Auditing Chapter 1 Essay Practice

Front 1

Discuss the three primary requirements for becoming a CPA?

Back 1

Answer:
The three primary requirements for becoming a CPA are:

Educational requirement. An undergraduate degree with a major in accounting is required. Most states now require 150 semester hours for licensure and some states require 150 semester hours before taking the CPA exam.

Uniform CPA examination requirement. This is a four-part exam with components on auditing and attestation, financial accounting and reporting, regulation, and business environment and concepts.

Experience requirement. The experience requirement varies from state to state with some states requiring no experience, while other states require up to two years of audit experience.

Front 2

Two types of attestation services provided by CPA firms are audits and reviews. Discuss the similarities and differences between these two types of attestation services. Which type provides the least assurance?

Back 2

Answer:
Two primary types of attestation services are: audits of historical financial statements and reviews of historical financial statements. While both services involve the accumulation and evaluation of evidence regarding assertions made by management in the company’s financial statements, a review involves a less extensive examination and provides a lower level of assurance about the client’s financial statements than an audit.

Front 3

Discuss the differences and similarities between the roles of accountants and auditors. What additional expertise must an auditor possess beyond that of an accountant?

Back 3

Answer:

The role of accountants is to record, classify, and summarize economic events in a logical manner for the purpose of providing financial information for decision making. To do this, accountants must have a sound understanding of the principles and rules that provide the basis for preparing the financial information. In addition, accountants are responsible for developing systems to ensure that the entity’s economic events are properly recorded on a timely basis and at a reasonable cost.

The role of auditors is to determine whether the financial information prepared by accountants properly reflects the economic events that occurred. To do this, the auditor must not only understand the principles and rules that provide the basis for preparing financial information, but must also possess expertise in the accumulation and evaluation of audit evidence. It is this latter expertise that distinguishes auditors from accountants.

Front 4

Discuss the similarities and differences between financial statement audits, operational audits, and compliance audits. Give an example of each type.

Back 4

Answer:
Financial statement audits, operational audits, and compliance audits are similar in that each type of audit involves accumulating and evaluating evidence about information to ascertain and report on the degree of correspondence between the information and established criteria. The differences between each type of audit are the information being examined and the criteria used to evaluate the information. An example of a financial statement audit would be the annual audit of IBM Corporation, in which the external auditors examine IBM’s financial statements to determine the degree of correspondence between those financial statements and generally accepted accounting principles. An example of an operational audit would be an internal auditor’s evaluation of whether the company’s computerized payroll-processing system is operating efficiently and effectively. An example of a compliance audit would be an IRS auditor’s examination of an entity’s federal tax return to determine the degree of compliance with the Internal Revenue Code.

Front 5

Discuss the similarities and differences between the roles of independent auditors, GAO auditors, internal revenue agents, and internal auditors.

Back 5

Answer:
The roles of all four types of auditors are similar in that they involve the accumulation and evaluation of evidence about information to ascertain and report on the degree of correspondence between the information and established criteria. The differences in their roles center around the information audited and the criteria used to evaluate that information. Independent auditors primarily audit companies’ financial statements. GAO auditors’ primary responsibility is to perform the audit function for Congress. IRS auditors are responsible for the enforcement of federal tax laws. Internal auditors primarily perform operational and compliance audits for their employing company.

Front 6

What is an engagement to attest on internal control over financial reporting?

Back 6

Answer:
Section 404 of the Sarbanes-Oxley Act requires public companies to report management’s assessment of the effectiveness of internal control over financial reporting. The Act further requires auditors to attest to the effectiveness of internal control over financial reporting. This evaluation, which is integrated with the audit of financial statements, provides forward-looking information, because effective internal controls reduce the likelihood of future misstatements in the financial statements.

Front 7

To do an audit, it is necessary for information to be in a verifiable form and some criteria by which the auditor can evaluate the information. (A) What information and criteria would an independent CPA firm use when auditing a company’s historical financial statements? (B) What information and criteria would an Internal Revenue Service auditor use when auditing that same company’s tax return? (C) What information and criteria would an internal auditor use when performing an operational audit to evaluate whether the company’s computerized payroll processing system is operating efficiently and effectively?

Back 7

Answer:
(A) The information used by a CPA firm in a financial statement audit is the financial information in the company’s financial statements. The most commonly used criteria are accounting principles generally accepted in the United States.

(B) The information used by an IRS auditor is the financial information in the company’s federal tax return. The criteria are the internal revenue code and interpretations.

(C) The information used by an internal auditor when performing an operational audit of the payroll system could include various items such as the number of errors made, costs incurred by the payroll department, and number of payroll records processed each month. The criteria would consist of company standards for departmental efficiency and effectiveness.

Front 8

Explain what is meant by information risk, and discuss the four causes of this risk.

Back 8

Answer:
Information risk is the possibility that information upon which a business decision is made is inaccurate. Four causes of information risk are:
remoteness of information,
biases and motives of the provider,
voluminous data, and
complex exchange transactions.

Front 9

Attestation services fall into five categories. What are these categories?

Back 9

Answer:
The five categories of attestation services include:
audits of historical financial statements,
attestation on internal control over financial reporting,
reviews of historical financial statements,
attestation services on information technology, and
other attestation services that may be applied to a broad range of subject matter.

Front 10

Discuss four factors that are likely to significantly reduce information risk in the next five to ten years.

Back 10

Answer:
Four factors that are likely to significantly reduce information risk in the next five to ten years are:
technological advances,
more companies will go on-line, reducing the risk of investors obtaining outdated information,
new accounting and auditing standards, and
auditors will find more efficient and effective audit techniques.