Ch 1 SM FINALca
Solutions for Chapter 1
Auditing: Integral to the Economy
Review Questions:
1-1. The special function performed by the public accounting profession is the attestation to the fairness of the financial statements of clients. The special function ensures the reliability and integrity of the financial reporting system. Judge Burger described the special function as "certifying the public reports that collectively depict a corporation's financial status," which involves "a public responsibility transcending any employment relationship with the client."
The auditing profession exists to serve the users of an organization's financial statements. These include lenders, investors, management, government, and (indirectly) all individuals who are ultimately affected by the integrity of the financial reporting process.
1-2. The audit opinion formulation process is a systematic approach by which the auditor evaluates the risk of being associated with a client, through the process of gathering and evaluating audit evidence, to determining the type of audit opinion that should be rendered. The stages and outcome of each stage are as follows:
Assessing Client Acceptance and Retention: The outcome is determining whether or not a firm should serve a potential client. The decision will depend on the risk to the auditor of being associated with a particular client.
Understanding the Client: The outcome is a business understanding of the client, its major processes, the risks inherent in its business, and the impact of current economic and competitive issues on the client.
Obtain Evidence About Controls: The outcome is an understanding of the client’s major internal control practices and whether the controls are sufficient to mitigate the risk of material misstatements in a company’s financial statements.
Obtain Substantive Evidence: The outcome is the audit evidence that is gathered, evaluated, and synthesized to determine if the auditor has sufficient competent evidence
Auditing: Integral to the Economy
Review Questions:
1-1. The special function performed by the public accounting profession is the attestation to the fairness of the financial statements of clients. The special function ensures the reliability and integrity of the financial reporting system. Judge Burger described the special function as "certifying the public reports that collectively depict a corporation's financial status," which involves "a public responsibility transcending any employment relationship with the client."
The auditing profession exists to serve the users of an organization's financial statements. These include lenders, investors, management, government, and (indirectly) all individuals who are ultimately affected by the integrity of the financial reporting process.
1-2. The audit opinion formulation process is a systematic approach by which the auditor evaluates the risk of being associated with a client, through the process of gathering and evaluating audit evidence, to determining the type of audit opinion that should be rendered. The stages and outcome of each stage are as follows:
Assessing Client Acceptance and Retention: The outcome is determining whether or not a firm should serve a potential client. The decision will depend on the risk to the auditor of being associated with a particular client.
Understanding the Client: The outcome is a business understanding of the client, its major processes, the risks inherent in its business, and the impact of current economic and competitive issues on the client.
Obtain Evidence About Controls: The outcome is an understanding of the client’s major internal control practices and whether the controls are sufficient to mitigate the risk of material misstatements in a company’s financial statements.
Obtain Substantive Evidence: The outcome is the audit evidence that is gathered, evaluated, and synthesized to determine if the auditor has sufficient competent evidence