits of financial statements are designed to test the correctness of account balances.Requireda. A construction company shows the following assets on its balance sheet• Construction equipment
It was stated that each account balance contains assertions about the nature of the item reflected on the financial statements.RequiredIdentify the accounting assertions that are contained in the
The AICPA has issued attestation standards in recognition that attestation services can be much broader than audits of an entity's financial statements. One type of an attestation is a "fairness
Audit committees have taken on much more responsibility in the past few years. However, it must also be remembered that an audit committee appointment is not a full-time appointment.Requireda.
A $6 billion privately-held consumer products company has approached you to help them implement an audit committee charter and to identify the elements needed to develop an effective audit
How is ethical behavior related to organizational success?
Why is it necessary to be a licensed CPA to perform an audit?
Why is independence considered the most important characteristic of an auditor?
What are the major threats to auditor independence? Explain why each item represents a threat to auditor independence.
What can a CPA firm do to manage the threats to auditor independence? Explain why each management approach should be effective and how it would be implemented.
What are the major principles that have guided the SEC's actions on auditor independence?
What are the prohibited services that a CPA or CPA firm cannot provide for a public company audit client?
Describe the principles that form the basis of the AICPA's Rules of Conduct.
Are there services that can be performed for non-public companies that cannot be performed for public companies? Explain.
Why might the profession allow some services to be performed for non-public clients that cannot be performed for public company clients?
How do the AICPA's and the SEC's independence rules on providing data processing and consulting services for an audit client differ?
What is meant by independence? (a) In fact and(b) In appearance? Give an example of an auditor being independent in fact but not in appearance.
Describe the difference between a direct financial interest and an indirect financial interest in an audit client.
Explain why the audit client might differ for a non-public company as compared to a public company?
Would independence be impaired, according to the AICPA, if a CPA:a. Obtained a home mortgage with a bank that later became an audit client while the mortgage was still in effect?b. Had been the audit
What role does the audit committee have in making judgments about auditor independence?
Under what circumstances is it appropriate for a CPA to disclose confidential information about a client?
Would a CPA violate the AICPA's code if he or she served a client both as its auditor and legal counsel? Explain your answer.
Under what circumstances is it appropriate for a CPA to:a. Provide services on a contingent fee basis?b. Accept a commission for referring a product or service to the client?c. Pay a referral fee to
How is the AICPA's code enforced?
Briefly describe the concepts and approaches underlying the utilitarian theory and the rights theory.
MULTIPLE CHOICE QUESTIONS1. Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their
Many professions have developed codes of conduct. The public accounting profession has developed detailed guidance in its Code.Requireda. What is the major purpose of the Codes of Conduct enacted by
Scene 1-You are the senior in charge of the audit of NOB Company. The CFO is pressuring you to complete the audit in two weeks. Some of the audit team members are new staff and have required a
The Sarbanes-Oxley Act mandates that the audit committee of the board of directors of public companies be directly responsible for the appointment, compensations, and oversight of the external
The following are situations in which auditors may find themselves.Requireda. What are the four guiding principles that have been developed by the SEC for auditor independence?b. Are the principles
For each of the following independent situations, indicate whether it is a violation of the AICPA's Rule of Conduct 101 on independence and explain your answer.a. Barnes is a partner in a CPA firm

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