Review Questions
Review questions Guide 4
3.1 Explain why auditor´s reports are important to users of financial statements and why it is desirable to have standard wording.
An audit is defined as the examination of financial statements made in accordance with generally accepted auditing standards in force at the time they are made, so that the auditor's report is important to be certain in the company's financial statements.
3.3 What are the purposes of the opinion paragraph in the auditor´s report? Identify the most important information included in the opinion paragraph.
The final paragraph of the standard report contains the auditor's conclusions based on the results of the audit. This part of the report is so important that often the entire audit report is simply referred to as the auditor's opinion.
3.5 What four circumstances are required for a standard unmodified opinion audit report to be issued?
1. Title of the report.
The rules require that the report has a title and that it contains the word independent. For example, the appropriate titles would be "independent audit report," "independent auditor's report," or "independent accountant's opinion." The requirement that the title contains the word "independent" is intended to convey to users that the audit was impartial in all aspects.
2. Recipients of the audit report.
The report is usually aimed at the company, its shareholders or the board of directors. In recent years, it has become customary to direct it to the board of directors and the shareholders to indicate that the auditor is independent of the company.
3. Introductory paragraph.
The first paragraph of the report has three functions: First, it presents the simple statement that the CPC firm performed an audit that has the purpose of distinguishing between the report of the compilation or the review report. Second, it lists the fi nancial statements that were audited, including the dates of the balance sheet and the accounting periods of the statement of income and the statement of cash flows. In the report, the terms of the fi nancial statements must be identical to those used by the administration to refer to them, for which a report on the statements of both years is essential. Third, the introductory paragraph asserts that states are the responsibility of the administration, while that of the auditor is to express an opinion on the states based on the audit.
4. Paragraph of the scope.
The scope paragraph is an assertion of facts as to what the auditor did in the audit. First, this paragraph indicates that the auditor followed the auditing standards generally accepted in the United States.
3.7 Compare the wording in the standard unmodified opinion audit report for a nonpublic entity under AICPA auditing standards in Figure 3-1 (p-72) with the wording for a public company audit under PCAOB auditing standards in Figure 3-3 ( p.76). How are the reports similar? How are the different?
How are similar reports? The two reports have the following descriptions, Introduction of Paragraph Scope of application of the paragraph, Paragraph view
How are the different? The PCAOB report is limited, it does not have the title of the report, address of the report, responsibility of the management, responsibility of the auditor, signature and address of the firm, date in which the auditor obtained sufficient evidence.
3.9 Describe what is meant by reports involving the use of other auditors. What are the three options available to the primary auditor responsable for the opinion, and when should each be used?
1. Not mentioning it in the audit report:When no reference is made to the other auditor, a normal unqualified opinion is given, unless other circumstances require a deviation. This approach is followed on a regular basis when the other auditor audited an unimportant part of the reports, is known or closely supervised by the principal auditor, or the auditor has thoroughly analyzed the work of the first auditor. The other auditor is still responsible for his report and work in the case of a ligitio or an action of the SEC.
2. Mention in the report(report with modified wording): This type of report is called report or shared opinion. A shared report without qualifications is appropriate when it is little. It is practical to analyze the work of another auditor or when the part of the financial statements audited by another CPC is important in relation to the whole. An example of a shared report that should not be construed as a qualification is presented in Figure 3-6. Note that the report does not include a separate paragraph that refers to shared responsibility, nor in the introductory paragraph, but refers to the other auditor in the paragraphs on scope and opinion. Note also that the portions of the audited financial statements by the other auditor they can be stated as percentages or absolute amounts.
3. Respect in opinionA qualified opinion or denial, according to its importance, is decided if the auditor is not willing to assume any responsibility for the work of another auditor. The lead auditor may also decide that a qualification is required in the overall report if the other auditor included qualifications in his part of the audit. The opinions with reservations and the denials will be studied in a later section.
