Auditing Discussion
a) The public accounting profession has taken a number of steps to minimize potential bias towards important users. The profession has specific standards for auditing, a separation between auditing and consulting roles, and other mechanisms. The audit function itself, and the use of generally accepted accounting principles, is a means of providing neutrality in financial reporting. Standardized reporting thus delivers statements and reporting that are the same across industries, and across all different types of stakeholders.
b) There are many users of financial statements. Four important user groups are management, stockholders, financial institutions and authorities. For unionized companies, unions would also be of a high importance level. Management uses statements to assess performance, as do stockholders as their returns depend on performance. Financial institutions have corporations as clients, and lend to them, thus have an interest in the financial performance. Regulatory authorities either in charge of the tax system or in charge of capital markets use the statements to assess taxes and to ensure that the statements accurately reflect the financial condition of the company. Accounting treatments can portray the company in different ways with respect to things like time horizon, and thus may be more or less beneficial to specific user groups.
1-41a) An audit ensures that the company's financial statements are accurate. This is important for all stakeholder groups. b) An audit of internal controls provides value to the public because it verifies that the company has controls against both error and fraud built into the procedures by which it compiles its financial statements. c) The audit committee selects the auditors, and sets policy with respect to both internal auditing and with respect to the internal controls that govern the audit function. The audit committee also seeks to ensure independence of the audit.
1-42a) Management of Quello might want independent financial statements because they will reveal the current state of the company. First, this will provide the baseline level on which the 20% annual targets are built. Second, it will provide insights into the financial resources that the company has with which to achieve its goals, and also can provide insight into areas of operations that can be improved to help achieve such goals. The independent financial statements are freer of bias than internal statements and it may have been a while since such independent statements were produced.
1-42b) They can set whatever parameters for their search they want. They need an auditor at a low cost who understands the industry and has the resources and experience to do the job. c) Quello is not required to have an audit committee because it is a privately-held company. d) Quello is not compelled to issue a report on the quality of its internal controls, again because it is a privately-held company, which means that it is not bound by SEC rules.
1-43. a. Disagree- this is important but the primary purpose is to ensure that the financial statements accurately reflect the company's financial condition. Fraud detection is a subset of that. B. Disagree. This is self-evident. C. Disagree. Red Cross is not a publicly-traded company. D. Disagree. Most users are fairly savvy about finance, and do not expect more than regulators do. The bar is pretty high from the SEC and PCOAB, and user expectations do not seem to exceed that. E. Agree on the first clause -- this is an independent audit. Disagree on the second clause -- how a company is structured has nothing to do with how well it knows the industry. F. Agree. That is the point of the PCAOB, to restore public confidence in the auditing profession. Conflict of interest has been removed, and there is no evidence to suggest that public confidence is flagging. G. Disagree, because the choices that a company makes under GAAP must be disclosed, and when they change a statement about material changes to the financial statement methodology must be issued, noting the effect of the change. H. Agree. The auditor should have an opinion on the second clause. I. Disagree. It very much does, because consulting pays more than auditing, so audits can be compromised to maintain the consulting revenue stream. This was one of the key issues in SOX.
1-44.a) There are a few issues where auditor judgment must be made: determining materiality, determining business risk, on the quality of the design of the internal controls, on certain financial statement items that may require adjustment, and on the types of reports that should be...
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