Principles-Of-Auditing-Homework-Group-4-2 (1).Docx

● Group members Lương Thị Hải Anh Lưu Thanh Nga Phạm Diệu Linh Tô Anh Thư Triệu Khánh Linh ● Due date 11/12/2023 I Chapter 1 Q1 1 When the Securities and Exchange Commission suggested the formation of[.]

● Group members:

- Lương Thị Hải Anh

- Lưu Thanh Nga

In December 2001, Enron filed for bankruptcy after admitting to accounting errors

Furthermore, it was followed by the WorldCom hoax, in which the business exaggerated its income As a result, several corporations revised their financial statements Finally, the Securities and Exchange Commission requested an inquiry into several corporations'

accounting methods, creating investor concern and shaking up an already shaky financial market in late 2001 and early 2002 It resulted in a credibility issue for the accounting

profession

Q1-2:

- Assurance services are professional services that improve the accuracy of information

or the context in which it is used for the decision-making process

- Two distinct types of assurance services:

+ Those that increase the reliability of information

+ Those that involve putting information in a form or context that facilitates decision-making

+

Q1-3:

- The most typical sort of attest engagement is a financial statement audit

- The most common assumption made by management is that the financial statements adhere to generally recognized accounting principles

Q1-4:

- A big organization with securities listed on a stock exchange must abide by the stock exchange's regulations and the Securities and Exchange Commission's guidelines to submit an audit report together with its yearly financial statements to its investors It must also hire auditors to offer a view of its internal controls A big listed firm

realizes, nevertheless, that it has to preserve investor trust in the credibility of its financial statements and internal control over financial reporting if it wants to keep on

to be able to raise financing from the public The report by a recognized public

accounting firm lends credibility to the corporation's financial accounts

- When a small family-owned business decides to have an audit, the goal is typically to utilize the auditors' report to back up a bank loan proposal

Q1-5:

A report by an independent public accountant concerning the fairness of a company's

financial statements is commonly required in the following situations:

(1) Application for a bank loan

(2) Establishing credit for purchase of merchandise, equipment, or other assets

(3) Reporting operating results, financial position, and cash flows to absentee owners

Business risk is the risk that the investment will be impaired because a company invested in

is unable to meet its financial obligations due to economic conditions or poor management decisions Information risk is the risk that the information used to assess business risk is not accurate Auditors can directly reduce information risk, but have only limited effect on business risk

Q1-10:

An operational audit is conducted in order to assess business operations In this audit, an Auditor checks the efficiency and effectiveness of the operations and suggests the areas and manners in which the efficiency or effectiveness could be enhanced It focuses on the entity's internal processes and procedures and internal controls The focus is mostly on improving theefficiency and effectiveness of the operation in the audit findings An operational audit also

attempts to find the weaknesses in operations and to reduce the related issues and problems.

Operational audits involve more subjective judgments than compliance audits This is so because, in a compliance audit, the auditor has to check whether or not certain laws have been complied with A company may either comply with the specific requirements or may not comply; therefore, there is limited scope for making judgments

In financial audits as well, the auditor has to check whether or not the applicable accounting standards have been complied with or not There may be, however, various options within theaccounting standards between two or more methods or treatments, and as a result, the auditor needs to judge whether or not the selected option is fair and most appropriate However, the level of subjectivity is lower in comparison with an operational audit

In an operational audit, the auditor has to assess the quality of operations, and therefore the overall process and underlying activities are more subject to judgment Therefore, an

operational audit involves more subjective judgments than a compliance or a financial audit

After completion of the audit, the report is generally addressed to the management or the Governance board so that the recommendations for improvements could be implemented by the company

Q1-11:

- A compliance audit is an audit to determine whether financial reports or other

assertions are in compliance with established criteria

- An operational audit, on the other hand, is a review of a department or other unit of a business or governmental organization to measure the effectiveness and efficiency of operations

Q1-12:

Internal auditors must be independent of the department heads and other line executives

whose work they review However, internal auditors are not independent in the same sense as

a public accounting firm The public accounting firm serves many clients and the revenue obtained from any one client is only a small part of the revenue of the firm Internal auditors,

on the other hand, are employees of one company, and are subject to the restraints inherent inthe employer-¬employee relationship Internal auditors can achieve a great deal of

independence by reporting to the audit committee of the board of directors, but they cannot achieve the same degree of independence as is possessed by the external public accounting firm

Q1-13:

The internal auditors are employees of Spacecraft, Inc., and may be influenced by corporate management The public accounting firm is independent of the company and is in a better position to take positions as opposed to those of company management The work of the internal audit staff emphasizes the measurement of the efficiency and effectiveness of variousoperating units of the company and compliance with all types of controls, whereas the public accounting firm is primarily concerned with determining the fairness of Spacecraft's financialstatements

Q1-16:

A peer review is a critical review of a public accounting firm's practices by another public accounting firm (or other CPAs functioning as a peer review team) The purpose of a peer review is to encourage adherence to quality control standards established by the accounting firm and the profession

Q1-22:

The various levels of accounting personnel in a large public accounting firm are staffassistants, senior auditors, managers or supervisors, and partners (and principals).

