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Auditing

Auditing Introduction Letter

Auditing Introduction Letter.
Dear Mr. Lancaster, I understand that Apollo Shoes, Incorporated is concerned about acquiring certain auditing and assurance services. In today’s business world a company needs to stay ahead by operating more successfully and proficiently than its competition. Stromsodt can help Apollo Shoes to gain this advantage by offering auditing and assurance services designed for the company needs. Stromsodt is a company with certification in Service Auditor Assessments as well as provides specialization of auditing in areas of superior athletic podiatric products.
Stromsodt has been providing auditing and assurance services to businesses just like yours for more than 30 years. With more than three decades of experience, Stromsodt has helped over hundreds of companies to achieve their company objectives and run more proficiently. Stromsodt is a company that is more productive and cost-effective than any other auditing and assurance service company. The company provides timely, experienced services at reasonable fees. The Auditing and Assurance services Stromsodt offers are as follows 1. Statutory Audits 2. Internal Audits 3. Risk Management.
Corporate Governance 5. Tax Audit 6. Management Audits 7. Review of Accounts 8. Special Audits 9. Due diligence 10. Restatement as according to International Accounting Standards (IAS)/ General Accepted Accounting Principles (GAAP) These services will benefit Apollo Shoes by 1. Ascertain whether the presentation of accounts are fair and true 2. Timely detection of errors and fraud in the company 3. Timely identification of risks of material misstatements 4. Validation of accuracy, validity, and authenticity of account information 5. Improvement of profitability . Maximization of revenue recovery 7. Preparation of documents on a timely basis What other firms fail to deliver, Stromsodt delivers. Stromsodt brings value to a company by focusing on a company’s objectives. Part of Stromsodt’s core philosophy is to provide and perform services that add only value to a client to reach set objectives. The company abides by five essential principles when performing services for a client. These principles are integrity, objectivity, professional competence along with due care, confidentiality, and professional behavior.

The roles I perform at Stromsodt vary depending upon the service. Some general tasks I perform include 1. Reviewing financial statements to determine conformity to GAAP 2. Attesting the effectiveness of internal controls over financial reporting 3. Reviewing previous financial report. Reviewing financial statements to determine conformity to GAAP helps a company by establishing to external users the assurance of a company’s financial statements. Attesting the effectiveness of internal controls over financial reporting helps to ensure no potential material misstatements or raudulent activities have occurred. This helps to lessen the likelihood of occurrence of these activities as well.
Reviewing previous reports can provide assurance to a company in knowing that its previous reports are accurate. In providing these services I would make sure that Apollo Shoes has the necessary information to achieve the objectives of the company by abiding by the five principles set forth by Stromsodt. I will also adhere to the 10 general accepted accounting standards an accountant or CPA is required to adhere by. These standards are as follows 1. Display adequate training and proficiency. 2. Maintain independence from the audited company. 3. Display professionalism in performance and planning the report. 4. Adequately plan the fieldwork and supervise assistants. 5. Sufficiently understand the internal control of the company as well as determine the tests to test these controls. 6. Provide sufficient information to back up opinion formed on the financial statements. 7. State and report if the financial statements represented are in accordance with GAAP. 8. State and report circumstances of company not consistently using principles 9.
Recommend additional information for disclosures expected to be in financial statements. 10. Provide opinion on the financial statements. In conclusion, I look forward to talking further about Apollo Shoes auditing and assurance needs and about how much Stromsodt can provide Apollo Shoes with these services. Please feel free to contact me anytime regarding this proposal. Thank you for the opportunity to submit the proposal, and I, along with the entire staff at Stromsodt, are looking forward to working with Apollo Shoes in the near future.

Auditing Introduction Letter

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Approximately 250 words

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Auditing Ethics

Auditing Ethics.
The natural setting, that we are predominantly in an imperfect world, brings about the question of ethics in many spheres of the human endeavor, including auditing.

It is therefore a pre-liquisite for all auditors in any organization to understand and give concerted considerations to the human factor (both within the organization and outside) as they conduct ethically sensitive audits as well as determining the required audit coverage. It is common practice for most organizations to have some postulated ethical guidance procedures-the codes of ethics- the comprehensive principles and values statement that should serve as a daily guide to auditors in their daily work.

This gives an outline regarding not only the ethical requirements but also the professional obligations that should be emphasized whenever any critical decisions relating to the business proceedings are to be made (Matthias, 2004, 16).
There should be prior, clear communication and reinforcement of such ethical codes among the suppliers, customers, and employees (including the internal and external auditors). However, the extent and the nature of any audit coverage are critically determined by the management’s degree of commitment to high ethical and integrity standards.
Discussion
It is paramount to understand at this point that there are several risk factors that are involved in the process of auditing ethics. This implies that the auditors must be well conversant with all the functional fields in an organization so as to identify activities and functions in which ethical implications would pose the greatest risks. After such risks have been identified, a value (such as low, medium or high) is assigned to facilitate proper allocation of audit efforts (Usoff, 2001, 21).
Among the most considered risks by auditors include, but are not limited to the following:
·         Sensitive data/information disclosure
·         Perceived business loss
·         Adverse publicity
·         Probable injury to employers, employees, and/customers and
·         Adverse legal implications.
Some areas are imperatively more risk prone than others and auditors should therefore allocate them more ethical auditing time. One of these is the procurement and purchasing department in most, if not all enterprises. Red flags must always be raised in times when larger gratuities and gifts are offered by suppliers. These also include other nominal gifts offered, and every employee who is involved in purchases must be thoroughly reminded of the company policy on gratuities and gifts.
Another are that require careful consideration at all times is the environmental, health issues, and safety department. An elaborate example deliberate audit denial is the Soviet’s Chernobyl nuclear reactor accident which they refused to acknowledge until other European neighbors complained about the nuclear fallouts.
Environmental issues have been among the major challenges to industries world wide, with many other stakeholders such as the media, the public and regulatory bodies demanding apt responses on the part of the companies to make responsible precautions (Caplan, 2003, 14).

