Chapter 1 Modern Auditing

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CHAPTER 1
AUDITING AND THE PUBLIC
ACCOUNTING PROFESSION – INTEGRITY OF FINANCIAL REPORTING

|LEARNING CHECK |

1. SEVERAL COMMON ATTRIBUTES OF ACTIVITIES DEFINED AS AUDITING ARE (A) SYSTEMATIC PROCESS, (B) OBJECTIVELY OBTAINING AND EVALUATING EVIDENCE, (C) ASSERTIONS ABOUT ECONOMIC ACTIONS AND EVENTS, (D) DEGREE OF CORRESPONDENCE, (E) ESTABLISHED CRITERIA, (F) COMMUNICATING THE RESULTS, AND (G) INTERESTED USERS.

2. A financial statement audit involves obtaining and evaluating evidence about an entity's financial statements for the purpose of expressing an opinion on whether the statements are presented fairly in conformity with established criteria--usually GAAP. Thus, the nature of the auditor's report is an opinion on the fairness of the financial statement presentation. A compliance audit involves obtaining and evaluating evidence to determine whether certain financial or operating activities of an entity conform to specified conditions, rules, or regulations. A report on a compliance audit takes the form of a summary of findings or assurance regarding degree of compliance. An operational audit involves obtaining and evaluating evidence about the efficiency and effectiveness of an entity's operating activities in relation to specified objectives. Reports on such audits include an assessment of efficiency and effectiveness and recommendations for improvements.

3. Independent auditors are individual practitioners or members of public accounting firms who render professional auditing services to clients. These services may involve financial statement audits, compliance audits, and operational audits. Internal auditors are employees of the companies they audit. They are involved in an independent appraisal activity, called internal auditing, as a service to the organization. Internal auditors are primarily concerned with compliance and operational audits. Government auditors are employed by various local, state, and federal governmental agencies. They may be involved in all three types of audits.

4. a. The financial statement audit is a form of an examination engagement in which the auditor provides reasonable assurance that the financials statements are free of material misstatement. The CPA might also perform an engagement to examine a forecast or a projection in which the auditor provides reasonable assurance that the forecast or projection reflects the underlying assumptions and that there is support reasonable for the underlying assumptions. A CPA might also perform an engagement to examine an assertion regarding compliance with laws or regulations in which the auditor provides reasonable assurance that the entity complied with laws or regulations.

b. A review of financial statements is an engagement in which the CPA provides negative assurance that he or she is not aware of any material modifications that need to be made to the financial statements in order for them to be in conformity with GAAP.

5. Accounting and compilation services provide financial statement users and decisions makers with relevant information. However, they are not designed to test the reliability of such information. The primary benefit received is information that may be relevant to a decision, even though evidence is not obtained about the reliability of such information.

6. The following table summarizes several assurance services provided by CPAs and explains the how they improve the relevance or reliability of information used by decision makers.

|Assurance Service |How the service improves the relevance or reliability of information used by decision makers | |CPA Risk Advisory |Provides relevant information to management or the board of directors about business risks faced| | |by an entity. It ma also provide information about...
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