...CHAPfER6 INTERNAL CONTROL IN A FINANCIAL STATEMENT AUDIT Answers to Review Q8estions 6-1 From management's p erspe ctive. the internal control provides a way to meet its stewardship or agen cy r esponsibilities. Management also needs a control system that generates reliabl e infornlation for decision-making purposes. The importance of internal control to the auditor is rooted ill th e se cond standard of fiel dwork.. The controls that are relevant to th.e entity's ability to initiate. record" p.fo cess. ~ npart Clmca:!l. T n~ dS~~ ~ti _~ ~l ~ this 'lmd.~ 9f~ ~1 mi~fY _ ~'P !Il1/l ufp~ m.immmm~ IOl£Ccmm ~rs thm the risk of m~t mi3!~,em_, me de. teRli of *=cDnls I'D wh~tive FCII:al!;lZefli. IIf i1'.ow it BI.l1ili '1M mm=1!1! of tall ~tilill mil huw wem.6~ !mm _~ mcrnmfll uf * .: ~ 8M ~~Il 'Jli,g: CIII:Iim1 iiY.-m. • Si~ c1~ 1mB.~mRt 'Ilritlh m~mt_'1J :a~ 1m! 'Ih~ mdimn m;m Illellli!l ~ee!'l the r\ei~t.y [If 6,1ll ~ ~~d ,,~ .11i.. mtmt .et ~ _i! i_ 6-2 The potential benefits and risks to an entity' s internal control from infonnation t echnology include (s ee Table 6-1 ): Ben efit£: € onsistent application. of prede6n.ed business rules and pexfrumlmce of complex ~df!i!d_Ilmill mF lu::e1il;iq Iqe 'n1um~1 a:f~am mr d~ "'E1lhmu:~_ nfthe tim.ma1i\, ~~~a . . ~~ efmmrmmion. i!lF~m~, tIlf!l!iditind ~~ D f ~fmati. . m . !:If ~ _lfiy 1lQ ~\m' ~ pdn'D.~ of ~ !1~I.y~~ d~~.s: _ im _ ~u!l!i~d'Qm!il. ·K.~du.etiml ill 6e riB that: c~ll!i 'Will be...
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...the financial statements of a university with generally accepted accounting principles. c. Giving an opinion on the fair presentation of a newspaper’s circulation data. d. Giving assurance about the average drive length achieved by golfers with a client’s golf balls. e. All of the above. 1.24 It is always a good idea for auditors to begin an audit with the professional skepticism characterized by the assumption that a. A potential conflict of interest always exists between the auditor and the management of the enterprise under audit. b. In audits of financial statements, the auditor acts exclusively in the capacity of an auditor. c. The professional status of the independent auditor imposes commensurate professional obligations. d. Financial statements and financial data are verifiable. 1.25 In an attestation engagement, a CPA practitioner is engaged to a. Compile a company’s financial forecast based on management’s assumptions without expressing any form of assurance. b. Prepare a written report containing a conclusion about the reliability of a management assertion. c. Prepare a tax return using information the CPA has not audited or reviewed. d. Give expert testimony in court on particular facts in a corporate income tax controversy. 1.26 A determination of cost savings obtained by outsourcing cafeteria services is most likely to be an objective of a. Environmental auditing. b. Financial auditing...
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...Task 1 Introduction: Auditing is an accounting system which is used in business. It made by an independent group or body to examine a business' financial transactions and statements. The only purpose of auditing is to present an accurate account of a company's financial business transactions. This practice is used for companies to make sure that they are trading financially fairly and also that the accounts they are presenting to the general public or shareholders are true and justified. These financial auditing results can be presented to shareholders, banks and anyone else with an interest in the company. One of the main reasons for a financial audit is to ensure that the company is not making any fraud. This is why the financial auditing body should be an independent third party. AR = Audit risk: is the risk that the auditor will incorrectly issue an unqualified opinion. IR = Inherent risk: is the risk of material misstatements absent any internal controls or testing. CR = Control risk: is the risk that internal controls will fail to prevent or detect material misstatement. DR = Detection risk: is the risk that audit tests will fail to detect material misstatement. i) In this planning of the audit, the three audit areas which appear to have high inherent risk in my opinion are: 1. Sales system: Gala restaurant is owned by husband and wife, and each of them has a 50% of the company share and they are both directors of the company, Gala has been making good sales...