Auditing Ethics

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Islamic Auditing and Conventional Banking

Islamic Auditing and Conventional Banking.
Auditing is an examination and verification of a company’s financial and accounting records and supporting documents by a professional, such as a Certified Public Accountant. According to AlBaraka, Islamic bank is an institution that mobilizes financial resources and invests that money in an attempt to achieve pre-determined islamically – acceptable social and financial objectives. Both mobilization and investment of money should be conducted in accordance with the principles of Islamic Sha’riah whereas according to Ustaz Hj Zaharuddin (2007) stated that conventional bank operates based on debtor-creditor relationships.
For example, it is between depositors (creditor) and bank (debtor); and borrowers (debtor) and the bank (creditor). Conventional bank maximize profit by charging interest to customers. On the other hand, Basu (2006) defines Audit report as “… the document to which auditor convey his opinion about the fairness of the financial statements”. The audit report is one of the vital parts of communication used by auditors. The nature of the report must be clear and concise enough to be disclosed and communicated as its represents the auditor’s credibility as well as the degree of responsibility being undertake.
Often the role of conventional auditor is to come up with a report examining the credibility of the financial statements and whether the financial statements are prepared in accordance with an applicable and relevant auditing standard. However, when referring to the auditor’s report of Islamic Bank or the Sha’riah supervisory report of an Islamic Bank, the scope of auditor’s report will be extended. This is because auditors for Islamic banks must also attest the compliance of the bank practice to that

Islamic Auditing and Conventional Banking

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Ocean Manufacturing As An Audit Client

Ocean Manufacturing As An Audit Client.
5(a) Prepare a memo to the partner making a recommendation as to whether Barnes and Fischer should or should not accept Ocean Manufacturing, Inc. as an audit client. Carefully justify your position in light of the information in the case. Include consideration of reasons both for and against acceptance and be sure to address both financial and nonfinancial issues to justify your recommendation. MEMORANDUM To:Jane Hunter From:Corrine Subject: Ocean Manufactory Should be Accepted Date:February 3, 2012 Ocean Manufacturing, a medium-sized manufacturer of small home appliances, is our prospective client.
First, we should decide whether to accept this client. The purpose is to minimize the likelihood that our auditors will be associated with clients who lack integrity. We can reduce the risk that material misstatements may exist and not be detected by the author. Therefore, we need to investigate the client and obtain certain information that we need. The first step to evaluate the client is to confer with the predecessor auditor. The client granted me permission to contact the previous auditor and he indicated the problems the firm had with Ocean: (1) complexities and problems with Ocean’s new IT system 2) management’s tendency to aggressively reflect year-end accruals in order to meet creditors’ requirements As far as we know the company switched to a new system in 2011 and the transition to the system was not well managed. The company was working to modify the system to make it better. Also, our local office’s IT team is fairly confident they will be able to diagnose Ocean’s control weakness and help Ocean overcome current difficulties. Therefore, the system is not an obstacle for our firm to accept the client.
To meet creditors’ requirements, the management inappropriately reflected year-end accruals. The information reflected on the integrity of management, which might be a risk for us to accept the client. According to the predecessor’s assertion, the reason for the change of auditor is a disagreement over the fee. And the president of Ocean Manufacturing indicated that the main reason for the switch is to build a relationship with a more nationally established CPA firm. Whatever the true reason is, neither will be serious problem regarding accepting the client.

We can refer to the fee in the engagement letter before all the auditing work begin. We don’t have a client in the home appliance industry and the industry has been growing at a steady peace. Therefore, the engagement will be a great opportunity for our company to enter a new market. According to the financial reports, we can get some information: On December 31, 2011, the financial report indicates a net profit of $3. 4 million and the net earnings are increasing steadily from 2009 to 2011, which means the company has potential to some extent.
According to all the information, we find that the client is able to be accepted. 5(b) Prepare a separate memo to the partner briefly listing and discussing the five or six most important factors or risk areas that will likely affect how the audit is conducted if the Ocean engagement is accepted. Be sure to indicate specific ways in which the audit firm should tailor its approach based on the factors you identify. MEMORANDUM To:Jane Hunter From:Corrine Subject: the Risk Areas if the Ocean Manufactory is Accepted Date:February 4, 2012 Ocean Manufactory is a potential company and so is the industry.
When our firm accepts the client, we will have an opportunity to explore the new market. Nevertheless, we can not ignores the risk we face. There are some risk areas we should consider since they will likely affect how the audit is conducted. The risk areas are as following: Home Appliances Industry The home appliance industry is a new industry for our firm and we have never had a client in this field. That means we are not familiar with this industry and lack the necessary expertise. In order to solve this problem we need specialists who do have the necessary expertise. The specialists’ work n this field can be used by our auditor to obtain sufficient audit evidence. Management The company experiences a significant management turnover. The new controller has little relevant experience and is not familiar with the company’s IT system. In this situation, the new controller can attend relevant training and talk to people who have more knowledge about the system to be more to familiar with the system as soon as possible. Accounting and Control System The new accounting system which maintains inventory, accounts receivable, accounts payable and so on was not well managed.
Some problems will exist in balance sheet account classification and inventory tracking due to untrained personnel. Employees should obtain some training on the new system to help them work efficiently and effectively. Besides, our local office’s IT team can diagnose the control weakness and help them to overcome the difficulties. Internal management Some important reports like internal management budget reports and receivable billings are often late and inaccurate. The weak management will result in many serious problems.
The Ocean Manufactory should strengthen the internal management and improve the effectiveness of the risk management control. Only in this way, the accountants can get the accurate and timely reports which is significant to our auditing process. 5. According to the previous auditor, the management tends to reflect the accruals aggressively in order to meet the creditors’ requirement. Facing the situation, we should try to talk to the management to figure it out. If the statement of the previous auditor is true, we will suggest the management to reflect the accruals accurately.

Ocean Manufacturing As An Audit Client

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Essay about Auditing

Essay about Auditing.
5(a) Prepare a memo to the partner making a recommendation as to whether Barnes and Fischer should or should not accept Ocean Manufacturing, Inc. as an audit client. Carefully justify your position in light of the information in the case. Include consideration of reasons both for and against acceptance and be sure to address both financial and nonfinancial issues to justify your recommendation. MEMORANDUM To:Jane Hunter From:Corrine Subject: Ocean Manufactory Should be Accepted Date:February 3, 2012 Ocean Manufacturing, a medium-sized manufacturer of small home appliances, is our prospective client.
First, we should decide whether to accept this client. The purpose is to minimize the likelihood that our auditors will be associated with clients who lack integrity. We can reduce the risk that material misstatements may exist and not be detected by the author. Therefore, we need to investigate the client and obtain certain information that we need. The first step to evaluate the client is to confer with the predecessor auditor. The client granted me permission to contact the previous auditor and he indicated the problems the firm had with Ocean: (1) complexities and problems with Ocean’s new IT system 2) management’s tendency to aggressively reflect year-end accruals in order to meet creditors’ requirements As far as we know the company switched to a new system in 2011 and the transition to the system was not well managed. The company was working to modify the system to make it better. Also, our local office’s IT team is fairly confident they will be able to diagnose Ocean’s control weakness and help Ocean overcome current difficulties. Therefore, the system is not an obstacle for our firm to accept the client.
To meet creditors’ requirements, the management inappropriately reflected year-end accruals. The information reflected on the integrity of management, which might be a risk for us to accept the client. According to the predecessor’s assertion, the reason for the change of auditor is a disagreement over the fee. And the president of Ocean Manufacturing indicated that the main reason for the switch is to build a relationship with a more nationally established CPA firm. Whatever the true reason is, neither will be serious problem regarding accepting the client.

