...Types of Audits KWyrick Advanced Accounting 2/23/15 Audits are an important necessity to insure the foundation and integrity of any company in today’s business world. Audits provide credibility and assurance for the company’s management and financials. This is useful information for stakeholders when deciding whether or not to invest in the company. The audit also provides reasonable assurance that the financials are free from material errors. Therefore the information provided is guaranteed to be honest and truthful. It is also important for some companies, such as nonprofits to have an audit performed. This provides regulations by the government to make sure that people are following the rules and not being taken advantage of. Other benefits of audits include uncovering or preventing fraud. If someone has been hiding financial information or trying to improve the financial status of the company wrongfully, it will usually be uncovered by the auditors. The three types of audits from the text include operational, compliance, and financial statement audit. These three audits work to solve different things. An operation audit reviews operations and looks for ways to improve efficiency and effectiveness. Compliance audits review contracts and agreements to make sure that all parties are doing their part or performing the tasks required. This is more common in nonprofits or governmental entities because one party is funding the other for a service. Financial statements audits...
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...* UNMODIFIED REPORT * UNMODIFIED- The financial statement shows a true and fair view about the company’s financial position * There are no “if”, ”but” or additional information provided. * MODIFIED REPORT * The choices for QUALIFIED can be described in a matrix * Example of insufficient appropriate audit evidence … Except as discussed in the following paragraph… We did not observe the counting of inventories at 31/12/200X… unable to determine inventory quantities by other methods… In our opinion, except for the effects of such adjustments to inventory, if any, had we been able to satisfy ourselves as to physical inventory… The financial statements give a true and fair view… * Example of disclaimer of opinion … Except as discussed in the following paragraph… We were not able to observe all physical inventories at 31/12/200X… unable to determine inventory quantities by other methods… Because of the significance of the matters discussed… we do not express an opinion on the financial statements. * Example of Material misstatement / “except for” As discussed in paragraph 17, no depreciation has been provided… not in accordance with International Accounting Standards… The provision for the year should have been $X… profits would be decreased by $Y. In our opinion, except for the matter referred to above, the financial statements give a true and fair view… * Example of Material misstatement / “adverse opinion” As discussed in paragraph 15...
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...Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. Solution: The SEC does not have direct influence over the audit of Smackey Company because, Smackey is not a public held organization, they do not have assets in excess of $10 million, and they do not have over 500 stockholders; which are the requirements for public and privately held companies. The SEC does have indirect influence over the audit because all companies, whether public or private are required to comply with General Accepted Accounting Principles (GAAP) and the SEC plays a significant role in influencing these standards. The auditors, while not bound by SEC rules they are required to obey specific audit rules and guidelines as outlined under the the American Institute of Certified Public Accountants (AICPA). The AICPA is responsible for establishing auditing and attestation standards for private companies in the United States and for enforcing a code of professional conduct for its members. The code is comprised of six principles that the auditors must adhere to. The principles are: responsibilities, the public interest, integrity, independence and objectivity, due care, and the scope and nature of services. Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client? Solution: During the initial planning of the audit of Smackey Dog Food, the auditors should discuss the...
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...services: 鉴证服务 A type of assurance service in which the public accounting firm issues a written communication that expresses a conclusion about the reliability of a written assertion of another party. Audit of historical financial statements: A form of attestation services, the auditor issues a written report expressing an opinion about whether the F/S is in material conformity (一致) with accounting standards. e.g.: listed company must provide shareholders with annual financial statements that are audited by an independent accounting firm. Review of historical cost financial statements: A form of attestation services, a public accounting firm issues a written report that provides less assurance than an audit as to whether the financial statements are in material conformity with accounting standards. Auditing standards: Establish mandatory (强制) requirements and provide explanatory (解释) guidance to auditors in fulfilling their professional responsibilities in the audit of financial reports. Auditing: Is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be performed by a competent, independent person. Compliance audit: 合规性审计 One of three primary types of audits, a review of an organization’s financial records performed to determine whether the organization is following specific procedure, rules or regulations set by some higher authority. An audit performed...