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...Module 6 – Ethical Dilemma MarlaJean Moreno ACT 450 – Principles of Auditing Colorado State University – Global Campus Professor: Brian Weaver May 15, 2016 Auditing Ethical Dilemma The primary purpose of the audit exercises conducted by all corporate entities is to assure the related stakeholders of the financial statements and other disclosures made by the entity of presenting a true and fair view of the undertakings of the corporation. Keeping that in mind, the auditor bears a fiduciary relationship with the various users of the financial statements issued by any company. The auditors in charge of providing assurance are under a delicate relationship of trust endowed upon them by related stakeholders to the entity under auditory concern. The various stakeholders of the company define the users of the financial statements disclosed by a commercial enterprise. Employees within the organization depend on the financial depiction presented by the company in order to ascertain their relative benefit and possibility of continuing gainful employment. Beyond the actual premises of the business, the information disclosed by the entity allows people who may have interaction with the company to make educated estimates regarding the business operations and activities. These include people who are in business transactions with any organization under concern. Suppliers and other corporate entities working in unison to allow a commercial enterprise to be able to deliver on its business...
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...Project to Improve Financial Reporting and Auditing (PIFRA) By Azeez Ahmad Zai Deputy Accountant General AG Sindh, Karachi. Introduction: The Govt. of Pakistan took an initiative to address the shortcomings of the financial reporting system and to ensure good governance. The IMF carried out a survey in Government Accounting in early 1990s, followed by a diagnostic study sponsored by the World Bank. As a result, the Project to Improve Financial Reporting and Auditing (PIFRA) was introduced by the Auditor General of Pakistan in 1994. The main objective of this project is to computerize the whole accounting and auditing system of the country. The idea behind computerizing the whole system is to generate timely, accurate and reliable financial statements; to monitor fiscal deficit; to forecast flow of cash; to manage public debt and to achieve effective financial controls. The accounting system of Pakistan was inherited from the century old accounting system of the Indian govt. The old accounting system lacks timeliness, accuracy and most importantly transparency. Accounts of any organization, large or small, are the most important tool for curbing the corruption by keeping an eye on ins and outs of the money and more importantly they give the overall inner picture of the organization to the stakeholders which helps them take better financial decisions. While talking about the country as an organization the importance of the accounts becomes much more vital...
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...The Impact of the Sarbanes-Oxley Act on Auditing Prior to the 2002, there were numerous accounting and corporate scandals that rocked the business world. Foremost of which is the Enron debacle which was followed by WorldCom, Tyco International and Global Crossing (CIO Decisions). The collapse of these businesses was attributed to the lack of regulatory controls in the part of the government as well as transparency of operations of corporations which can be of help to its stakeholders in the analysis of profitability and assurance of good governance to the public. They importance of the Act lies on the accountability and security of financial reporting that the stakeholders would have in a corporation’s implementation of good business practices and adherence to laws and regulations in the administration and operations of the company. The Sarbanes-Oxley Act revised a significant portion of the federation securities laws which had been in place for 60 years already (Sarbanes-Oxley Information). Before SOX, there is a self-regulation in the accounting profession whereby the Securities and Exchange Commission was “given statutory authority to set accounting standards and oversight over the Activities of the auditors…the role of establishing standards was left to the accounting profession” (CPCAF). One of the key changes in internal audits is that the “Act requires all financial reports to include an internal control report” (Sarbanes...
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...function of the PCAOB and AS 5 and AS 11 Ramecha Davis This paper is submitted in partial fulfillment of the requirements for Auditing BUS5423 Section 70 Texas Woman’s University Dr. John Nugent April 20, 2015 Abstract The purpose of this research paper is to provide an in depth review of the Public Company Accounting Oversight Board (PCAOB) and how it contributes to the interest of the Sarbanes Oxley Act of 2002. The research highlights the importance of the PCAOB’s role in the accounting profession as well as prospective changes that may evolve in the future related to PCAOB. Upon reading this research the reader will be familiar with PCAOB’s roles and functions, as well as auditing standards (AS) released such as AS5 and AS11. The PCAOB’s significance in the protection of investors is revealed as well. Keywords: SEC, PCAOB, SOX, AS 5, AS 11, Internal Control, Materiality Table of Contents Introduction……………………………………………………………………………………………….5 PCAOB…………….……………………………………..……………………………….……….……5-6 a) The PCAOB Mission, Vision, & Core Values………………………………….………........6-7 b) Current Standards…………………………………………………………….…..............…7-8 c) Future Standard Plans…………………………………………………………………….…8-9 Sarbanes Oxley Act of 2002 Section 404……………………………………………………………...….9 a) Auditing Standard 5…………………………………………………………………….….9-10 b) Auditing Standard 11……………………………………………………………………..10-12 c) Communication Requirements..............................................