We can refer to the fee in the engagement letter before all the auditing work begin. We don’t have a client in the home appliance industry and the industry has been growing at a steady peace. Therefore, the engagement will be a great opportunity for our company to enter a new market. According to the financial reports, we can get some information: On December 31, 2011, the financial report indicates a net profit of $3. 4 million and the net earnings are increasing steadily from 2009 to 2011, which means the company has potential to some extent.
According to all the information, we find that the client is able to be accepted. 5(b) Prepare a separate memo to the partner briefly listing and discussing the five or six most important factors or risk areas that will likely affect how the audit is conducted if the Ocean engagement is accepted. Be sure to indicate specific ways in which the audit firm should tailor its approach based on the factors you identify. MEMORANDUM To:Jane Hunter From:Corrine Subject: the Risk Areas if the Ocean Manufactory is Accepted Date:February 4, 2012 Ocean Manufactory is a potential company and so is the industry.
When our firm accepts the client, we will have an opportunity to explore the new market. Nevertheless, we can not ignores the risk we face. There are some risk areas we should consider since they will likely affect how the audit is conducted. The risk areas are as following: Home Appliances Industry The home appliance industry is a new industry for our firm and we have never had a client in this field. That means we are not familiar with this industry and lack the necessary expertise. In order to solve this problem we need specialists who do have the necessary expertise. The specialists’ work n this field can be used by our auditor to obtain sufficient audit evidence. Management The company experiences a significant management turnover. The new controller has little relevant experience and is not familiar with the company’s IT system. In this situation, the new controller can attend relevant training and talk to people who have more knowledge about the system to be more to familiar with the system as soon as possible. Accounting and Control System The new accounting system which maintains inventory, accounts receivable, accounts payable and so on was not well managed.
Some problems will exist in balance sheet account classification and inventory tracking due to untrained personnel. Employees should obtain some training on the new system to help them work efficiently and effectively. Besides, our local office’s IT team can diagnose the control weakness and help them to overcome the difficulties. Internal management Some important reports like internal management budget reports and receivable billings are often late and inaccurate. The weak management will result in many serious problems.
The Ocean Manufactory should strengthen the internal management and improve the effectiveness of the risk management control. Only in this way, the accountants can get the accurate and timely reports which is significant to our auditing process. 5. According to the previous auditor, the management tends to reflect the accruals aggressively in order to meet the creditors’ requirement. Facing the situation, we should try to talk to the management to figure it out. If the statement of the previous auditor is true, we will suggest the management to reflect the accruals accurately.

Essay about Auditing

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Accounting and Auditing: Crazy computers

Accounting and Auditing: Crazy computers.
FASB (Financial Accounting Standards Board) plays the role of determining Generally Accepted Accounting Principles to ensure proper accounting standards are followed. According to FASB, revenue is recognized once it is earned.

Commission in Crazy Computer’s case is recognized immediately since Crazy Computers collects the cash on behalf of Third Party insurance and then pays it. Commission however should not be added to sales because when balancing the equation, Sales is equal to opening stock plus purchases less closing stock.

This means that by adding commission to sales the equation may not balance and it will be exaggerated. The commission revenue consists of income and it is therefore used in the final statements of accounts to calculate the profit of the business.
Commission received from TPI can therefore be used when coming up with profits for the year. In case Third Party Insurance agrees to re insure, revenue to be obtained from Third Party Insurance (TPI) will only be recognized after Third Party Insurance pays up the amount to Captive Insurance Company (CIC).
Commission revenue can only be recognized immediately if Crazy Computers will automatically be deducted from the $110 that the company gives to Third Party Insurance so that it does not have to wait for TPI to pay. This would mean that Crazy Computers would have $165 at the end of the sale then give $25 to TPI.
However, it may not show whether the computers on their own were able to sustain themselves without the boost from the commissions earned. When Crazy Computers introduce CIC, they will still get the commission but it will be offset when the amount received from TPI is added.
Even as Crazy Computers recognizes revenue from sale of third party insurance on behalf of TPI, it should be careful when it comes to receiving the money back for re-insurance through CIC. The best method to account for the funds to be collected from the Captive Insurance is to do them separately from Crazy Computers.
This is because Crazy Computers and CIC are two different kinds of businesses. FASB advices that in order to check the progress of a business it is good to gauge its profitability which is done by subtracting the expenses from sales made by the business.
This will ensure that when it comes to paying claims, revenue received from Crazy Computers should not be used for CIC obligations. It will also ensure that the money collected from CIC is not to be used in the computer business unless Crazy Computers borrows from CIC.
If Crazy Computers was to account for CIC revenue together with the computer revenue, calculating profits would get complicated since the revenue received is not made from sales only. In other words, treating the two businesses as separate entities will ensure the profitability of the two can be determined.
Crazy Computer’s idea to create a wholly owned subsidiary would be a good idea if the Third Party Insurer agrees to re-insure with them. Based on the transaction illustrated in the case study, currently Crazy computers pay $110 for insurance such that TPI takes responsibility for any obligations from customers.
Because CC gets commission for every sale made then from the $200 received it is left with $80 after paying the sales persons $10. With the introduction of CIC and if TPI agrees to re insure with CIC, CC will get $ 85 back out of the $110 paid to TPI.
This means that cash received goes up from $80 to $165. CIC would therefore be profitable. However, in case of any third party obligations CIC will be solely responsible. This is why it is extremely important for Crazy Computers to ensure that CIC’s income does not mix with computer income so as to ensure each department can sustain its own expenses.
Word count (635).
Reference
FASB. (2008). Financial Accounting Standards and Revenue Recognition.
            from http/www.fasb.org.

Accounting and Auditing: Crazy computers

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Auditing theory

Auditing theory.
The chairman should have been or presently a senior practitioner in public accountancy. 14. The following sectors represented by the PICA to the membership of AAAS have one representative, except a. Government c. Commerce and industry b. Public practice d. Academe 15. Statements on financial accounting standards constituting GAP are issued by the a.
Philippine Institute of Spas. C. Audit Standards and Practices Council. B. Securities and Exchange Commission. D. Accounting Standards Council. 16. Indicate whether the following functions would be performed by: P S – Senior M – Manager AS – Audit Assistant (1) Supervises two or more concurrent audit engagements Performs detailed audit procedures Overall responsibility for audit Signs audit report s d. 17. The amount of audit fees depend largely on the – Partner a. Size and capitalization of the company under audit. B. Amount of profit for the year. C. Availability of cash. . Volume of audit work and degree of competence and responsibilities involved. Page 3 of 7 18. In determining audit fees, an auditor may take into account each of the following except a. Volume and intricacy of work involved. C. Number and cost of manors needed. B. Degree of responsibility assumed. D. Size and amount of capital of client. 19. Under this method of billing a client, the external auditors charges on the basis of time spent by principals/partners, supervisors, seniors and Juniors at predetermined rates agreed upon with the client Maximum fee basis c.
Flat sum basis Retainer basis d. Per diem basis RA No. 9298 – Philippine Accountancy Act of 2004 and its AIR 1 . Which of the following is not one of the specified objectives of the Accountancy Act of 2004? A. Examination for registration of Spas. B. Supervision, control, and regulation of accounting practice. C. Standardization and regulation of accounting education. D. Promulgation of accounting and auditing standards. In all of the following situations except one, a person is deemed to be engaged in professional accounting practice.

