let's run through the remaining homework questions for chapter one and we'll start with number 11 which is on page 30. it says distinguish between a compliance audit and an operational audit well with the compliance audit you're checking to see did The Entity follow rules procedures regulations or laws with an operational audit you are examining a unit or a department within an entity and you are measuring Effectiveness and efficiency 12. is an independent audit or status possible or desirable for internal Auditors is compared with the independence of a public accounting firm no you cannot be as independent as an external auditor because you are an employee of the company in which you audit but you should not be giving your reports to anyone whose work you're reviewing so you should not be under any of the managers you shouldn't be under any vice presidents you really shouldn't even be under the president you really if you drew an organizational chart you should see that the internal Auditors are the line only goes up to the audit Committee of the board of directors that's how it should be set up and that's as independent as you can be being an employee of the company 16 what is meant by peer review and public accounting what's a review of the quality control of a CPA firm being performed by another CPA firm and that's where the word peer comes from one CPA firm goes in and examines another CPA firm's quality control 25 what is the international auditing and Assurance Standards Board and what is the purpose of its pronouncements well the iaasb is a committee of the ifac the International Federation of accountants and their purpose is to try to harmonize auditing standards and so they also then are setting auditing standards for those countries that don't have their own auditing setting board such as the ASB or peekaboo in the United States and they are trying to encourage that it's member countries to harmonize the standards as much as possible let's do the multiple choice on page 31 number 30 letter A which is following best describes the relationship between Assurance services and the test Services they're very similar and you know test services are Assurance Services as well the difference is you are required to be independent to do a test services B which is following is primary responsibility for the fairness of representations made in financial statements this is a key point for you to understand who is responsible for the financial statements management is responsible for the financial statements the Auditors are examining to see if they followed Gap but you're responsible for if you're working for a company you're responsible to know what Gap is to make sure that the financial statements followed Gap so that's an important point there letter b letter C the most important benefit of having an annual audit by public accounting firm is to number one provide Assurance to investors and other Outsiders that the financial statements are reliable okay we're trying to reduce information risk D the sarbanes actually Act created the public Company accounting oversight board which of the following is not one of the responsibilities of that board they do not do number two they do not review Financial reports filed with the SEC but they do establish Independence standards for auto Auditors they do establish auditing standards for audits of public companies and they do sanction registered CPA firms e which of these organizations has a responsibility to perform inspections of Auditors of public companies well we just answered that that's peekaboo public Company accounting oversight board F governmental auditing in addition to including audits of financial statements often include audits of efficiency effectiveness and what's left yes number four compliance in general internal Auditors Independence will be greatest when they report directly to the audit Committee of the board of directors H which of the following did not precipitate the passage of the sarbanes actually Act of 2002 to regulate public accounting firms the answer is not on this page it's for ethical scandals at the aicpa we didn't have those but there was the actual conviction of the CPA firm Arthur Anderson uh there were restatements of financial statements by several public companies and we had the Enron and Worldcom scandals those all forced us the legislate legislators to come up with Starbucks all right what's the following organizations establishes accounting standards for U.S government agencies that's facab the federal Accounting Standards Advisory Board number three for U.S government agencies who sets it for state and local governments gasby the governmental Accounting Standards Board but the answer for I is three that's for the federal government Jay which of the following is correct about forensic audits it's number four forensic audits are usually performed in situations which fraud has been found and then they also included or is suspected but technically when you say forensic audit Fraud's already been found and you're trying to figure out how it happened and how much were the damages okay what best describes the purpose of the auditor's consideration of internal control and a financial statement audit for a non-public company consideration of internal control and we're going to hit this you're going to hear this phrase over and over again this semester number one determine the nature timing and extent of audit testing you got to see how strong their controls are are the stronger their controls are the less testing you're going to have to do because you can rely on their system L which of the following is an example of a compliance audit well it's not number one that's the financial statement audit how about number two an audit of companies policies and procedures for adhering to environmental laws and regulations that's compliance audit are they following those environmental laws and regs so L is two what about 31. the role of the auditor and the American economy has changed over the years in response to changes in our economic and political institutions consequently the nature of an audit today is quite