Chapter 1The Demand for Audit & Other Assurance Services 1) Why should I care about auditing?

2)

3) Chapter 1The Demand for Auditing and Assurance Services I have no use for bodyguards, but I have very specific use for two highly trained certified public accountants.- Elvis Presley 4) Definition of Auditing

5) Overview of Financial Statement Auditing

6) Accounting v. Auditing? Accounting: Accounting is the recording, classifying, and summarizing of economic events for the purpose of providing financial information used in decision making. Auditing: Auditing is determining whether recorded information properly reflects the economic events that occurred during the accounting period. 7) Which of the following is the primary distinction between auditors and accountants? a) Auditors are required to be CPAs b) Auditors have more in-depth knowledge of accounting than accountants in order to verify or supervise their work c) Most accountants are CMAs d) All of the above e) None of the above

8) User Demand for Reliable Information Information Risk: o The risk (probability) that the information (mainly financial) disseminated by a company will be materially false or misleading. o Users demand an independent third party assessment of the information Causes: o More complex o More voluminous o Demanded by remote users o Biases or motives

9) The primary purpose of auditing is to eliminate business risk? TRUE FALSE

10) Solution?

11) Professional Skepticism Professional skepticism: Auditors questioning, evaluative, attitude toward evidence o Managements assertions without sufficient corroboration. o Financial trends need investigation o Documents are checked for authenticity or alteration o Ask questions, get answers, then verify the answers. A potential conflict of interest always exists between the auditor and the client. o Management wants to portray the company and its operations in the best possible light. o Auditors want to portray the company and its operations fairly.

12) Because an audit in accordance with generally accepted auditing standards is influenced by the possibility of material misstatements, the auditor should conduct the audit with an attitude of: a) b) c) d) Objective judgment Conservative advocacy Professional responsiveness Professional skepticism

13) Assurance Services Assurance services are independent professional services that improve the quality of information, or its context, for decision makers. Examples o Consumer reports o Compliance with entertainment royalty agreements o CPA WebTrust o Process/System assessment o Quality control standards compliance

14) Attestation Engagements An attestation engagement: A practitioner assesses and reports on subject matter or an assertion about the subject matter that is the responsibility of another party. o Audit of financial statements o Audit of internal control over financial reporting o Reviews of financial statements o Attestation services on information technology o Other attestation services Some financial attestation engagements (other than audits) o Supplementary financial statistics o Pro forma financial information o Financial forecasts and projections Some non-financial attestation engagements o Compliance with contractual requirements o Effectiveness of internal control systems o Inventory quantities and locations 15) The Relationships Among Auditing, Attestation, and Assurance Engagements

16)

17) Which of the following would not be considered an assurance service? a) Mystery shopping reports b) NBA draft lottery operations audit c) Audit of financial Statements d) Tax services e) Both a and b f) All of the above

18) Which of the following is considered an attestation engagement? a) Review of financial statements b) Tax return preparation c) Audit of financial statements d) Bookkeeping services e) Only a and c f) All of the above (a-d)

19) Sarbanes-Oxley Act of 2002: In response to several accounting related corporate scandals Congress passed the Sarbanes-Oxley Act The Acts major provisions include: o Requirement of CEO/CFO certification of financial statements (302) o Requirement of auditor examination of company internal controls (404) o Creation of the Public Company Accounting Oversight Board (PCAOB) to serve as an auditing profession watchdog. o Prohibition of certain client services by firms conducting a clients audit. 20) Sarbanes-Oxley: Managements Responsibility For Financial Reporting One of its most important provisions (Section 302) states that the key company officials must certify the financial statements. The company CEO and CFO must sign a statement indicating: i. ii. iii. They have read the financial statements. They are not aware of any false or misleading statements (or any key omitted disclosures). They believe that the financial statements present an accurate picture of the companys financial condition.

21) The Public Company Accounting Oversight Board (PCAOB) uses the term internal control over financial reporting to describe a process that does not include which of the following procedures? a) Procedures performed by the auditor b) Procedures that pertain to the maintenance of reasonably detailed records that accurately and fairly reflect the transactions and disposition of the companys assets c) Procedures that provide reasonable assurance that company receipts and expenditures are made only in accordance with company management and direct authorization d) Procedures that provide reasonable assurance regarding timely detection of unauthorized disposition of company assets 22) A CPA firm must do which of the following before it can participate in the preparation of a company registered with the Securities and Exchange Commission (SEC)? a) Join the SEC Practice Section of the AICPA b) Register with the Public Company Accounting Oversight Board c) Register with the Financial Accounting Standards Board d) Register with the SEC pursuant to Securities Exchange Act of 1934 23) Sarbanes-Oxley Section 302 sets forth rules regarding auditor independence TRUE FALSE

24) Section 302 of the Sarbanes-Oxley Act require a companys management to make quarterly certifications with respect to the companys internal control over financial reporting. Which of the following are true with regard to these certifications? I. II. The auditor should perform procedures to provide a high level of assurance that the controls are operating effectively. If the auditor communicates to the appropriate level of management that the auditor believes that modification to the disclosures about changes in internal control over financial reporting are necessary for the certifications to be accurate, but management does not respond appropriately, the auditor should inform the audit committee a) I only c) Both I and II b) II only d) Neither I nor II 25) Types of Audits and Auditors i. Financial (External Auditors/CPAs): Ensure that financial statements are in accordance with specified criteria. ii. Operational (Internal and Governmental Auditors) Improve operational economy Improve operational efficiency iii. Compliance (Internal and Governmental Auditors) Ensure compliance with company and/or govt. rules and regulations Most audits are a combo of financial, operational, and compliance audits. 26) Fill-in-the-blank A ________ audit is conducted to determine whether the financial statements are stated in accordance with specified criteria. 27) Match the auditor with the type of audit A. B. C. D. Internal Revenue Agent Government Accountability Office Auditor Independent Auditor Internal Auditor Examination I. II. III. Operational audit Compliance audit Financial statement audit

28) Become Certified! Education 29) The CPA Exam Is computerized i. ii. iii. iv.

Experience

Consists of four parts: Auditing and attestation4 hours Financial accounting and reporting4 hours Regulation3 hours Business environment3 hours

Skill setsresearch, communication, analysis, judgment and understanding