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...over the audit of Smackey Dog Foods, Inc. Solution: The SEC (Securities and Exchange Commission) has substantial influence on the audit of Smackey Dog Food, Inc. This can be seen in the audit standards that have to be followed by the established independence of the auditors involved in the Smackey audit. In the audit of public listed companies which includes Smackey, the auditors need to observe several principles. Independence is one of the six principles exhibited by the AICPA and the others include responsibilities such as the public interest, integrity, objectivity and independence, due care, and scope and nature of services. An audit team is required to be objective and independent with regard to professional responsibilities and by being independent in fact and appearance when providing auditing and other attestation services. Under the Sarbanes – Oxley, auditors have to be objective and independent otherwise legal sanctions can be pursued and incurred. Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food client? Solution: The following are several essential activities involved in the initial planning of an audit and how they are specifically related to Smackey Dog Food, Inc. : 1. First understand the client’s business and industry. The audit firm can get the full benefit of its experience in auditing other food manufacturers in planning and doing the audit for Smackey...
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...Case #3.4 – Sunbeam – Incentives and Pressure to Commit Fraud I. Technical Audit Guidance To maximize the knowledge acquired by students, this book has been designed to be read in conjunction with the post-Sarbanes-Oxley technical audit guidance. All of the post-Sarbanes-Oxley technical guidance is available for free at http://www.pcaobus.org/Standards/index.aspx. In addition, a summary of the Sarbanes-Oxley Act of 2002 is also available for free at http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Sarbanes-Oxley+–+The+Basics.htm. II. Recommended Technical Knowledge PCAOB Auditing Standard No. 5 Paragraph #9 Paragraph #11 Paragraphs #29-30 Paragraph #32 Paragraph #A8 (in Appendix A) III. Classroom Hints This case provides students with an opportunity to apply their technical knowledge about inherent risk and fraud risk to Sunbeam's business model during the 1990's. By providing details about Sunbeam business during this time, students are able to see the relationship between an audit client's business strategy and inherent risk assessment at the financial statement assertion level. In addition, this case provides students with an opportunity to think about fraud risk assessment during times of significant change at an audit client. To meet these objectives, this case illuminates a number of relevant issues about the development of Sunbeam. In particular, the case focuses on the changes that occurred at Sunbeam after hiring Albert J. Dunlap as...
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...Apollo, a publicly-traded company, should have an audit committee overseeing its internal financial reporting integrity. This audit committee would oversees the audits, both internal and external. Once found evidence of fraudulent accounting, external auditors must communicate the findings within Apollo with the committee or other governing body. External auditors also report the effect that the fraud may result with Apollo. We would plan and conduct our audit with professional skepticism. We are required to recognize the condition or events that suggest if fraud may exist. Based on the audit risk assessment we conduct, we develop audit procedures to obtain reasonable assurance that substantial frauds have been found. It is expected that the auditor to implement procedures that will lead to the discovery of errors or fraud without significant impact on the financial statements can not be held responsible for undetected such irregularities. The auditor should communicate with the management of his client. He should ask the management information concerning any significant fraud or error has been detected in order to detect key problems that could lead to certain activities, the implementation of audit procedures more than usual However the auditor faces the risk inevitable that some significant errors to be detected, even if the audit is planned and done properly. Type accounting fraud The most common type of fraud, the audit found that revenue recognition errors. Revenue...
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...An HR audit is like an annual health check, says EJ Sarma. It plays a vital role in instilling a sense of confidence in the management and the HR functions of an organisation A healthy HR function in an organisation is as important as the physical and mental well being of a human body. Typically the basic reason why organisations prefer to conduct an HR audit is to get a clear judgement about the overall status of the organisation and also to find out whether certain systems put in place are yielding any results. HR audit also helps companies to figure out any gaps or lapses and the reason for the same. Since every company plans certain systems and targets, an HR audit compares the plans to actual implementation. The concept of HR audit has emerged from the practice of yearly finance and accounting audit, which is mandatory for every company, to be done by external statutory auditors. This audit serves as an examination on a sample basis of practices and systems for identifying problems and ensuring that sound accounting principles are followed. Similarly, an HR audit serves as a means through which an organisation can measure the health of its human resource function. Organisations undertake HR audits for many reasons: 1 To ensure effective utilisation of human resources. 2 To review compliance with tons of laws and regulations. 3 To instill a sense of confidence in the human resource department that it is well-managed and prepared to meet potential challenges and opportunities...