different from the nature of an audit performer in the year 1900 classify the following phrases in two groups one phrases more Apple to an audit performed in 1900 and two phrases more Appleton ought to perform today letter a complete review of all transactions well we don't do that today so that would be number one b assessment of internal control that would be an audit today so B is two c Auditors attention concentrate on the balance sheet that would be number one in 1900 year audit D emphasis upon use of sampling techniques that's today so D is two e determination of fairness of financial statements that's today so that e is two that's what we really focus on the fairness f audit procedures to prevent or detect fraud on the part of all employees and managers that's something that would have been done in 1900 not today that's not the purpose of a financial statement audit so f is one G registration statement well they didn't have to register in 1900 so that would be today there was no SEC then H fairness reported earnings per share that's today so H is 2 I influence of stock exchanges and the investing public upon the use of independent Auditors that would be more today Jay concerned about fraudulent financial reporting well probably both but the official solution is today because we are concerned about fraudulent financial reporting okay gas generally accepted auditing standards that's today um L bankers and short-term creditors as principal users that'd be 1900 so L is one M pressure for more disclosure that's today two and N auditing for compliance with laws and regulations that's also today because we have lots and lots of laws and regulations when there weren't quite so many in 1900 all right so just keep right on going here 32. auditor should be familiar with the available professional literature from a variety of sources listed next or 11 Publications in the field that I've been counting and auditing and we're supposed to state which organization which is listed on page 33 so letter A statements on auditing standards that's the aicpa's responsibility specifically the auditing Standards Board the Journal of accountancy is published by the aicpa regulation so just with that word kind of gives us a clue SX form and content of financial statements that's the SEC the Securities Exchange Commission SARS that's the aicpa financial reporting releases we didn't talk about that but that is the SEC the Securities Exchange Commission what about letter F accounting and Reporting standards for corporate financial statements that's fasby that's our Gap okay so f is fasby Financial Accounting Standards Board what about accounting reporting standards for governmental entities that's gasby unless it would have said Federal says just said for governmental entities uh we're going to do Gatsby governmental Accounting Standards Board H industry audit and accounting guides and I audit risk alerts and J The Tax Advisor those are all aicpa and then K auditing standards the aicpa and and peekaboo 33. matching so one quality control the best match there is letter e peer review two operational audit that's H measurement of Effectiveness and efficiency of a unit of an organization that's an operational audit three internal control best answer there and you may have had to go through these others first to figure that one out is letter I it's a basis for sampling and testing because the stronger their internal control the less testing will have to do four government accountability office that's J the auditing staff that reports directly to Congress five disclosure well if it's material information that needs to be disclosed so that's letter c six critical characteristic that must be maintained by the accounting profession and that is we've got to maintain credibility or our work is meaningless so six is D7 peekaboo and they regulate the Auditors of public companies the letter A the SEC registration statements okay the SEC requires registration statements and we'll hit that a little bit more this semester so 8 is f 9 audited financial statements we give an opinion so letter B is the best match there for number nine and then ten compilation of financial statements that is an accounting service that you perform so let's turn the page and let's look at 35 match the following definitions for the various types of services okay so letter A and a test engagement in which the CPAs agree to perform procedures for a specified party and issue a report that is restricted to use by that party your best match is number one agreed upon procedures engagement B an engagement designed to express limited Assurance relating to subject matter or an assertion limited Assurance Assurance is a review so B is nine C and engagement in which the CPAs issue and examination a review or an agreed upon procedures report on subject matter or an assertion about subject matter that is a responsibility of another party that is management uh a test engagement d an examination designed to provide an opinion that is the CPA's highest level of assurance so we stop there that's an audit of financial statements so that's number four e as required by Starbucks and and peekaboo an audit that includes providing Assurance on both the financial statements and internal control of financial reporting that's an integrated audit so e is number seven F Professional Services that enhance the quality of information or its context for decision makers Assurance services so f is two and G and a test engagement designed to provide the highest level of assurance that CPAs provide on an assertion and you might have wanted to put four there but six is the best answer there that means you're doing an examination which an audit is an examination of financial statements 36 more matching you know some of this we didn't discuss but we'll discuss it here hey a government agency authorized to regulate companies seeking approval to issue Securities for sale to the public that's the SEC so a is eight B of representation or Declaration made by the responsible party typically management of the entity that is an assertion so that is number two see a series of statements issued