Assignment 1

Financial Auditing

Week 1 Homework -

Chapter One:

1-25:

As a result of a number of events that caused Congress to doubt the ability of the accounting profession
to regulate itself, a number of reforms were made to the accounting professions system of selfregulation.

a. Provide a brief overview of the legislation that altered the self-regulation process of the acc.
profession.

Ans: Sarbanes-Oxley Act of 2002: Set of reforms that toughened penalties of corporate fraud, restricted
the types of consulting CPAs may perform public companies audit clients, created the Public Company
Accounting Oversight Board to oversee Accnt. profession. Eliminated self-regulation. Composition of
PCAOB. Increase emphasis on internal controls.

b. Explain the regulation process for accounting firms that audit public companies.

Ans:

Regulation Process to audit Public Companies:

1. Establish the audit, quality control and ethical standards.

2. Registering public accounting firms with PCAOB

3. SEC requirements for our. comp. auditors

4. Peer reviews

5. State Accountancy boards

6. Performaing inspections of the practices of registered

7. Conducting invesigstions, disciplnary proceedings of registered firms

8. Sanctioning registred firms

SEC investigates violations of securities laws, allegations of fraudulent reporting. State board of
accountancy may revoke license of public account firm.

Regulation Process to audit Non-Public Companies:

AICPA performs inspections through PCPS: the AICPA alliance for public accounting firms section. Peer
reviews and state accountancy board.

1-30,

a. In 1900

b. Today

c. In 1900

d. Today

e. Today

f.
In 1900

g. Today

h. Today

i.
Today

j.
Today (correction: 1900)

k. Today

l.
In 1900

m. Today

n. Today

Assignment 1

Financial Auditing

1-38;

Views expressed by Peters are more consistent with accounting standards.

Chapter Two:

2-27,

If the certified public accountant is appointed controller of the corporation, he or she loses the
independent status that is the most essential qualification of the certified public accountant. The
interests of the officers of a corporation may at times be in conflict with the interests of creditors, bankers,
or stockholders. These outside groups are best protected when independent CPAs examine the financial
statements prepared by management of the corporation. The performance of an internal audit function
under the direction of the new controller may be a highly desirable step, but it does not eliminate the need
for an independent audit. Bad ideas areas follows:
- Not Issuing audited financials (creditors and shareholders)
- Internal audit team report to the controller, but instead report to audit committee.

2-30 k.,

Choice 3

2-31;

Reviewers Comments

Comment Is
Correct (Yes
or No)

Explanation of Incorrect
Comments (not required)
The report is ordinarily addressed to
the audit committee, the board of
directors, the shareholders or the
company itself.

a.

The report should not be addressed to

management.

Yes

b.

The report should indicate that we have

audited, rather than examined the
financial statements (first paragraph after
introduction).

Yes

c.

The report should not indicate anything

concerning managements responsibility for
internal control.

No

The report is correct as presented.

d.

The report should state that the auditors

responsibility is to express reasonable
assurance, not an opinion (first paragraph
under auditors responsibility).

No

While an audit does provide

reasonable assurance, the report is
correct as presented.

Assignment 1

Financial Auditing

e.

The audit is designed to assess risks of

material misstatements due to errors or
fraud; the term illegal acts is incorrect
(second paragraph under auditors
responsibility).

Yes

The word errors should replace

illegal acts in the report (and the
order of the terms should be
reversed).

f.

The report should not refer to the auditors

evaluating the appropriateness of
accounting policies, since those are the
responsibility of management.

No

An audit report does refer to the

appropriateness of accounting
policies.

g.

The evidence should be sufficient and

appropriate rather than adequate (third
paragraph under auditors responsibility).

Yes

Self-explanatory.

h.

The opinion should not include in all

material respects since the auditor is
providing an opinion on the accuracy of the
financial statements (opinion paragraph).

No

Audits are performed to provide

reasonable assurance of detecting
material misstatements, and the
report so indicates.

i.

The opinion should be on accounting

principles generally accepted in the United
States of America, not on auditing
standards (opinion paragraph).

Yes

The financial statements follow the

appropriate accounting principles,
while the audit follows generally
accepted auditing standards.

j.

The signature on the report should be that

of the CPA firm, not that of the partner.

Yes

While the international report allows

the partner to sign the report (in
addition to the CPA firm name), the
GAAS report does not.

Chapter Three: 3-34 c.

Ans: choice a (audit fees should never be based on contingency)

3-35

a. N. You are performing the work.

b. A.

c. A.

d. A

e. N

f. N

g. A

h. N

i. N

Assignment 1

j. N

Financial Auditing