Which of them is the exception? A. Performing audits or verification of financial transactions and records for more than one client. B. Employed as the department chairman that supervises the BAS program of an educational institution. C. Employment as controller of a private business enterprise and such employment squires that the holder thereof should be a CPA. D. Appointment in the government where first grade civil service eligibility is a prerequisite. A person is not deemed to be engaged in professional accounting practice if a.
Her merely holds himself out as skilled in the science and practice of accounting and qualified to render services as a CPA. B. He merely offers to render services as a CPA to the public, but does not actually render such services. C. He offers or renders bookkeeping services to more than one client. D. He installs and revises accounting systems for more than one client. Practice in Public Accountancy shall constitute in a person a. Involved in decision making requiring professional knowledge in the science of accounting, or when such employment or position requires that the holder thereof must be a certified public accountant. . In an educational institution which involve teaching of accounting, auditing, management advisory services, finance, business law, taxation, and other technically related subjects. C. Who holds, or is appointed to, a position in an accounting professional group in government or in a government owned and/or controlled reparation, including those performing proprietary functions, where decision making requires professional knowledge in the science of accounting, d.
Holding out himself/herself as one skilled in the knowledge, science and practice of accounting, and as a qualified person to render professional services as a certified public accountant; or offering or rendering, or both, to more than one client on a fee basis or otherwise. Any position in any business or company in the private sector which requires supervising the recording of financial transactions, preparation of financial tenements, coordinating with the external auditors for the audit of such financial statements and other related functions shall be occupied only by a duly registered CPA.
Provided (choose the incorrect one) a. That the business or company where the above position exists has a paid-up capital of at least and/or an annual revenue of at least b. The above provision shall apply only to persons to be employed after the effectively of the Implementing Rules and Regulations of RA 9298. C. The above provision shall not result to deprivation of the employment of incumbents to the position. D. None of the above.

