Name: Thuy Duong Nguyen

Course: Auditing and Assurance Services Seminar

Homework for Chapter 3 and 4
April 23, 2015

Thuy Duong Nguyen

Chapter 1
The Role of the Public Accountant in the American Economy
1-2. Assurance services are independent professional services that enhance the quality or the
context of information in order for the users to make better and more accurate decision. The two
types are: (a) those that increase the reliability of information and (b) those that involve putting
information in a form or context that facilitates decision making.
1-5. A report by an independent public accountant concerning the fairness of a company's
financial statements is commonly required in the following situations:
- Application for a bank loan.
- Establishing credit for purchase of merchandise, equipment, or other assets.
- Reporting operating results, financial position, and cash flows to absentee owners
(stockholders or partners).
- Issuance of securities by a corporation.
- Annual financial statements by a corporation with securities listed on a stock exchange
or traded over the counter.
- Sale of an ongoing business.
- Termination of a partnership.
1-15. A peer review is a critical review of a public accounting firm's practices by another public
accounting firm or other CPAs functioning as a peer review team. The purpose of a peer review is to
encourage adherence to quality control standards established by the accounting firm and the profession.

1-17. Services offered by public accounting firms in addition to auditing include other forms of
attestation, tax work, consulting services, litigation support services, fraud investigation services,

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personal financial planning and accounting services. Accounting services include preparation of
financial statements for smaller companies that have limited accounting personnel. Consulting
services include aiding clients in the design of accounting systems, conversion to Information
Technology (IT) systems, preparation of budgets, planning business combinations with other
companies, executive search, and numerous other projects.
1-27.
a. An example of possible bias: an individual or business entity applies for a bank loan. There is
an incentive to overstate assets, income, and owner's equity, and to overlook or minimize
liabilities, which gives the appearance of greater financial strength.
b. A bank loan officer may insist that a prospective borrower provide audited financial
statements. This provides assurance that the data in the financial statements have been examined
by independent competent persons.
1-28.
a. (3) Both sets of standards require independence.
b. (1) The client's management is primarily responsible for representations contained in the
financial statements. The independent auditors are responsible for performing their audit in
accordance with generally accepted auditing standards.
c. (1) The most important benefit of having an annual audit by a public accounting firm is to
provide assurance to investors and other outsiders that the financial statements are dependable.
The expansion of the securities markets has tremendously increased the need for verification of
financial statements performed by competent, independent persons.

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d. (2) The PCAOB ordinarily does not review financial reports filed with the Securities and
Exchange Commissionalthough, if they so desire, they may review such reports to accomplish
their other responsibilities. The other three replies are all explicit responsibilities of the PCAOB.
e. (4) The Public Company Accounting Oversight Board was given the authority by the
Sarbanes-Oxley Act of 2002 to establish or adopt auditing standards for audits of public
companies.
f. (4) Governmental auditing often extends to audits of efficiency, effectiveness, and compliance
(with laws, regulations, etc.). The other responses, adequacy, evaluation, and accuracy, are terms
not typically used to summarize the scope of governmental auditing.
g. (3) Normally, the higher in an organization an internal auditor reports, the greater the degree of
independence. Accordingly, reporting to the audit committee of the board of directors increases
the likelihood that the internal auditor will be able to act independently of those being audited.
h. (4) Ethical scandals at the AICPA was not one of the causes of the passage of the SarbanesOxley Act of 2002. All of the other responses contributed to passage of the Act.
i. (3) The Federal Accounting Standards Advisory Board establishes accounting standards for
United States governmental agencies. The Governmental Accounting Standards Board
establishes accounting standards for state and local government entities.
j. (4) Forensic audits are usually performed when fraud has been found or is suspected.
k. (1) Because the auditors purposes for considering internal control are to (a) plan the audit and
(b) to determine the nature, timing, and extent of the tests to be performed, answer (1) is correct.