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...“Audit” is defined as an independent evaluation implementation by an independent expert of a particular activity or event. There are many types of audits such as financial, operational, technological etc. The most popular reference to audits, however; are the ones that examine financial statements. Auditing is the examination and systematic structural evaluation of an organized business. The evaluation is made up of operations within the business organization and the products and developments of production occurring within the business system. An investigation into past history of a business is involved in auditing. Records and data about a company are also involved, in order to measure and discover the legality of the business's transactions operations, tax reporting, and thorough handling of finances. To be blunt, audits test the financial legitimacy claimed by a business entity. According to R. Gene Brown’s “Changing Audit Objectives and Techniques”, (The Accounting Review, Vol. 37, No. 4), reviewing the history of auditing helps to provide a basis for analyzing and interpreting the changes which have occured in audit objectives and procedures over the years. Fundamentally, this review shows a recent significant correlation between expanded reliance on internal controls and a decrease in detailed testing. The future of auditing will probably consist primarily of a procedural or systematic review, with the analysis of effectiveness of internal controls providing the major...
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...Chapter 7 Audit Evidence Key objectives: 2. Identify the four evidence decisions made by auditors in creating an audit program. 3. Specify the characteristics that determine the persuasiveness of evidence. 4. Know the eight types of evidence used by the auditor, including the quality of each type of evidence. 5. Understand the purposes of audit documentation. The focus in chapter 7 is on the evidence accumulation process, which falls under the third standard of field work. We will be especially interested in the types of evidence, and the characteristics that make that evidence competent or reliable. The auditor must gather sufficient appropriate audit evidence to support the audit opinion. 1. Four Evidence Decisions 1. Which audit procedures to use. 2. What sample size to select for a given procedure. 3. Which items to select from the population. 4. When to perform the procedures. These are planning decisions. The most important decision is reaching an audit conclusion for each procedure based on the evidence. 1. Audit procedures are designed to meet the general audit objectives discussed in Chapter 6, and are laid out in the audit program. 2. Sample Size - Sampling is discussed in 49 detail in chapters 15 and 17. The sample size should be sufficient to reach a conclusion about the population. Sample size may be set by statistical formula, firm policy, or auditor judgment. 3. Sample Selection - Sample selection is a function of the objective of the test, and is also discussed...
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...Case #2.4 – Enron: Quality Assurance I. Technical Audit Guidance To maximize the knowledge acquired by students, this book has been designed to be read in conjunction with the post-Sarbanes-Oxley technical audit guidance. All of the post-Sarbanes-Oxley technical guidance is available for free at http://www.pcaobus.org/Standards/index.aspx. In addition, a summary of the Sarbanes-Oxley Act of 2002 is also available for free at http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Sarbanes-Oxley+–+The+Basics.htm. II. Recommended Technical Knowledge The Sarbanes-Oxley Act of 2002 Section 103 Section 203 III. Classroom Hints This case provides students with an opportunity to understand what is meant by quality control in the financial statement audit process and to understand why a quality control mechanism is an important internal control procedure for an audit firm. Further, the case provides a terrific example for students to see what can actually happen when quality control breaks down at an audit firm. In the case of Arthur Andersen, the breakdown in quality control ultimately led to the demise of the firm. To meet these objectives, this case illuminates the role of the professional standards group (PSG) at Arthur Andersen and the dialogue that occurred for several technical issues between Andersen’s PSG and the lead partner on the Enron engagement, David Duncan. We believe it is essential for students to carefully read over the recommended technical knowledge, along...