Auditing theory

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Chapter 1 Modern Auditing

Chapter 1 Modern Auditing.
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. . 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 the reliability of management’s system for | | |identifying and monitoring business risks. | |CPA Performance View |Provides relevant financial and nonfinancial information to management or the board of directors| | |about the entity’s performance. It ma also provide information about the reliability of | | |management’s system for monitoring the entity’s performance. | 7. a.
The audit provides reasonable assurance that financial statement information is free of material misstatements. Decision makers can uses financial information to anticipate business opportunities and to make business decisions based with reasonable assurance that the information set used to make decisions is reliable. b. A review of financial statements provides less assurance about the reliability of financial information than that provided by an audit. 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.
This service is focused on both the relevance and reliability of information used by decision makers. A compilation does not provide assurance about the reliability of financial statement information used by decision makers. However, a compilation service may provide decision makers with relevant information that they would not otherwise have. c. The CPA risk advisory service may transform complex information into knowledge by helping management better understand business risks. The CPA risk advisory service may also provide assurance about the reliability of information produced by management’s system of evaluating business risks. . The origin of the company audit as we know it can be linked to British legislation during the industrial revolution in the mid-1800s. One or more stockholders designated by other stockholders initially performed company audits, but subsequent revisions in the legislation permitted the use of outside independent auditors, giving rise to the formation of auditing firms. The focus of these early audits was on finding errors in the balance sheet accounts and stemming the growth of fraud associated with the increasing phenomenon of professional managers and absentee owners.
Several important milestones in the rise of the U. S. profession were (1) the passage of legislation (2) the stock market crash of 1929 which drew attention to deficiencies in financial reporting and produced a challenge to the accounting profession to provide stronger leadership, (3) adoption of a requirement by the New York Stock Exchange in 1933 that all listed corporations obtain an audit certificate from an independent CPA, and (4) passage of the Securities Act of 1933 and the Securities Exchange Act of 1934 which added to the demand for audit services for publicly owned companies.
Three important changes in audit practice that evolved by the 1040s were (1) a shift from detailed verification of accounts to sampling or testing as the basis for rendering an opinion on the fairness of financial statements, (2) development of the practice of linking the testing to be done to the auditor’s evaluation of a company’s internal controls, and (3) deemphasis of the detection of fraud as an audit objective.
In recent years, the profession has come under increasing pressure to reverse the deemphasis on detecting fraud as the public’s expectation that the auditor will detect fraud persists. The quality of audits was questioned when a series of restatements of earnings from public companies such as Sunbeam, Waste Management, Xerox, Adelphia, Enron and WorldCom brought about a crisis of confidence in the work of auditors.
By 2002 the collapse of Enron and WorldCom led Congress to pass the Sarbanes-Oxley Act of 2002. This act created the Public Companies Accounting Oversight Board (PCAOB) and gave it responsibility for setting auditing, ethics, independence, and quality control standards for audits of public companies. 9. Four factors that contribute to the need for independent audits are (a) conflict of interest, (b) consequence, (c) complexity, and (d) remoteness. Collectively these factors contribute to information risk. 0. Financial statement audits enable companies to (a) meet statutory and other regulatory requirements that must be satisfied in order to gain access to capital markets, (b) obtain debt and equity financing at a lower cost of capital, (c) deter inefficiency and errors in the accounting function and reduce the risk of fraud in the accounting and financial reporting process, and (d) make internal control and operational improvements based on suggestions made by the auditor as a by-product of the audit. 1. The limitations of a financial statement audit include the fact that an auditor works within fairly restrictive economic limits that impose time and cost constraints and necessitate the use of selective testing or sampling of the accounting records and supporting data. Also, the auditor’s report must usually be issued within three months of the balance sheet date, which affects the amount of evidence that can be obtained.
The availability of alternative accounting principles permitted under GAAP, and the impact of accounting estimates and uncertainties on the financial statements represent additional inherent limitations on financial statement audits. 12. Six public sector organizations include (1) the Securities and Exchange Commission, (2) state boards of accountancy, (3) the U. S. General Accounting Office, (4) the Internal Revenue Service, (5) state and federal courts, and the U.
S. Congress. Five private sector organizations associated with the public accounting profession include (1) the Public Companies Accounting Oversight Board, (2) the American Institute of Certified Public Accountants, (2) State Societies of Certified Public Accountants, (4) Practice Units (CPA firms), and (5) Accounting Standard Setting Bodies — principally the Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB). 3. The Securities and Exchange Commission regulates the distribution of securities offered for public sale and subsequent trading of securities on stock exchanges and over-the-counter markets. The SEC also has the authority to establish GAAP for companies under its jurisdiction, and it currently recognizes the pronouncements of the FASB as constituting GAAP in the filing of financial statements with the agency.
In some instances, however, the SEC’s disclosure requirements exceed GAAP. Finally, the SEC also exerts considerable influence over auditing profession. The Sarbanes-Oxley Act of 2002 established a private sector, Public Companies Accounting Oversight Board to oversee the audit of public companies that are subject to securities laws. The PCAOB’s rulemaking process results in proposals that do not take effect until the SEC approves them. 14. a.
The PCAOB has authority in five major areas (1) registering public accounting firms that audit the financial statements of public companies, (2) setting quality control standards for peer review of auditors of public companies and conducting inspections of registered public accounting firms, (3) setting auditing standards for audits of public companies, (4) setting independence and ethics rules for auditors of public companies, (4) performing other duties or functions to promote high professional standards for public company audits, and enforce compliance with the Sarbanes-Oxley Act of 2002. . Three important AICPA divisions, or teams, that have a direct impact on auditors are (1) the AICPA Practice Monitoring Program is responsible for quality control standards and peer reviews of firms that provide assurance services to private companies, (2) the Auditing and Attest Standards Team sets auditing and attest standards for audit, accounting, and review services provided to private companies, and (3) the Professional Ethics Division is responsible for setting and enforcing the AICPA Code of Professional Conduct. 15. a.
A CPA firm may be organized as a proprietorship, partnership, Professional Corporation, or any other form of organization permitted by state law or regulation (including limited liability partnerships (LLPs) and limited liability corporations (LLCs)). b. CPA firms are often classified into the following four groups: (1) Big Four, (2) Second Tier, (3) Regional, and (4) Local. 16. a. The purpose of the profession’s multilevel regulatory framework is to help assure quality in the performance of audits and other professional services. b. The four components of the profession’s multilevel regulatory framework are: Standard-setting. The private sector establishes standards for accounting, auditing, ethics, and quality control to govern the conduct of CPAs and CPA firms. • Firm regulation. Each CPA firm adopts policies and procedures to assure that practicing accountants adhere to professional standards. • Self-or peer regulation. The AICPA has implemented a comprehensive program of self-regulation including mandatory continuing professional education, peer review, audit failure inquiries, and public oversight. Government regulation. Only qualified professionals are licensed to practice, and auditor conduct is monitored and regulated by state boards of accountancy, the SEC, and the courts. 17. The five elements of quality control are (1) independence, integrity and objectivity, (2) personnel management, (3) acceptance and continuance of engagements, (4) engagement performance, and (5) monitoring. 18. a. The key elements of the PCAOB inspection program includes: • Inspecting and reviewing selected audit and review engagements of the firm. Evaluating the sufficiency of the firm’s quality control systems and the firm’s documentation and communication of that system. • Performing such other testing of the audit, supervisory, and quality control procedures of the firm as are necessary or appropriate in light of the purpose of the inspection and the responsibilities of the board. The PCAOB conducts annual inspections of firms that regularly provide audit reports for over 100 public companies.
The PCAOB inspects the quality control activities of firms that provide audit reports for 100 or fewer public companies every three years. b. The purpose of the AICPA practice monitoring (peer review) program is to: • Determine that a firm’s system of quality control for its accounting and auditing practice has been designed in accordance with quality control standards established by the AICPA. • Determine that a firm’s quality control policies and procedures were being complied with to provide the firm with reasonable assurance of conforming with professional standards. Determine that a firm has demonstrated the knowledge, skills, and abilities necessary to perform accounting, auditing, and attestation engagements in accordance with professional standards, in all material respects. |Comprehensive Questions | 1. 19 (Estimated time – 20 minutes) a. Internal auditing is an independent appraisal activity performed by employees of the company being audited. The objective of internal auditing is to assist management in the effective discharge of its responsibilities.
External auditing is done by independent, external auditors for the purpose of expressing an opinion on the fairness of the company’s financial statements. Governmental auditing is done by government auditors to determine (1) fairness of financial reports, (2) compliance with applicable laws and regulations, (3) efficiency and economy of operations, and (4) effectiveness in achieving program results. b. The Public Companies Accounting Oversight Board and the American Institute of Certified Public Accountants, the Institute of Internal Auditors, and the U.
S. General Accounting Office establish practice standards for independent, internal, and government auditors, respectively. c. The audits serve different purposes and are made by different types of auditors. Auditing only by internal auditing will not satisfy the requirements of stock exchanges and the SEC for independent audits by external auditors. Moreover, internal audits will not satisfy all government requirements for audits, particularly in the area of compliance with applicable laws and regulations.
In sum, each type of auditing is necessary. 1. 20 (Estimated time – 30 minutes) |a. Type of Audit |b. Type of Auditor(s) |c. Primary Recipient(s) | |1. Financial statement (1) |Independent(1) |Stockholders, investors, regulatory agencies, and| | | |general public | |2.
Operational (3) |Internal (2), Independent(1) |Senior Management | |3. Compliance (2) |Government – IRS (4) |IRS | |4. Operational (3) |Government – GAO (3) |Congress | |5. Financial statement (1) |Independent (1) |Creditors | |6.
Operational (3) |Internal (2) |Management | |7. Compliance (2) |Government – GAO (3) |Congress | |8. Compliance (2) |Independent (1), Internal (2), |Congress | | |and Government – GAO (3) | | |9.
Financial Statement (1) |Independent (1) |Citizens, taxpayers | |10. Operational (3) |Government – GAO (3) |Congress | |11. Compliance (2) |Independent (1), Internal (2) |Bondholders | |12. Compliance (2) |Internal (2), Independents (1) |Management | 21. Estimated time – 15 minutes) a. The first step in the accountant’s value chain involves capturing data about business events, such as data about sales and the collection of receivables. The second step involves developing an information set that communicates the total picture with integrity and objectivity. The relevant information set here might include information about sales, receivables and the calculation of inventory turn days. Transforming complex information into knowledge involves understanding how the client’s receivable collection period (58 days) compares with the rest of the industry.