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l. (2) A compliance audit measures the compliance of an organization with established criteria
such as laws and regulations. Answer (2) addresses policies and procedures on environmental
laws and regulations.
1-32.
Statement
When financial statements are involved this is referred to as an
audit.
The term We are not aware of any material modifications that
should be made is often included in the report.
The report issued provides a summary of procedures followed and
findings.
The report issued provides reasonable assurance.
The procedures involved are generally limited to inquiry and
analytical procedures.
The report issued provides absolute assurance.
The report provides limited assurance.
The procedures followed are agreed upon with the specified user or
users.
This type of engagement provides more assurance than a review.
The CPA need not be independent to perform this service.
1-33.
a. 1 Agreed-upon procedures engagement
b. 9 Review
c. 3 Attest engagement
d. 4 Audit of financial statements
e. 7 Integrated audit
f. 2 Assurance services
g. 6 Examination
Chapter 2
Professional Standards

Type of Engagement
E
R
A
E
R
N
R
A
E
N

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2-1. The Sarbanes- Oxley Act of 2002 created a PCAOB and gave this body authority to develop
auditing standards for the audits of the public companies. The AICPA has the authority to
develop the auditing standards for audits of nonpublic companies.
2-2. Generally accepted accounting principles are accounting principles that have substantial
authoritative support. These standards provide the criteria for financial reporting. Generally
accepted auditing standards are those issued by the AICPAs Auditing Standards Board for the
auditors work in fulfilling the overall objectives of a financial statement audit. GAAS address
the general responsibilities of the auditor and the auditors further considerations relevant to the
application of these responsibilities.
2-3. A financial reporting framework is a set of criteria used to determine measurement,
recognition, representation and disclosure of all material items appearing in the financial
statement. It is important for the auditors because they need to base on the framework to give
their opinions on the financial statements.
2-16. A material amount is sufficiently important to influence decisions made by reasonable
users of financial statements. The amount may differ by account based on specific account
characteristics.
2-30.
a. (4) Because the license to practice as a CPA is granted by the state, the state has the right to
revoke the right of an individual to practice as a CPA.
b. (2) The AICPA has authority to establish auditing standards for nonpublic companies. The
Financial Accounting Standards Board has the authority for accounting standards for both public
and nonpublic companies. The Public Company Accounting Oversight Board has the authority to
6

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establish standards for audits and reviews of public companies and quality control for firms that
audit public companies.
c. (2) FASB Concepts Statements are considered unauthoritative guidance.
d. (2) Financial Statement audits provide reasonable, not absolute, assurance.
e. (2) The quality control standards were established to provide reasonable assurance that
professional services confirm with professional standards.
f. (3) The internal control of the client is not explicitly mentioned in the unqualified standard
report although it is implicit in the reference to the generally accepted auditing standards.
g. (1) The independent mental attitude on the part of the auditor is required by the second general
standard of the PCAOB.
h. (3) Such a quality control policy is designed to assure that personnel assigned to an
engagement are independent to perform the work, an ethical requirement.
i. (1) An audit provides reasonable assurance of detecting misstatement due to fraud, regardless
of whether due to fraudulent financial reporting or misappropriation of assets.
j. (1) An integrated auditing report on the financial statements of a public company states that the
audit of was performed in accordance with the Public Company Accounting Oversight Board
standards, not the AICPA standards.
k. (3) The PCAOB staff performs inspections of audit firms that are registered with the PCAOB.
In order to perform an audit of a public client, an audit firm must be registered.
l. (4) Neither the AICPA audit report nor does the international audit report include an opinion on
internal control. The other replies provide actual differences between the two reports.
2-31.
Comments

Correct?

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a. The report should not be addressed to management.
b. The report should indicate that we have audited rather than examined the

Yes
Yes

financial statements.
c. The report should

managements

No

responsibilities for internal control.

d. The report should state that the auditors responsibility is to express reasonable

No

assurance not an opinion.

e. The audit is designed to access risks of material misstatements due to errors or

Yes

fraud, the term illegal acts is incorrect.

f. The report should not refer to the auditors evaluating the appropriateness of

No

accounting policies:, since those are responsibility of management.

g. The evidence should be sufficient and appropriate rather than adequate.
h. The opinion should not include in all material respects since the auditor is

Yes
No

providing an opinion on the accuracy of the financial statement.

i. The opinion should be on accounting principles generally accepted in the United

Yes

States of America, not on auditing standards.

j. The signature on the report should be that of the CPA firm, not that of the partner.

Yes

not

indicate

anything

concerning

2-34.
Principles
Yes/No
a. The purpose of an audit is to provide financial statement users with an opinion by No
the auditors on whether the financial statements are presented fairly, in all material
and immaterial respects, in accordance with the applicable financial reporting
framework.
b. The auditors are responsible for having appropriate competence and capabilities to Yes
perform the audit.
c. The auditors are unable to obtain absolute assurance that the financial statements Yes
are free from material misstatement.
d. The opinion states whether the financial statement are presented fairly, in all Yes
material aspects, in accordance to the applicable financial reporting framework.
e. Inherent limitation of an audit includes the need to conduct an audit to achieve a No

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balance between the benefit to management and the benefit to the auditors.