Case 1

Topics: Auditing, Audit, Executive compensation Pages: 7 (1838 words) Published: February 23, 2014
Midterm 1 Study Guide

1. Chapter 1
a. What creates the demand for audits? What is the difference between business risk and information risk? i. Banks look at (1) risk-free interest rate, (2) business risk for the customer, and (3) information risk ii. Can significantly reduce information risk because financial statements are audited iii. Business risk: reflects the possibility that the business will not be able to repay its loan because of economic or business conditions, such as a recession, poor management decisions, or unexpected competition in the industry iv. Information risk: reflects the possibility that the information upon which the business risk decision was made was inaccurate. A likely cause of the information risk is the possibility of inaccurate financial statements b. Know the different types of audits, the purpose of each, and the type of auditor who performs them i. Operational Audit: evaluates the efficiency and effectiveness of any part of an organization’s operating procedures and methods, accompanied by recommendations; testing controls 1. used by management

2. performed by CPAs, GAO auditors, and internal auditors
ii. Compliance Audit: conducted to determine whether the auditee is following specific procedures, rules, or regulations set by higher authority 1. Used by authority figures
2. Performed by CPAs occasionally, GAO auditors, IRS auditors, and internal auditors iii. Financial Statement Audit: conducted to determine whether the financial statements are stated in accordance with specific criteria (GAAP or IFRS) 1. Used by many different groups

2. Performed by CPAs, GAO auditors occasionally, and internal auditors c. Difference between assurance, attestation, and nonassurance services i. Assurance services: an independent professional service that improves the quality of information for decision makers (performed by CPAs or other professionals) ii. Attestation services: type of assurance service in which the CPA firm issues a report about subjective matter or assertion that is made by another party 1. Audit of historical financial statements – annual basis; positive assurance 2. Audit of internal control over financial reporting

3. Review of historical financial statements – limited, negative assurance, quarterly 4. Attestation services on IT—reliability and security (online seals of approval) 5. Other attestation services that may be applied to broad range of subject matter – sustainability iii. Nonassurance services: services falling outside scope of assurance 1. Accounting and bookkeeping services

2. Tax services
3. Management Consulting services
d. Why auditors must be competent and independent?
i. Competent: qualified to understand the criteria as well as understand the types and amounts of evidence necessary to reach a proper conclusion ii. Independent: in mental attitude (lack of bias in accumulation and evaluation of evidence) and independent of management 2. Chapter 2

a. Identify and describe the four responsibilities of the PCAOB (created by SOX) i. Registers public accounting firms
ii. Establishes and modifies standards related to auditing, quality control, ethics, and independence for public company audits (auditing standards) iii. Performs inspections of the quality controls of audit firms (inspections) iv. Discipline violators when they find issues

b. Understand the options for regulation in the audit market and describe how regulation of auditors changed after SOX i. Before SOX, there was self regulation, where a volunteer committee was subject to review by partners 1. They had standards and peer reviews (audit each other)

ii. Now, there is government regulation (SEC, GAO, PCAOB) doing the review of accounting firms c. Know the 10 generally accepted auditing standards (GAAS) and be able to differentiate them from quality control standards (TIP PIE ACDO) i. General

1. Training and technical proficiency (T = Training)
2. Independence in mental attitude (I =...
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