In this case the 75% of the industry collect their receivables faster than the client. Anticipating and creating the opportunity involves recognizing that the client will improve its cash flow if it brings its collection days more in line with the industry median. This may further involve a study of specific customers that are delinquent and considering how to take steps to speed collection. The final stage involves management’s implementation of tighter credit policies, improved discounts for paying quickly, or charging interest for being delinquent. b.
A financial statement audit is important as it provides reasonable assurance that the sales and receivables information that is being used to make business decisions is free of material misstatement. If the information supporting the calculation of accounts receivable turn days is materially understated, the company may not recognize that it needs to take steps to improve cash flows, and in turn, make poor business decisions. 22. (Estimated time – 20 minutes) a. The benefits of a high quality audit include the following: • Access to Capital Markets.
An audit allows companies’ access to public securities markets. In many cases, companies also need audits to support a lender’s loan decisions. • Lower Cost of Capital. An audit often allows companies to obtain capital at a lower cost of capital, because of the reduced information risk associated with audited financial statements. • Deterrent to Inefficiency and Fraud. Research has demonstrated that when employees know that an independent audit is to be made, they take care to make fewer errors in performing accounting functions and are less likely to misappropriate company assets.
The fact that financial statement assertions are to be verified reduces the likelihood that management will engage in fraudulent financial reporting. • Control and Operational Improvements. Based on observations made during a financial statement audit, the independent auditor often makes suggestions to improve internal control, to evaluate management’s assessments of business risks, to recommend improved performance measures, and to make recommendations to achieve greater operational efficiencies within the client’s organization.
Your fellow business student is correct that these benefits are not achieved when an audit is not performed in accordance with professional standards. b. Even an audit performed in accordance with professional standard may not detect every material misstatement in financial statements. The following inherent limitations explain why an audit can only provide reasonable assurance that financial statements are free of material misstatement, not a guarantee that the financial statements are accurate. • Reasonable Cost. Audits must be performed at a reasonable cost.
Auditors use selective testing, or sampling, of the accounting records and supporting data. In addition, the auditor may choose to test internal controls and may obtain assurance from a well-functioning system of internal controls. Audits cannot audit every transaction. • Reasonable Length of Time. The auditor’s report on many public companies is usually issued three to five weeks after the balance sheet date. This time constraint may affect the amount of evidence that can be obtained concerning events and transactions after the balance sheet date that may have an effect on the financial statements.
Moreover, there is a relatively short time period available for resolving uncertainties existing at the statement date. • Alternative Accounting Principles. Alternative accounting principles are permitted under GAAP. Financial statement users must be knowledgeable about a company’s accounting choices and their effect on financial statements. For example, there may be a material difference between the value of inventory using LIFO or FIFO. • Accounting Estimates. Estimates are an inherent part of the accounting process, and no one, including auditors, can foresee the outcome of uncertainties.
Estimates range from the allowance for doubtful accounts and an inventory obsolescence reserve to impairment tests for fixed assets and goodwill. An audit cannot add exactness and certainty to financial statements when these factors do not exist. 1. 23(Estimated time – 15 minutes) |1. |State boards of accountancy |10. |State societies of CPAs | |2. |FASB and GASB |11. |SEC, state and federal courts | |3. |AICPA |12. GASB | |4. |SEC |13. |AICPA | |5. |AICPA, state societies of CPAs, |14. |State boards of accountancy | | |and state boards of accountancy | | | |6. |FASB |15. |AICPA | |7. |State boards of accountancy |16. Practice units | |8. |SEC |17. |GAO | |9. |AICPA |18. |IRS | 1. 24(Estimated time – 20 minutes) a. The four sets of standards in the private sector and the standard setting bodies are: (1) accounting by the FASB and GASB, (2) auditing by the AICPA, (3) professional ethics by the AICPA, and (4) quality control by the PCAOB and the AICPA. The other components of the regulatory framework are: (1) firm regulation that occurs within the public accounting firm through day-to-day monitoring of the actions of the firm’s professional staff by the firm’s management; (2) inspections and peer reviews that relates to the activities of professional entities outside the firm such as the PCAOB and the AICPA’s Practice Monitoring (Peer Review) program; and (3) governmental regulation that occurs at both the state and federal levels through activities that range from positive enforcement programs to punitive actions.
This type of regulation is done by state boards of accountancy, the SEC, and state and federal courts of law. 1. 25(Estimated time – 30 minutes) | | |Purpose of Policy / Procedure |Additional | |Policy/ |Element |(b) |Procedure | |Procedure |(a) | |(c) | |1. Personnel Management |Personnel should have the qualifications to |Establish qualifications necessary for | | | |fulfill responsibilities they may be called upon |each level of responsibility in the firm. | | | |to assume in the future. | | |2. |Engagement Performance |Work at all levels should be supervised to ssure |Establish procedures for reviewing working| | | |that it meets the firm’s standards of quality. |papers and reports. | |3. |Personnel Management |Work is assigned to people who have the technical |Identify areas and specialized situations | | | |training for the assignment and personnel should |for which consultation is required. | | |seek assistance, when necessary, from persons | | | | |having appropriate expertise, judgment, and | | | | |authority | | |4. Independence, Integrity and|All professionals should be independent of |Monitor compliance with independence | | |Objectivity |clients. |rules. | |5. |Monitoring |Determine that procedures relating to the other |Provide for reporting inspection results | | | |elements are being effectively applied. |to appropriate management levels in the | | | | |firm. | |6. Personnel Management |Only individuals who possess the qualities of |Maintain a recruiting program to obtain | | | |integrity, competency, and motivation should be |new hires at the entry level. | | | |hired. | | |7. |Personnel Management |Personnel should have the knowledge required to |Provide Programs to develop expertise in | | | |fulfill assigned responsibilities. specialized areas and industries. | |8. |Engagement Performance |Personnel should have the technical training and |Permit partner in charge of engagement to | | | |proficiency required by the engagement. |approve assignments. | |9. |Acceptance and Continuance |The firm should not be associated with clients |Establish review procedures for continuing| | |of Clients and Engagements. |whose management lacks integrity. |a client. | 1. 6(Estimated time – 30 minutes) a. The PCAOB’s inspection program and the AICPA’s practice monitoring (peer review) program do not have a direct impact on individual members. They are focused on a firm’s quality control activities. However, these programs may have an indirect effect on members who are involved in audits that are subject to inspection or peer review and all individuals in a firm may receive certain types of continuing professional education based on the findings of these programs. . The PCAOB is responsible for the inspection of audit firms that audit public companies. The AICPA’s practice monitoring (peer review) program is focuses on audit firms that audit private companies. The objectives of both programs focus on a firm’s adherence to quality control practices. c. The following table compares the objectives of the PCAOB’s inspection program and the AICPA’s practice monitoring (peer review) program. They both focus on a firm’s adherence to quality control practices. PCAOB’s inspection program |AICPA’s practice monitoring (peer review) program | |In conducting inspections, the Sarbanes-Oxley Act of 2002 states |The purpose of a peer review is to determine whether: | |that the PCAOB should: |The reviewed firm’s system of quality control for its accounting | |Inspect and review selected audit and review engagements of the |and auditing practice has been designed in accordance with quality | |firm. control standards established by the AICPA. | |Evaluate the sufficiency of the firm’s quality control systems and |The reviewed firm’s quality control policies and procedures were | |the firm’s documentation and communication of that system. |being complied with to provide the firm with reasonable assurance | |Perform such other testing of the audit, supervisory, and quality |of conforming to professional standards. |control procedures of the firm as are necessary or appropriate in |The reviewed firm has demonstrated the knowledge, skills, and | |light of the purpose of the inspection and the responsibilities of |abilities necessary to perform accounting, auditing, and | |the board. |attestation engagements in accordance with professional standards, | | |in all material respects. | d. The primary activities of the AICPA practice monitoring program include providing peer reviews and issuing reports on a firm’s compliance with quality control standards. Professional Simulation | (Estimated time – 30 to 45 minutes) | |Research | | | | | | |Situation | |Communication | A student can perform the search of quality control standards in two ways. First, the student can do a key words search on “monitoring procedures. ” Second, if a student looks at the way the Quality Control Standards are organized, he or she will note that QC Section 30 addresses Monitoring a CPA Firm’s Accounting and Auditing Practice.
The relevant paragraphs are outline below. 1. Explain the monitoring procedures that should be performed by the firm. QC Section QC 30. 03 -. 08 2. Explain the factors that should be considered by small firms with a limited number of management individuals. QC Section QC 30. 10 -. 11 | | |Communication | | | | | |Situation |Research | | To: Tom Meyers and Kenny Vaughn Re: Monitoring Procedures
From:CPA Candidate Based on a review of relevant quality control standards (QC 30. 03-. 09) the firm’s monitoring procedures should include the following: 1) Inspection procedures evaluate the adequacy of the firm’s quality control policies and procedures, its personnel’s understanding of those policies and procedures, and the extent of the firm’s compliance with its quality control policies and procedures. These might include: a) Review of selected administrative and personnel records pertaining to the quality control elements. ) Review of engagement working papers, reports, and clients’ financial statements. c) Discussions with the firm’s personnel. d) Summarization of the findings from the inspection procedures, at least annually, and consideration of the systemic causes of findings that indicate improvements are needed. e) Determination of any corrective actions to be taken or improvements to be made with respect to the specific engagements reviewed or the firm’s quality control policies and procedures. f) Communication of the identified findings to appropriate firm management personnel. ) Consideration of inspection findings by appropriate firm management personnel who should also determine that any actions necessary, including necessary modifications to the quality control system, are taken on a timely basis. 2) Preissuance or postissuance review of selected engagements. 3) Analysis and assessment of a) New professional pronouncements. b) Results of independence confirmations. c) Continuing professional education and other professional development activities undertaken by firm personnel. ) Decisions related to acceptance and continuance of client relationships and engagements. e) Interviews of firm personnel. 4) Determination of any corrective actions to be taken and improvements to be made in the quality control system. 5) Communication to appropriate firm personnel of any weaknesses identified in the quality control system or in the level of understanding or compliance therewith. 6) Follow-up by appropriate firm personnel to ensure that any necessary modifications are made to the quality control policies and procedures on a timely basis.

