Solutions for Chapter 1
Auditing: Integral to the Economy
The special function performed by the public accounting profession is the attestation to the fairness of the financial statements of clients. The special function ensures the reliability and integrity of the financial reporting system. Judge Burger described the special function as "certifying the public reports that collectively depict a corporation's financial status," which involves "a public responsibility transcending any employment relationship with the client."
The auditing profession exists to serve the users of an organization's financial statements. These include lenders, investors, management, government, and (indirectly) all individuals who are ultimately affected by the integrity of the financial reporting process.
The audit opinion formulation process is a systematic approach by which the auditor evaluates the risk of being associated with a client, through the process of gathering and evaluating audit evidence, to determining the type of audit opinion that should be rendered. The stages and outcome of each stage are as follows:
Assessing Client Acceptance and Retention: The outcome is determining whether or not a firm should serve a potential client. The decision will depend on the risk to the auditor of being associated with a particular client. Understanding the Client: The outcome is a business understanding of the client, its major processes, the risks inherent in its business, and the impact of current economic and competitive issues on the client. Obtain Evidence About Controls: The outcome is an understanding of the client’s major internal control practices and whether the controls are sufficient to mitigate the risk of material misstatements in a company’s financial statements. Obtain Substantive Evidence: The outcome is the audit evidence that is gathered, evaluated, and synthesized to determine if the auditor has sufficient competent evidence to render an audit opinion. Wrap Up Procedures: A final review of evidence, as well as a review of the audit process by someone outside of the audit to determine whether all procedures have been performed and that audit risks have been evaluated. The final outcome is the decision on which audit opinion to render.
The environment has changed in the following ways:
The U.S. audit standards are now set by a regulatory agency for public companies. The economy is more global, and thus auditors must understand international audit standards. The risks that affect the companies subject to audit have changed with greater sensitivity to global issues. The use of information technology continues to increase.
While the environment has changed, the expectations of users have stayed essentially the same. They expect (a) auditors to detect and report on fraud, and (b) certify financial statements that are both in accordance with GAAP and are transparent regarding economic activities and conditions.
An audit service requires a report to a third-party user and thus requires independence on the part of the attestor. Audit services differ from general assurance services in that assurance services do not require a report to a third party. For example, a company may request assurance services of their internal controls. At their request, the company may be the only recipient of a report. Thus, the difference is related to whether or not the service is provided to third parties. Further, an audit service is generally recognized as one that pertains to an organization’s financial statements and internal controls over financial reporting.
Auditors exercise professional judgment in virtually every aspect of the audit. That judgment requires the auditor to exercise professional skepticism within a framework of knowledge of the economics of a business and accounting knowledge. That judgment is utilized in the following areas (but is not...
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