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...Introduction Technology plays a vital role in continuous auditing activities. As an automatic method, continuous auditing’s responsibility is to perform auditing activities more frequently which including control and risk assessments. With the aim of helping to automate the identification of anomalies or exceptions, analyze models, test controls and review trends, “Continuous” in this aspect of continuous reporting and auditing serves as the financial information’s real-time ability to be shared and checked. Continuous auditing presents that the financial information’s integrity can be evaluated at any given-point-time; as a result, financial information’s inefficient, frauds and errors could able to be verified constantly. In the other hand, we could consider continuous auditing as a very detailed audit. 1 Historical development of continuous auditing As a kind of audit method, it theoretical sources is from the traditional auditing method. The traditional auditing theory is the basis of analyzing the continuous auditing. Most of the auditing is a format of statutory audit, but not all the auditing is required by the statutory from the beginning. Under the freedom of market environment, we should strengthen research on audit risk, explore ways of audit risk management and control, continue to improve audit quality, and reduce audit risk. “In fact, the concept of “continuous auditing” has been around since the late 1980s. But the urgency that Sarbanes-Oxley has brought...
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...Generally Accepted Auditing Standards 43 AU Section 150 Generally Accepted Auditing Standards (Supersedes SAS No. 1, section 150.) Source: SAS No. 95; SAS No. 98; SAS No. 102; SAS No. 105; SAS No. 113. Effective for audits of financial statements for periods beginning on or after December 15, 2001, unless otherwise indicated. .01 An independent auditor plans, conducts, and reports the results of an audit in accordance with generally accepted auditing standards. Auditing standards provide a measure of audit quality and the objectives to be achieved in an audit. Auditing procedures differ from auditing standards. Auditing procedures are acts that the auditor performs during the course of an audit to comply with auditing standards. Auditing Standards .02 The general, field work, and reporting standards (the 10 standards) approved and adopted by the membership of the AICPA, as amended by the AICPA Auditing Standards Board (ASB), are as follows: General Standards 1. The auditor must have adequate technical training and proficiency to perform the audit. 2. 3. The auditor must maintain independence in mental attitude in all matters relating to the audit. The auditor must exercise due professional care in the performance of the audit and the preparation of the report. Standards of Field Work 1. The auditor must adequately plan the work and must properly supervise any assistants. 2. The auditor must obtain a sufficient understanding of the entity and its environment, including...
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...Auditing standards history in the United States Auditing profession has relied on agreed upon procedures at the beginning of its emergence. The current formal audit practice has evolved relatively recently. The story of how auditing evolved started in the early 20th century with the growth of industrial revolution, when firms entered the stock market which was unregulated at the time a growing need evolved to detect fraud and make more reliable financial statements as investors began to depend on financial reports. Federal Trade Commission requested AICPA to provide guidance to accountants and auditors in 1917 as a response AICPA issued a series of recommendation to the accounting community on financial reporting and auditing. In 1929 the AICPA issued a specific guide for auditing (Verification of Financial Statements) and it stated that the extent of the work is a responsibility of the auditor which is one of the most important auditing concepts even now. In 1936 AICPA issued Examination of Financial Statements by Independent Public Accountants, a guide on performing audit procedures on small and mid-sized companies. The SEC which was created in 1934. A part of its duties was to oversight the auditing profession, and it required the companies to send periodic reports in accordance with GAAP and to provide assurances with their reports. Auditing standards issuance used to be triggered by financial fraud events or crimes. Statement on Auditing Procedure (SAP) No. 1 in October...
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...were involved in this case. Arthur Edward Andersen built his firm, Arthur Andersen & Company, into one of the largest and most respected accounting firms in the world through his reputation for honesty and integrity. His motto was “Think straight, talk straight” and he insisted that his clients adopt that same attitude when preparing and issuing their periodic financial statements. Arthur Andersen’s auditing philosophy was not rule-based; instead he invoked a substance-over-form approach to auditing and accounting issues. He avidly believed that the primary role of the auditor was to ensure that clients reported fully and honestly to the public, regardless of the consequences for those clients. Ironically, Arthur Andersen & Co.’s dramatic fall from eminence resulted from its association with a client known for aggressive and innovative uses of “accounting gimmicks” to window dress its financial statements. Enron Corporation was the second largest client of the firm and was involved in large, complex transactions with hundreds of special purpose entities (SPEs) that it used to obscure its true financial condition and operating results. Among other uses, these SPEs allowed Enron to download underperforming assets from its balance sheet and to conceal large operating losses. During 2001, a series of circumstances, including a sharp decline in the price of Enron’s stock, forced the company to assume control and ownership of many of its troubled SPEs. As a result, Enron...
