Introduction to Financial Audit
Case Set 2
1. Read AU 110
(a) What are management’s responsibilities pertaining to the independent audit?
According to the PCAOB Standards, section AU 110.03 clearly states that management shall bear responsibility for all issued financial statements, the adoption of sound accounting policies, and for establishing and maintaining a system of internal controls that will record, track and process transactions, events and conditions. Management shall also maintain an understanding of all transactions made within the entity being audited. Due to this fact, management is also responsible for the fair presentation of financial statements in compliance with generally accepted accounting principles.
(b) What are the auditor’s responsibilities pertaining to the independent audit? Be sure to cite paragraph numbers as appropriate, and do not simply copy and paste from the standard. Explain the responsibilities in your own words.
According to the PCAOB Standards, section AU 110.02, it is the responsibility of the auditor to express an opinion once an audit has been planned and performed and has attained a reasonable assurance, the financial statements are free of material misstatement, which includes fraud or error. This by no means indicates there are no immaterial misstatements due to fraud or error, but that it is the responsibility of the auditor to detect and report only material misstatements. Once a material misstatement is found, it is up to management to fix the issue, not the auditor. (United States)
2. What are some advantages to your firm of accepting the Hood audit?
One advantage is that in the past few years Hood has made no significant changes to its IT systems or manufacturing process outside of routine improvements to increase efficiency. This means that there should be little or none misunderstandings when it comes to the treatment of financial transactions since there has been no major change from
Bibliography: AICPA. "AU Section 318." n.d. AICPA Web site. 24 March 2013. . Miller, C.R. and A. Savage. Vouch and trace: A revenue recognition audit simulation. 2009. 24 March 2013. United States. PCAOB. Securities and Exchange Commission. Auditing Standards. PCAOB, 1 Jan. 2002. Web. 22 Mar. 2013.