Chapter 1 Modern Auditing

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Advanced Auditing Case 2.3

Advanced Auditing Case 2.3.
Advanced Auditing Case Assignment 2. 3 1. (a) When confirming year-end accounts receivable, auditors hope to accomplish the objective of obtaining evidence from third parties to evaluate the client’s assertions of year-end accounts receivable amounts. The client’s assertions that accounts receivable confirmation can effectively address are existence, rights, and valuation. b) When performing year-end sales cutoff tests, auditors hope to accomplish the objective of obtaining evidence from third parties to evaluate the client’s assertions of sales recorded for the period under audit. The client’s assertions that sales cutoff tests can effectively address are completeness and presentation. 2. Coopers & Lybrand made several significant errors of judgment in its effort to confirm the Wow Wee receivable at the end of 1995.
These errors of judgment include ignoring or overlooking red flags including: the 69% change in the percentage of factored accounts receivable from 1994 to 1995, the $2. 4 million in sales to Wow Wee booked in the final day of fiscal 1995, the fact that Wow Wee is a manufacturing company, the fact that Wow Wee was left out of the top 25 customers list when it was among the top 5 based on recorded sales, and the clearly falsified bill of lading.
Coopers & Lybrand failed to make the appropriate modifications to their planned audit procedures to examine these irregularities. Coopers & Lybrand also failed to follow up on the confirmation of the Wow Wee receivable that they accepted from Goldberg. These errors of judgment involve extreme negligence on the part of the auditors. I would classify these errors as reckless as there is no evidence to support that Coopers & Lybrand were involved in the fraud.

I think that the auditors did not suspect that fraud would occur at Happiness Express in 1995 as they had previously audited Happiness Express in 1994 and rightfully issued an unqualified opinion. I think that the auditors believed that these were simple mistakes that did not need to be further examined. The company’s revenue grew so significantly from 1994 to 1995 and because of this, I think that is was easy for the auditors to believe that the employees were simply overwhelmed by the company’s alarming growth and made mistakes as a result. . Yes Coopers & Lybrand should have confirmed the receivable from West Coast Liquidators at the end of fiscal 1995 because it represented 13%, a clearly material amount, of the total accounts receivable. They also should have included one or more of the sales to West Coast Liquidators in their year-end sales cutoff tests for 1995 as many of these transactions were booked in the final month of the fiscal year.
Sales transactions occurring close to the end of the fiscal year are much more likely to be suspicious in nature or fraudulent than transactions occurring earlier in the year. 4. The alternative procedures that can be applied to a large receivable of an audit client when a confirmation cannot be obtained include examination of subsequent cash receipts, the matching of such receipts with the actual items paid for, and examination of shipping, or other client documentation.
The evidence provided by these methods may differ from the evidence provided by confirmation of a receivable depending on the client’s documentation of the transaction. Typically, in a company with proper internal controls and documentation, alternative procedures should be able to effectively address the same assertions that the confirmation of a receivable address. At very least, alternative procedures provide evidence for the existence assertion. 5. According to AU Section 317. 7, auditors should be aware of the possibility that illegal acts, such as insider trading, may have occurred however, an audit made in accordance with GAAS provides no assurance that illegal acts will be detected or that any contingent liabilities that may result will be disclosed. In the event that an auditor discovers evidence concerning the existence of possible illegal acts that could have a material indirect effect on the financial statements, they should apply audit procedures directed to ascertain whether an illegal act has occurred.

Advanced Auditing Case 2.3

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Auditing Critique

Auditing Critique.
Source Article
Information Systems Risk and Audit Planning by Jean C. Bedard, Lynford Graham and Cynthia Jackson.  International Journal of Auditing. Int. J. Audit. 9: 147–163 (2005)
The purpose of the above research article is to provide empirical evidence on the nature and frequency of client characteristics affecting audit planning relevant to systems risk, and to assess the association of these characteristics with auditors’ systems risk assessments and audit planning decisions.