The staff assistant performs audit procedures such as the observation of physical inventoriesand confirmation of receivables under the supervision of a senior The senior auditor plansand coordinates the audit and drafts the audit report The senior also reviews working papers,controls the allocation of audit time, and trains assistants on the job The manager orsupervisor usually is responsible for supervising and reviewing several audit engagementsconcurrently and resolving significant problems with the client The partners maintaincontacts with clients, develop new business, establish policies of the firm, review theadequacy of audit work, and sign audit reports The engagement partner is responsible for theperformance of the audit in accordance with professional standards A partner also devotestime to the recruitment and development of staff, to AICPA and other professional groupactivities, to educational and other civic activities, and generally to promoting anenvironment in which the firm can prosper The position of principal, which is often held bytop-ranking consulting personnel who do not hold the CPA certificate, has responsibilitiessimilar to those of a partner

Q1-23:

The most significant responsibilities of a partner in a public accounting firm include (only three required:

• Assume ultimate responsibility for the audits assigned to him or her

• Sign audit reports

• Review the audit work for compliance with firm and professional standards

• Maintain relations with audit clients

• Establish firm policies

• Staff recruitment and development.

Q1-24:

-Associations are separate legal entities that are designed to help their member firms to increase the availability of services and resources they provide

-sharing at least one of the following

-common brand name

-common control

-profits

-common business strat

-significant professional resources

-common quality control policies and procedures

Q1-25:

The International Auditing and Assurance Standards Board establishes InternationalStandards on Auditing (ISAs) International Standards on Quality Control (ISQC) andstandards for other assurance and related services Its pronouncements are meant to foster thedevelopment of consistent worldwide professional standards Its standards do not override thenational auditing standards of its members

II Chapter 2

Q2-1:

The oversight of diverse corporate entities is entrusted to the American Institute of CertifiedPublic Accountants (AICPA) and the Public Company Accounting Oversight Board(PCAOB) For instance, the AICPA assumes the regulatory role for non-public entities, while

the PCAOB is designated to supervise public corporations Initially, the PCAOB adopted theauditing standards delineated by the AICPA, but subsequently, it developed its own set ofstandards.

Distinctive attributes between the PCAOB and AICPA are explicated as follows:

- Public Company Accounting Oversight Board (PCAOB):

The PCAOB is tasked with formulating standards governing auditing, quality control, andethical conduct specifically applicable to public companies It is responsible for theregistration of CPA firms authorized to audit public corporations, wielding the authority torescind or preclude a CPA's involvement in audits Possessing federal authority bestowedthrough legislative channels, the PCAOB conducts inspections of auditing practicesemployed by registered firms for public companies

- American Institute of Certified Public Accountants (AICPA):

The AICPA assumes the responsibility of setting standards encompassing attestation,accounting and review, quality control, independence, and ethical conduct tailored for non-public enterprises CPA firms are afforded the voluntary option to join the AICPA in either orboth of its sections: the Private Companies Practice Section (PCPS) and the Center for PublicCompany Audit Firms The AICPA's authority emanates from its broad acceptance by stateboards of accountancy, other legislative bodies, and the judicial system The AICPA Centerfor Public Company Audit Firms administers a peer review program, scrutinizing the non-public practices of firms whose auditing practices for public companies fall under thepurview of PCAOB inspection

Q2-3:

The formulation of corporate financial statements is regulated by Generally AcceptedAccounting Principles (GAAP), whereas the auditing of financial statements is governed byGenerally Accepted Auditing Standards (GAAS) GAAS delineates overarchingresponsibilities and delineates their applications in a comprehensive manner.

