What are the advantages and disadvantages of the primary types of auditors? Which type interests you the most? Explain.

The most common primary types of auditors are certified public accounting firms, government accountability office auditors, internal revenue agents, and internal auditors. CPAs are licensed to express audit opinions on financial statements and are used as independent or external auditors. I’m not currently aware of any disadvantages of being a CPA. GAO auditors work for the federal government and report directly to Congress. In many states GAO audit experience fulfills the experience requirement to be a CPA. Due to vast experience and the scope of their job auditing the federal government, GAO auditors are highly regarded. On the other hand, the immensity of the job maybe isn’t for just anyone. IRS agents enforce federal tax laws to ensure compliance in tax returns. It might seem a simple matter to generally focus on one type of audit, however, the tax laws are complicated and contain hundreds of volumes of interpretations. Internal auditors are employed by individual companies to audit for management. Experience in internal auditing often leads to CPA or CIA certification. One problem with internal auditors is lack of independence. Although they report directly to the president, or other ranking authority, they cannot be entirely independent due to the employer-employee relationship. As a result, external auditors are sometimes hesitant to rely on internal audit reports due to this lack of independence.

Why is it important to understand the difference between an originating temporary difference and permanent difference in a company? Explain if this concept is relevant for personal finance.

An originating temporary difference is the initial difference between the book basis and the tax basis of an asset or liability. A temporary difference will eventually result in either a taxable or deductible amount in the future. Taxable differences give rise to recording deferred tax liabilities while deductible differences give rise to recording deferred tax assets. A permanent difference results from items that enter into pretax financial income but never into taxable income, or enter into taxable income but never into pretax financial income. Since permanent differences affect only the period in which they occur, they do not give rise to future taxable or deductible amounts. As a result, companies recognize no deferred tax consequences.

When conducting an error analysis, what must a CPA consider? Why? What might happen if these items are not taken into consideration?

The initial considerations must be what type of error is involved, what entries are needed to correct the error, and how are the financial statements to be restated. Three types of errors can occur: balance sheet errors, which affect only the presentation of an asset, liability, or stockholders’ equity account, income statement errors, which affect only the presentation of revenue, expense, gain, or loss accounts in the income statement, or balance sheet and income statement errors, which involve both the balance sheet and income statement. Errors are classified into two types. Counterbalancing errors are offset or corrected over two periods. Non-counterbalancing errors are not offset in the next accounting period and take longer than two periods to correct themselves. If these errors are ignored and are of sufficient materiality, they can cause misstated financials that may lead to avoidable company liability down the road.

Which business structure would you choose if you were to set up your own CPA practice: a partnership, proprietorship, or corporation? Why? Explain what factors affect your decision.

I would most likely choose a partnership for a variety of reasons. First and foremost is the business I work for is already set up that way and it is something with which I am familiar. Additionally, the future of the company looks to have two managing partners, one of which will be me. Also, from a tax perspective, each partner’s pro rata share of the entire reported partnership income is included on the individual partner’s tax return. When actual distributions of assets are made to the partners, they are not taxed again. Another reason is the ease of formation of a partnership, generally just a written agreement is used. Finally, the company I work for deals mostly with small clients of a private nature and the partnership allows the use of a comprehensive basis of accounting other than GAAP.

What ethical dilemmas might CPAs experience? Explain what ethical responsibility a CPA might neglect.

Some of the ethical dilemmas potentially experienced by CPAs include independence, scope of services, confidentiality, practice development, and difference on accounting issues. Independence requires the complete separation of the business and financial interests of the public accountant from the client corporation. The scope of services refers to many other services that may be compatible with financial auditing. Non-audit services can result in a lack of independence from the client. Confidentiality refers to the expectation of keeping the client’s information confidential, however, something may arise that conflicts with the public accountant’s duty to protect the public. Advertising is now allowable to assist with practice development, however, it is vital to ensure that misleading or blatant mistruth is avoided to maintain the prestige and credibility of the occupation. Differences on accounting issues may arise between the client company’s desire of how to account for a particular item that is at odds with the public accountant or perhaps not accordance with GAAP. One example of a neglected ethical responsibility could be an accountant keeping the books and payroll for a large company and after becoming familiar with the company’s prospective employee qualifications begins to make suggestions on who to hire. This shows a lack of independence and an over-reach within the scope of services pertaining to that particular client.