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...is defined as an independent evaluation implementation by an independent expert of a particular activity or event. There are many types of audits such as financial, operational, technological etc. The most popular reference to audits, however; are the ones that examine financial statements. Auditing is the examination and systematic structural evaluation of an organized business. The evaluation is made up of operations within the business organization and the products and developments of production occurring within the business system. An investigation into past history of a business is involved in auditing. Records and data about a company are also involved, in order to measure and discover the legality of the business's transactions operations, tax reporting, and thorough handling of finances. To be blunt, audits test the financial legitimacy claimed by a business entity. According to R. Gene Brown’s “Changing Audit Objectives and Techniques”, (The Accounting Review, Vol. 37, No. 4), reviewing the history of auditing helps to provide a basis for analyzing and interpreting the changes which have occured in audit objectives and procedures over the years. Fundamentally, this review shows a recent significant correlation between expanded reliance on internal controls and a decrease in detailed testing. The future of auditing will probably consist primarily of a procedural or systematic review, with the analysis of effectiveness of internal controls providing the major basis for...
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...What efforts is the Auditing Standards Board making to clarify auditing standards? There are efforts on the United States side to clarify the auditing standards. The Auditing Standard Boards [of the United States], which sets auditing standards for nonpublicly traded entities, has launched the Clarity Project in an effort to make U.S. Generally Accepted Audited Standards (GAAS) easier to read, understand, and apply. The Clarity Project includes the goal of working toward convergence of U.S. auditing standards with International Standards on Auditing (ISA). This convergence project is attempting to make auditing standards coordinated or comparable throughout the world. Additionally, the Public Company Accounting Oversight Board (PCAOB) adopted a suite of eight auditing standards related to the auditor’s assessment of, and response to, risk in an audit. The eight new risk assessment standards address the audit procedures from the initial planning stages through the final evaluation of audit procedures and results. As a result, the PCAOB auditing standards and ISAs have more similarities than ever before. 2. Describe the five key differences between ISA’s and US Auditing Standards. Even so, there are still some differences between ISA’s and U.S. Auditing Standards. The five key differences between ISA’s and US Auditing Standards are: documentation of audit procedures; going-concern considerations; assessing and reporting on internal control over financial reporting; risk-assessment...
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...MGT320 Portfolio Project Post-Enron Era Ethics The time for change is now! CEO’s must continue to be held accountable for the accuracy of their financial statements, and the performance of their company. To assure the accuracy of a publicly traded company’s financial status reporting, an additional requirement of an outside industry experienced auditing firm is needed, as well as performance based pay contracts for publically traded companies’ officers. The goal is simple, change the mindset of CEO’s, boards of directors (BOD’s), and shareholders by teaching them the fundamentals of business ethics. To obtain our goal, we must first have a basic understanding of existing legislation and the willingness to create new legislation for the betterment of America. To begin, a discussion in regards to the Sarbanes-Oxley Act is important for the purposes of an overview of existing legislation. In the past the US government has relied on the states to monitor and enforce the rules of auditors. Typically public accountants were licensed by the states to audit corporate financials; however the states had very little, if any, money to provide the necessary funds for enforcement. “Public accountants were licensed by the states, but states devote few resources to supervising auditors; federal regulation of auditing was light; and no federal agency supervised auditors. A Public Oversight Board for auditors was created in 1978, but it was dominated by accountants, funded by the audit...
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...auditors report Auditor’s Report This report addresses the auditor's responsibilities relating to subsequent events and subsequently discovered facts in an audit of financial statements. It also addresses a predecessor auditor's responsibilities for subsequent events and subsequently discovered facts when reissuing the auditor's report on previously issued financial statements that are to be presented on a comparative basis with audited financial statements of a subsequent period. In addition this report also incorporates management representation and consideration of an entity’s ability to continue as a going concern. There may be times when new information may come to an auditor's attention subsequent to the date of their report of an audited financial statements, this might affect the previously issued report. With information form the PCAOB this report describes how a subsequent audits should be followed by any auditor who becomes aware that facts may have existed at that time of the original audit of the financial statement. When performing an integrated audit of financial statements and internal control over financial reporting, refer to paragraph 98 of PCAOB Auditing Standard No. 5, which relays that an audit of internal control over financial reporting should be integrated with an audit of financial statements, this will provide directions, with respect to the subsequent discovery of information existing on the date of the auditor's final report. Most of the guidelines...
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