Review questions chaper 4
1) Distinguis betwen a vendor´s invoice and a vendor’s statement. Wich document shoul ideally be used as evidence in auditing acquisition transactions and which is best when verifying accounts payable balances. Why?
A vendor statement is nor as desirable as invoices for verify individual transactions becouse a statement includes only the total amount of transaction. The units acquired, Price, freight and other data are nor included. The best documento to verify is the vendor’s is superior for verifying accountants payable becouse it includes the ending balance.
2) one posible internal control for each of the six transaction related Audit objectives for cash disbursements. For each control, list a test of control to test its effectiveness.
1. Recorder cash disbursements are for godos and service actually recived: Segregation of duties betwen accounts payable and custody of signed checks.
2. Existing cash disbursement transactions are recorded: Checks are prenumbred and accounted for
3. Recorded cash disbursement transaction are accurate: Calculations and amounts are internally verified.
4. Cash disbursement transactions are correctly included in the accounts payable master file and are acorectly summarized: Accounts payable master file contents are internally verified
5. Cash disbursement transactions are correctly classified: Accountant classifications are internally verified.
6. Cash disbursement transactions are recorded on the correct dates: Dates are internally verified.
3) Evaluate the following statement by an auditor concerning tests of acquisition and cash disbursements: “in selecting the acquisitions and cash disbursements sample for testing, the best approach is to select a random month and test every transaction for the period.Using this approach enables me to thoroughly understand internal control becouse i have examined everything that happened during the period. As a parto f the monthly test, I also test the beginning and ending bank reconciliation and prepare a proof of cash for the month. At the completion of these tests i fell i can evaluate the effectiveness of internal control.
Auditors tyically perform the acquisitions and cash disbursements tests at the same time. For transaction selected for examination from the acquisition journal, the vendor’s invoice receiving report, and other acquisition documentation are examined at the same time as the related cancelled chack. Thus, the verification is donde efficiently without reducing the effectiveness of the tests.
Becouse of the importance of the tests of controls and substantive tests of transactions for acquisitions and cash disbursements, the use of atributes sampling common.
4) What are the similarites and differences in the objective of the folowing two procedures?
1. Select a random sample pf receiving reports and trace them to related vendor’s invoices and acquisition journal entries, comparing the vendror’s name, type of material and quantity acquired, and total amount of the acquisition.
2. Select a random sample of acquisition journal entries and trace them to related vendor’s invoices and receiving reports, comparing the vendor’s name, type of material and quantity acquired, and total amount of the acquisition
Autorizacion of payments:
· The signing of checks by an individual with proper authority
· Separation of responsabilities for sgning and performing the accounts payable function
· Careful examination of supporting documents by the checj signer at the time the check is signed , the check should be prenumbered to make it easier to account for all checks and printed on special paper tan makes it difficult to alter the payye or amount.
The existence of a separate acquisition journal or listing for recording all acquisition:
· Relate each of tje internal controls to transaction-related Audit objectives.
· Relate tests of controls to internal controls.
· Relate substantive tests of transactions to transaction-related Audit objectives after considering controls and deficiencies in the system.
5) Describe two major changes a client may male to its supply-chain management system and discuss how those changes might increase or decrease the risk of material misstatement in specific accounts.
A large number of transaction can affect accounts payable. The balance is often significant anda made up a large number of vendor balances, and it is relatively expensive to Audit the account, For these reasons auditors often asses inherent risk as médium or high. They are especially concerned about the completeness and cutoff balance-related Audit objectives because of the potential for understatements in the account balance. As parto f the process of identifying significant risks and assessing the risk of material misstatement in accounts payable, the audito considers any recent changes in the acquisition and payment cycle.
6) It is less common to confirm accounts payable at an interim date tan accounts receivable.
The vendor’s statement is superior for verifying payable becouse it includes the ending balance.
The auditor can compárate existing vendor’s invoice with the client’s list and still not uncover missing ones, wich is the primary concern in accounts payable.