Research Definition
From Wikipedia: The word research derives from Middle French; its literal meaning is ‘to investigate thoroughly’. Research is often described as an active, diligent, and systematic process of inquiry aimed at discovering, interpreting, and revising facts. This intellectual investigation produces a greater understanding of events, behaviors, or theories, and makes practical applications through laws and theories. The term research is also used to describe a collection of information about a particular subject, and is usually associated with science and the scientific method.
Keeping the above definitions of research in mind the article “Information Systems Risk and Audit Planning” by Jean C. Bedard, Lynford Graham and Cynthia Jackson can be categorized as a research article as the writers seem to have followed the basic structure and completed the investigative requirements. The researchers have attempted to provide empirical evidence on the consideration of information systems risk in a financial statement audit. This is a key issue because the importance of information systems to businesses has increased steadily over the past decade, as has the importance of internal control to companies and to their auditors.
Research Method
The writers have used empirical research to approach this topic as also identified in the article itself. The basic aim of the article was to provide empirical evidence on the consideration of information systems risk in a financial statement audit. To perform the study, they described the types of client characteristics identified by the auditors as being relevant to planning, and relate those characteristics to systems risk  assessments and testing plans. Generally, empirical research is any research that bases its findings on direct or indirect observation as its test of reality. In this research initially focus groups consisting of partners and managers of the participating organization were employed which helped to determine the research task. This seems to be an appropriate method espcially when specific statements from the firm’s decision aid for risk identification and assessment had to be identified. In ranking risk areas on appropriateness for the study, the focus groups considered such factors as the importance of the risk area in audit planning, its application to a broad range of clients, and its potential for differentiating more from less risky clients. Among these issues are the two systems risk areas considered in this study, previously described: (1) whether top management sufficiently oversees and addresses the risks related to data security and EDP system security for critical information systems; and (2) whether there are weaknesses in the relevance, completeness, timeliness and reliability of management information used by the company to monitor enterprise activity.
Finally, data for this study were collected from auditors serving on engagement teams for various clients of two accounting firms (now among the Big 4), in the presence of one of the authors. Selection and scheduling of participants were accomplished with the assistance of a contact person at each firm, who was only aware that the study concerned audit planning. Due to client confidentiality concerns, the authors were unaware of the identity of the clients on which the participants were responding. Participants responded to a questionnaire about characteristics of one of their actual clients, which was selected in advance of the research session.
Research Questions and their Effectiveness
In the article three research questions have been formulated to acquire understanding of the research problem:
1.      What is the nature of systems risk factors identified by auditors as important in engagement planning?
2.      Which types of client characteristics are associated with differences in risk assessments?
3.      Which types of risk factors are associated with planning specific types of audit tests?
The first research question concerns the nature of client risk characteristics present in a representative sample of audit clients. The second research question relates to the association of client characteristics and risk assessments within each risk area. Auditing standards note that auditors should respond to engagement risks by increasing their risk assessments and altering the nature, timing, and extent of audit procedures. The third and final research question considers the role of system risk factors in planning audit tests. As noted previously, auditing standards indicate that auditors should adjust the audit plan to reflect client risk factors.
The above research questions seem satisfactory to warrant an answer and also are inline with the research objective specified at the start of the article: “To provide empirical evidence on the consideration of information systems risk in a financial statement audit.” This has been stated since the first question instigates an answer which covers the initial planning phase when risk assessment for any client is being done and also the identification of client characteristics to understand the differences is being carried out in the second question and finally the understanding of risk factors which may be related to EDP or Management information quality risk assessment.
The rationale for the study has been effectively incorporated in the Background section with the research questions which forms a basis for their justification. As the reader goes through the research paper it can be appreciated that the authors have clearly specified their objective initially and they have also clearly mentioned the research questions and their importance to the study and how each of the three questions helps to solve the research task.
Implications and Key Limitations of the Research
One of the major limitations of this type of research is the confidential nature of information with which the researchers deal with and the obvious reluctance being shown by the managers and partners participant organization to share such information.
Another limitation is that the researchers examined the auditors’ memories of client conditions – essentially, the researchers studied how auditors assess risk and plan tests in light of conditions that they identify. Thus, in contrast to behavioral experiments, the design of this study could not assess memory accuracy. An alternative means of addressing the questions studied is through an archival study of audit workpapers. In contrast to this study of individual responses, audit workpapers capture the end product of group decisions. Further research should address whether the results of this study hold using behavioral and/or archival approaches.
Despite the key role of information systems in corporate control and in financial statement audits, the authors could not find any research which could provide evidence on the nature of risk characteristics commonly present in business systems, and the implications of such risks for audit planning. This study addressed this research gap by examining two crucial areas of information systems risk: EDP security and management information quality. These risk-areas encompass the physical and electronic integrity of client systems, and the appropriateness of information contained in those systems, respectively.
Identification of Research Conclusions and Results
The conclusions and results of the study have been mentioned twice which informs the reader about researchers’ intentions and the level of achievement of research objectives. Initially the article summary informs the reader about the main findings and finally their description can be found in the Discussion section.
The main findings of the study encompass two major aspects. The first is the lack of significant association between risk factors and risk assessments in the EDP security risk area, while strong associations were found in management information quality. The second is that control environment factors affect planning in management information quality, but not in EDP security. The recent high-profile cases of corporate fraud, featuring possible management override of controls, emphasize that auditors must react appropriately to issues of information system security and management style/competence. Thus, the results support the recent emphasis on internal controls in US and international auditing standards.
 This study addresses this research gap by examining two crucial areas of information systems risk: EDP security and management information quality. To address this issue, the researchers asked participating auditors to document the frequency of specific client characteristics in these two risk areas, which they consider when planning for an actual client engagement. The researchers also asked that they provide a risk assessment within each risk area, and to plan audit procedures to address the identified risks. Results show that auditors predominately identified client characteristics that would increase systems risk (i.e., negative characteristics, commonly termed risk factors), although some positive characteristics that would decrease systems risk were also identified. The most frequent risk factors identified in the area of EDP security are related to system security controls, outdated systems, and management style/attitude. In the management information area, the most frequently identified risk factors relate to the nature of information produced by client systems, followed by factors relating to management style/attitude and management competence.
Areas of Further Research
As mentioned in the article that in contrast to behavioral experiments, the design of this study could not assess memory accuracy. An alternative means of addressing the questions studied is through an archival study of audit workpapers. In contrast to this study of individual responses, audit workpapers capture the end product of group decisions. Further research should address whether the results of this study hold using behavioral and/or archival approaches.
Overall Effectiveness of the Exercise
This exercise proved to be a tremendous learning experience as far as understanding of research articles and the way they should be approached is concerned. To write a critique on a research article requires a thorough understanding of the basics of writing a research article, various research methods to use and how to conduct the research itself with an appropriate research design.

References
     Jean C. Bedard, Lynford Graham & Cynthia Jackson. (2005) Information Systems Risk and Audit Planning.  International Journal of Auditing. Int. J. Audit. 9: 147–163 (2005)

Auditing Critique

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