by the ASB of the arcpa General accepted auditing standards gas are developed in issues okay I found this on the web for set of statements issued by the ASP of the ASC paw check it out Siri she interrupted me uh C is nine statements on auditing standards d a set of criteria used to determine measurement recognition presentation and disclosure of all material items appearing in the financial statements that is the financial reporting framework number four okay set of criterias used that's our framework so D is four e a set of reforms that toughen penalties for corporate fraud restricted the kinds of Consulting CPAs can perform for auto clients and created peekaboo to oversee CPA firms of public accounting firms that was the sarbanes Oxley active 2002 so e is 7 F the five-member board established in 2002 to oversee the audit of public companies that are subject to the Securities laws the board has authority to establish or adopt rules for auditing quality control ethics Independence and other standards relating to the preparation of audit reports that's peekaboo number six G the national Professional Organization of CPAs that is the aicpa that is number one in h you will find the answer on page two in the textbook the standards or benchmarks used to measure and present the subject matter and against which the CPA evaluates the subject matter they are criteria that are established or developed by groups composed of experts that follow due process procedures including exposure the proposed criteria for public commitment and that would be the suitable criteria number 11. and then our last one number 37. for the purposes of this problem assume the existence of five types of Auditors so our choice is our CPA GAO IRS Bank examiner and internal auditor also assume that the work of these various otters can be grouped in five classifications so we have the audits of financial statements compliance audits operational audits accounting services and Consulting Services for each of the following topics you are to State the type of auditor most probably involved also identify the topic with one of the above classes of work so letter a financial statements and small business be submitted to a bank in support of a loan application that's going to be a CPA someone independent and it's going to be a financial statement audit it could have been a review but that wasn't one of our choices so it's a financial statement audit B financial statements of a large Bank listed on the New York Stock Exchange to be distributed stockholders performed by a CPA it is an audit of financial statements so no Bank examiner there for the bank examiners don't do the audits of the financial statements licensed independent CPAs do C review of the management directive stating that goals and responsibilities of a corporations mail handling department so that's just an audit of one Department are they being effective that is an operational audit and that's probably going to be performed most likely by an internal auditor d review of costs and accomplishments of a military research program carried on within the Air Force to determine whether the program was cost effective well that's the federal government so it's probably going to be the GAO Auditors and that's an operational audit e examination on a surprise basis of Midtown State Bank emphasis placed on verification of cash martial Securities and Loans receivable and on consistent observation of the banking code so since we're looking at the banking code that's going to be a bank examiner and that is compliance are they following the code f analysis of the accounting system a small business with the objective of making recommendations concerning installation of a computer-based system well the type of work is Consulting and most likely that is a CPA doing that Consulting work G determination of fairness of financial statements for public distribution by a corporation that has professional level internal auditing staff well remember only CPAs can perform financial statement audits which what this is so CPA financial statement audit we're not done Turn the Page H review of the activities of the receiving department of a large manufacturing company with special attention to efficiency of material inspection and promptness of reports issued most likely that's an internal auditor doing an operational audit I reviewed the tax return the corporate president determine whether charitable contributions are adequately substantiated that's the IRS Auditors doing a compliance audit J review of daily attendance during spring term at Blue Ridge Consolidated School District to ascertain whether payments received from the state were substantiated by people day data and Weather disbursements by The District were within authorized limits well that's definitely compliance but who's going to do that most likely with the choices we were given it's going to be CPA okay it's as possible there was an internal auditor that was doing that but more than likely than not they don't have an internal auditor it's a b CPA okay review of transactions of government agency determine whether disbursements under the payment and kind program of the U.S the Department of Agriculture followed the intent of Congress that's definitely GAO auditor and that is definitely a compliance audit an L compilation of quarterly financial statements for a small business that does not have any accounting Personnel capable of preparing financial statements the compilation going to be done by the CPA firm and that is an accounting service so let's conclude chapter one with the main points of chapter one first of all the auditor's role is to add credibility to the financial statements so they're adding credibility to Management's representations management assertions Auditors do not create financial information we're adding credibility to financial information that is already there auditing reduces information risk it reduces information risk which is possibility that information was inaccurate so if you have any questions post them in discussions on discussion board send me an email and I'll be glad to try and clarify anything