Generally Accepted Accounting Principles

(GAAP)

Generally Accepted Auditing Standards (GAAS)

These constitute accounting standards

designed to assist companies in the

preparation of financial statements GAAP

encompasses standards, conventions, and

regulations adhered to by accountants

during the process of financial statement

preparation

These represent auditing standards aimed

at ensuring a transparent and impartialaudit process GAAS safeguards theaccuracy, uniformity, and verifiability offinancial statements through a set ofguidelines that auditors employ in theirpractices

Q2-3:

The financial reporting framework delineates the principles and guidelines employed for thepreparation of financial statements within the United States The utilization of generallyaccepted accounting principles is integral to the financial reporting framework It isimperative for an auditor to verify adherence to the financial reporting framework and ensurethe absence of material misstatements resulting from irregularities in the financial statements

This framework assumes significance in the audit process, as the auditor's report attests to the

conformity of financial statements with said framework An audit conducted in accordancewith generally accepted auditing standards is predicated on the understanding thatmanagement or the responsible party bears responsibilities, including:

1 Preparing and presenting financial statements in accordance with a financial reportingframework that encompasses the formulation, implementation, and maintenance of internalcontrol pertinent to the preparation of financial statements, and ensuring the absence ofmaterial misstatements

2 Furnishing the auditor with records, documentation, and other pertinent materialsessential to the preparation and presentation of financial statements

Q2-4:

The relationship between generally accepted auditing standards (GAAS) and statements onauditing standards (SAS) can be elucidated in the following manner:

- GAAS is comprised of 10 comprehensive standards that establish a framework, which

is open to interpretation by the AICPA In meticulous detail, SAS interprets these 10 GAASstandards and stands as the foremost authoritative reference for auditors

- When undertaking audits of financial statements, auditors strictly adhere to both GAASand SAS

- GAAS and SAS collectively serve as guiding principles for the audit of financialstatements

Q2-5:

Professional skepticism is an outlook encompassing a questioning mindset, vigilance toward

indicators of potential misstatement arising from error or fraud, and a discerning evaluation

of audit evidence Recognized as an integral element of a high-quality audit, professionalskepticism is imperative for ensuring thorough and reliable audit outcomes

Q2-6:

The auditor's responsibility for finding client noncompliance with laws and regulations (hereinafter, laws) is determined by the nature of the audit Professional Standards distinguishtwo categories of laws: those that have a direct impact on financial statement numbers and those that do not

The auditors' responsibility for laws that have a direct impact, the auditors must gather sufficient appropriate audit evidence to obtain reasonable assurance of detecting material misstatements resulting from noncompliance this is the same responsibility the auditors havefor material errors and fraud

Other laws require auditors to execute specific audit methods in order to discover instances ofnoncompliance with other laws that may have a substantial effect (other than the amounts) onthe financial statements

Q2-7:

I do not agree While performing an audit in accordance with AICPA guidelines might outcome in an unmodified auditing report, the auditor is unable to depend on reports from prior years The firm may have undergone major changes from the previous period, causing the audit report to be inaccurate

Q2-8:

Primary responsibility for the fairness of the financial statement lies with management, even

though the financial statement may be created and printed in the auditor's office.

Management is accountable for preparation and fair presentation of the financial statement according to generally accepted accounting principles This encompasses the design,

implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements Financial statements must be free of material

misstatement, whether due to fraud or error

As a financial statement is considered a statement of the company and not of the auditors, an auditor has no right to make changes in the financial statement Even if the auditor disagrees with some of the financial entries in the account books, the auditor will first discuss it with management If management tends to disagree with the opinion, an auditor cannot change theentries in the account books, but can qualify entries in his or her report

For example:

Auditors believe that the balance in the allowance for uncollectible accounts is not sufficient

to cover the probable collection losses in the accounts receivable The auditors will first discuss this problem with management and let them know why they think the allowance is inadequate If management agrees to increase the allowance then they need to adjust the entry; but if management thinks otherwise or is not persuaded by the auditor's argument, the auditors will probably qualify their opinion and show this in their report

Q2-10:

There is either a problem with GAAP or GAAS so much that you could not issue a standard unmodified or unqualified opinion

Q2-11:

In the opinion paragraph of the auditor's standard report the auditors make representations as

to the following:

(1) The fairness of the financial statements, in all material respects

(2) Application of generally accepted accounting principles

(3) By implication consistent application of generally accepted accounting principles

(4) By implication adequate disclosure

Q 2-12:

While the specific wording may vary depending on the auditing standards and regulations applicable, a nonpublic company audit report generally addresses the risk of not detecting a material misstatement resulting from fraud versus one resulting from error in the following ways:

- Acknowledges the higher risk of fraud:

The report will typically state that the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error This is because fraud often involves intentional actions, such as:

● Collusion

● Forgery

● Intentional omissions

● Misrepresentations

● Overriding internal controls

These actions can make it more difficult for auditors to detect fraud, even when they perform

a thorough audit

- Discusses the assessment of fraud risk:

The report will describe the procedures the auditor performed to assess the risk of material