Chapter 1—The Demand for Audit & Other Assurance Services

1) Why should I care about auditing?2)

3) Chapter 1—The Demand for Auditing and Assurance Services“I have no use for bodyguards, but I have very specific use for two highly trained certified public accountants.”- Elvis Presley

4) Definition of Auditing

5) Overview of Financial Statement Auditing

6) Accounting v. Auditing?

Accounting: Accounting is the recording, classifying, and summarizing of economic events for the purpose of providing financial information used in decision making.

Auditing: Auditing is determining whether recorded information properly reflects the economic events that occurred during the accounting period.

7) Which of the following is the primary distinction between auditors and accountants?a) Auditors are required to be CPAsb) Auditors have more in-depth knowledge of accounting than accountants in order

to verify or supervise their workc) Most accountants are CMAsd) All of the abovee) None of the above

8) User Demand for Reliable Information

Information Risk: o The risk (probability) that the information (mainly financial) disseminated by a

company will be materially false or misleading.o Users demand an independent third party assessment of the information

Causes: o More complexo More voluminous

o Demanded by remote userso Biases or motives 9) The primary purpose of auditing is to eliminate business risk?

TRUEFALSE

10) Solution?

11) Professional Skepticism

Professional skepticism: Auditor’s questioning, evaluative, attitude toward evidenceo Management’s assertions without sufficient corroboration.o Financial trends need investigationo Documents are checked for authenticity or alterationo Ask questions, get answers, then verify the answers.

A potential conflict of interest always exists between the auditor and the client.o Management wants to portray the company and its operations in the best

possible light.o Auditors want to portray the company and its operations fairly.

12) Because an audit in accordance with generally accepted auditing standards is influenced by the possibility of material misstatements, the auditor should conduct the audit with an attitude of:

a) Objective judgmentb) Conservative advocacyc) Professional responsiveness

d) Professional skepticism

13) Assurance Services

Assurance services are independent professional services that improve the quality of information, or its context, for decision makers.

Exampleso Consumer reportso Compliance with entertainment royalty agreementso CPA WebTrusto Process/System assessmento Quality control standards compliance

14) Attestation Engagements

An attestation engagement: A practitioner assesses and reports on “subject matter or an assertion about the subject matter that is the responsibility of another party.”

o Audit of financial statementso Audit of internal control over financial reporting o Reviews of financial statementso Attestation services on information technologyo Other attestation services

Some financial attestation engagements (other than audits)o Supplementary financial statisticso Pro forma financial informationo Financial forecasts and projections

Some non-financial attestation engagementso Compliance with contractual requirementso Effectiveness of internal control systemso Inventory quantities and locations

15) The Relationships Among Auditing, Attestation, and Assurance Engagements

16)

17) Which of the following would not be considered an assurance service?a) Mystery shopping reportsb) NBA draft lottery operations audit c) Audit of financial Statementsd) Tax servicese) Both a and bf) All of the above

18) Which of the following is considered an attestation engagement?a) Review of financial statementsb) Tax return preparationc) Audit of financial statementsd) Bookkeeping servicese) Only a and cf) All of the above (a-d)

19) Sarbanes-Oxley Act of 2002:

In response to several accounting related corporate scandals Congress passed the Sarbanes-Oxley Act

The Act’s major provisions include:o Requirement of CEO/CFO certification of financial statements (302)o Requirement of auditor examination of company internal controls (404)o Creation of the Public Company Accounting Oversight Board (PCAOB) to serve as

an auditing profession “watchdog.”o Prohibition of certain client services by firms conducting a client’s audit.

20) Sarbanes-Oxley: Management’s Responsibility For Financial Reporting

One of its most important provisions (Section 302) states that the key company officials must certify the financial statements. The company CEO and CFO must sign a statement indicating:

i. They have read the financial statements.ii. They are not aware of any false or misleading statements (or any key omitted

disclosures).iii. They believe that the financial statements present an accurate picture of the

company’s financial condition.

21) The Public Company Accounting Oversight Board (PCAOB) uses the term “internal control over financial reporting” to describe a process that does not include which of the following procedures?a) Procedures performed by the auditorb) Procedures that pertain to the maintenance of reasonably detailed records that

accurately and fairly reflect the transactions and disposition of the company’s assets

c) Procedures that provide reasonable assurance that company receipts and expenditures are made only in accordance with company management and direct authorization

d) Procedures that provide reasonable assurance regarding timely detection of unauthorized disposition of company assets

22) A CPA firm must do which of the following before it can participate in the preparation of a company registered with the Securities and Exchange Commission (SEC)?a) Join the SEC Practice Section of the AICPAb) Register with the Public Company Accounting Oversight Boardc) Register with the Financial Accounting Standards Boardd) Register with the SEC pursuant to Securities Exchange Act of 1934

23) Sarbanes-Oxley Section 302 sets forth rules regarding auditor independenceTRUE FALSE

24) Section 302 of the Sarbanes-Oxley Act require a company’s management to make quarterly certifications with respect to the company’s internal control over financial reporting. Which of the following are true with regard to these certifications?

I. The auditor should perform procedures to provide a high level of assurance that the controls are operating effectively.

II. If the auditor communicates to the appropriate level of management that the auditor believes that modification to the disclosures about changes in internal control over financial reporting are necessary for the certifications to be accurate, but management does not respond appropriately, the auditor should inform the audit committee

a) I onlyb) II only

c) Both I and IId) Neither I nor II

25) Types of Audits and Auditors i. Financial (External Auditors/CPAs):

Ensure that financial statements are in accordance with specified criteria.ii. Operational (Internal and Governmental Auditors)

Improve operational economyImprove operational efficiency

iii. Compliance (Internal and Governmental Auditors)Ensure compliance with company and/or govt. rules and regulationsMost audits are a combo of financial, operational, and compliance audits.

26) Fill-in-the-blankA ________ audit is conducted to determine whether the financial statements are stated in accordance with specified criteria.

27) Match the auditor with the type of audit

A. Internal Revenue Agent I. Operational auditB. Government Accountability Office Auditor II. Compliance audit

C. Independent Auditor III. Financial statement auditD. Internal Auditor

28) Become Certified! Education Examination Experience

29) The CPA Exam Is computerized

Consists of four parts: i. Auditing and attestation—4 hours

ii. Financial accounting and reporting—4 hoursiii. Regulation—3 hoursiv. Business environment—3 hours

Skill sets—research, communication, analysis, judgment and understanding