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Carmichael

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1. Who is the author of this paper and what is his position (give description of responsibilities) with the PCAOB at the time of this article?

The author of the article titled, “The PCAOB and the Social Responsibility of the Independent Auditor” is Douglas R. Carmichael. At the time of this article Douglas Carmichael was the Chief Auditor of the Public Company Accounting Oversight Board. His responsibility as Chief Auditor was to advise the Board and the head of the PCAOB’s professional standard-setting division on matters of policy and technical issues relating to the auditing of public companies as well as what the auditor’s role was. His role of advisor helped keep the PCAOB from being influenced by the accounting industry and their standards.

2. What does Carmichael see as the underlying mission of the PCAOB?

Carmichael sees the underlying mission of the PCOAB is to restore the confidence of investors in the independent auditors of public companies by registering public accounting firms that prepare the financial statements of public companies, inspecting the audit practices of the registered accounting firms, enforcement of compliance with professional standards and securities laws by the registered accounting firms, investigation, discipline and imposition of sanctions on firms and associated persons, as well as establishing or adopting auditing, quality control, ethics, independence, and other standards related to the preparation of financial statements of public companies.

3. According to Carmichael, why is it so important that the public have confidence in the independent auditors of public companies?

Dr. Carmichael states that it is important to have confidence in the independent auditors of public companies because if that confidence is lost the public will ultimately suffer. If there is no confidence in the opinion of the independent auditor then the value of the opinion is worthless and the public and users of the financial reports will question not only the truthfulness of the company’s financial reports but all accounting and audit practices as well.

4. What is Professor Theodore Limperg’s basic theory of the auditor’s function?
A. Does Limperg’s Theory of Inspired Confidence support the principle-based approach or the rules-based approach to guide the performance of an audit?
B. What is the most important factor in determining audit performance?
C. What is the auditor’s responsibility in this process?

Professor Theodore Limperg’s basic theory of the auditor’s function, the Theory of Inspired Confidence, links society’s desire for reliable financial information to the ability of auditing methods to meet those desires. As society transforms, its needs change and warrant changes in audit methods and the function of the independent auditor. Limpberg’s Theory of Inspired Confidence supports the principles-based approached to guide the performance of an audit. The principles inform the method of the audit rather than the mere following of procedure. Principles are the basis of any ethical purpose and set the standards of what makes a good, ethical audit rather than show how the job should be done. Principles are however, subjective. This approach permits the independent auditor to adjust the nature of the audit to the firm under review; the independent auditor can be flexible in the interpretation of the foundation principles. This may generate suspicion of being self-interested or crafted for the interest of the firm rather than the public good, but adversely allows the flexibility to deal with new problems, or scandals, as they arise. That is why Limperg advocates that the most important criterion in determining audit performance is that the independent auditor always performs the work to obtain evidence necessary to provide the guarantee that is expected by society, the reliability of the financial statements. In order to maintain the confidence of the public the independent auditor must act as a confidential agent of society. He must comply with the social responsibilities of acting as an agent, checking the stewardship of managers and providing a timely and relevant opinion. If the independent auditor’s function is lost, an expert and independent opinion based on examination, his objective is also lost.

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