The vendor’s invoice is superior for verifying transactions becouse the auditor is verifying individual transaction and the invoice shows the details of the acquisitions.
Review questions chaper 5
5.1 Lawsuit against CPA firm continue to increase. State your opinión of the positive and negative effectss of the increased litigation on CPA and on society as a whole
Positive:
· growing awareness of the responsibilities of public accountants on the part of the users of the financial statements.
· Increased awareness of the Securities and Exchange Commission (SEC) regarding its responsibility to protect the interests of investors
Negative:
· Auditing and accounting are more complex due to factors such as the increase in the size of the business, the globalization of the company and the complexity of the operations
· deep-pocket responsibility
· Courts have difficulty understanding and interpreting the technical aspects of accounting and auditing.
5-3 How does the prudent person concept affect the liability of the auditor.
Each person who offers his service to another and is hired has the obligation to exercise the skill in his job with reasonable care and diligence.
It is a prerequisite that has a special ability, if a service is offered it is understood that it is responsible before the public to possess the degree of ability; If his claims are not well founded, he commits a series of frauds with each businessman in terms of confidence in his public work. He bought himself with good faith and integrity, but notGuaranteed infallibility, for which it is liable to its employer for negligence, bad faith or dishonesty, but not for arising from errors of mere judgment.
5-5 What is meant by contributory negligence? Under what conditions Will this likely be a successful defense?
is the legal defense of a auditor under which claims that the customer acquired that obligations are fulfilled and that is the breach of these led to the damages recovered.
For example of CPC could not determine that certain accounts receivable were uncollectible and, upon reviewing the collection, the credit manager lied to them and gave them false documents. In this circumstance, assuming that the Audit of accounts receivable was performed in accordance with the auditing standards generally accepted, there would be a defense for concurrent negligence.
5-7 Why is it important for CPA firm to get an engagement letter from their client before starting their duties?
• The AICPA has insistently requested that letters be signed between the client and the CPC signature for all contracts, but especially for unaudited contracts. The letter must define, for the purposes of the contract, the responsibilities of the CPC and more restriction imposed on them.
• The Accounting and Review Services Committee, which was formed as an important division of the AICPA guided paralias for unaudited financial statements of non-public companies,issued its first statement in 1979. The Auditing Standards Board has removed all references to non-audited states of non-public companies in SAS to avoid confusion between the audited and unaudited contracts.
5-9 Contrast the auditor’s liability under the Securities Act of 1993 with that under the Securities Exchange Acto f 1934
The Securities Act of 1933: deals with information in registration statements and informational brochures.It only refers to the reports that companies that issue new securities must present. theonly the parts that can be recovered from the auditors, in accordance with the 1933 Act, are the original purchases of values.
· Any third party that purchased securities described in the registration statement may sue the auditor for falsehoods or omissions in the audited financial statements included in that statement.
· Third parties are not required to prove that they relied on the financial statements or that the auditor was negligent or fraudulent in doing the audit. Users should only prove that the audited financial statements contained a significant counterfeit or omission.
· As a defense, the auditor has the burden of demonstrating that 1) conducted an appropriate audit according to the circumstances or 2) all or part of theThe claimant's loss was caused by factors other than deceptive financial statements.
· The 1933 law is the only customary norm or common law where the burden ofThe test lies with the defendant. Exchange Acto f 1934 audited financial statements issued to the public in annual reports or filed with the SEC as part of the annual report of Form 10-K.
· Each company that sells securities on national stock exchanges and securities that are not sold on the stock exchange must submit the audited statements annually In addition to the annual audited financial statements, auditors may be responsible for quarterly information from other reports
· It is illegal for any person, directly or indirectly, to use any means or instrument of interstate commerce, mail or any installation of the national stock market, a) use any device, scheme or device to defraud
5-13 In what ways can the profesional positicely respond to and reduce liability in auditing?
· seek protection against litigation without merit, to meet the needs of users, Educate users about the limits of the Audit and audit research. Continuous research is important to find better ways to discover errors or fraud.
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