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...discouraged employees from investigating ethical lapses and encouraged their employees to use aggressive and also illegal accounting procedures. b. Andersen also holds a lot of the responsibility. Andersen reviewed, analyzed and approved several of the accounting practices performed by Enron that they should not have. They should have questioned several things going on with Enron, such as their lack of internal control. They failed to do so. 2. List three types of consulting services that audit firms have provided to their audit clients in recent years. For each item, indicate the specific threats, if any, that the provision of the given service can pose for an audit firm’s independence. c. Bookkeeping – This has potential conflict because as an auditor you may not audit your own work as in depth as you would someone else’s. d. Tax Advice/ Tax Return Prep. – This has the same type of threat as the bookkeeping. It seems a little silly for the person who prepared the return to turn around and audit the return. It seems that they would not be coming into the situation with an open mind. e. Tax Compliance – Most of the information for tax compliance comes straight from audited financial statements. Thus presenting the same scenario as the other two above. 3. For purposes of this question, assume that the excerpts from the Powers Report shown in Exhibit 3 provide accurate...
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...114 (Objectives 11, 13, 15) the following questions deal with audits by CPA firms. 14. Choose the best response. A. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? 1) It is difficult to prepare financial statements that fairly present a company’s financial position, operations, and cash flows without the expertise of an independent auditor. 2) It is management’s responsibility to seek available independent aid in the appraisal of the financial information shown in its financial statements. 3) The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements. 4) Itisacustomarycourtesythatallstockholdersofacompanyreceiveanindependent report on management’s stewardship of the affairs of the business. B. Independent auditing can best be described as 5) A branch of accounting. 6) Adisciplinethatatteststotheresultsofaccountingandotherfunctionaloperations and data. 7) A professional activity that measures and communicates financial and business data. 8) A regulatory function that prevents the issuance of improper financial information. C. Which of the following professional services is an attestation engagement? 9) A consulting service engagement to provide computer processing advice to a client. 10) An engagement to report on compliance...
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...The key areas of concern for students writing the PA exams are as follows: 1) Time management 2) Missing level 3 of the competency and jumping directly to level 4 3) Missing the competencies to be found in the exhibits in the case questions. Another concern is when students are writing both PA1 and PA2 at the same time. It is critical that those students “switch hats” from being a public practitioner in PA1 to a comptroller in PA2. And for those writing only one exam, make sure you write from the correct perspective. Consider the following for each case: 1) Type of communication (memo, letter or report) 2) Who is writing 3) To whom the case is being written to 4) The time frame. a. ie when in the audit: beginning, middle, end; there is no point writing about issues at beginning of audit if the audit is over and there is a draft audit report b. ie regarding purchase or sale of property: has the decision already been made to buy the property (shares or assets) or not; and if so, has the financing been decided. Or maybe there is an issue such as in Feed & Grow with the auditor owning shares of company to be consolidated with client; the extra shares to result in >50% ownership have not yet been bought so it is next year’s issue. The issue must still be addressed but the recommendation might be to consider the issue further. Not all issues have to be answered today; just that they must be addressed. The recommendation can be to explore...
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...Enron Corporation (Case 1.1) Most of us work from rags to riches but this is not the case of the Enron Corporation. Instead of becoming the nation’s greatest company, Enron instead laid claim to being the largest corporate bankruptcy in the history. The greediness and egotism wiped out the honesty and integrity that should instill on the persons who were involved in this case. Arthur Edward Andersen built his firm, Arthur Andersen & Company, into one of the largest and most respected accounting firms in the world through his reputation for honesty and integrity. His motto was “Think straight, talk straight” and he insisted that his clients adopt that same attitude when preparing and issuing their periodic financial statements. Arthur Andersen’s auditing philosophy was not rule-based; instead he invoked a substance-over-form approach to auditing and accounting issues. He avidly believed that the primary role of the auditor was to ensure that clients reported fully and honestly to the public, regardless of the consequences for those clients. Ironically, Arthur Andersen & Co.’s dramatic fall from eminence resulted from its association with a client known for aggressive and innovative uses of “accounting gimmicks” to window dress its financial statements. Enron Corporation was the second largest client of the firm and was involved in large, complex transactions with hundreds of special purpose entities (SPEs) that it used to obscure its true financial condition and...
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