1. In your own words, define “Auditing.”
Auditing is an independent person evaluating a company’s information through a substantial amount of evidence to ensure the information provided follows the established criteria. In addition to ensuring compliance to the related criteria, a report is provided in determining how well the company corresponds to such criteria.
2. Discuss the importance of “Evidence” in auditing.
Evidence is important because it is what is used by auditors to determine whether the information provided for review by the auditors is stated in accordance with the established criteria.
3. Define “Independence” and “Objectivity” as they relate to auditing.
According to The Institute of Internal Auditors (2011), “Independence: The freedom from conditions that threaten the ability of the internal audit activity to carry out internal audit responsibilities in an unbiased manner. Objectivity: An unbiased mental attitude that allows internal auditors to perform engagements in such a manner that they believe in their work product and that no quality compromises are made. Objectivity requires that internal auditors do not subordinate their judgment on audit matters to others.”
4. Audits typically consist of three phases: Planning; Fieldwork; Reporting. Describe activities that accompany each phase.
In the planning phase, the auditee is notified of the upcoming audit and the objectives that will be evaluated. A basic overview is provided to the auditee so that they may gather the necessary information in preparing for the next phase, fieldwork. Fieldwork consists of analyzing enough evidence, or information, in order to determine whether the company is performing its operations as it should, in accordance with the information’s criteria. After the conducted fieldwork, the auditor would then prepare a report, expressing their findings as well as making recommendations on where they find areas that can be improved.
5. Distinguish between Assurance and Attestation Services.
The objective for an assurance service is to improve the quality of information. An attestation service, a type of assurance service, is a CPA firm providing a report about a subject matter or assertion made by a third party.
6. Describe the following types of Audits:
a. Operational Audits
Operational audits evaluate the efficiency and effectiveness of any part of an organization’s operating procedures and methods
b. Compliance Audits
Compliance audits are conducted to determine whether the company is following the procedures, rules, or regulations that are set by the higher authority.
c. Financial Statement Audits
Financial Statement Audits is the determination that the financial statements, and the information being verified, are stated correctly and in accordance with the specified criteria.
d. Informational Technology Audits (may need to go outside the text to address this)
Informational Technology Audits is an audit of IT controls and how well it protects corporate assets and ensures data integrity. In addition to examining the physical security controls, it examines the overall business and financial controls that are involved in the information technology system
7. Discuss the following types of Auditors:
a. Auditors Working for CPA Firms
Auditors working for CPA firms are licensed CPAs and are responsible for auditing the published historical financial statements. They are often called ‘external auditors’ or ‘independent auditors.’
b. Governmental Auditors (e.g. GAO, IRS, health inspectors)
Governmental auditors work for the Government Accountability Office Auditors and conducts audits for Congress, with the same responsibilities as of CPA firms.
c. Internal Auditors
Internal auditors are employed by all types of organizations to audit for management, therefore, the responsibility varies.
8. Identify the roles CPA firms play in society.
CPA Firms provide audit services to a wide array of businesses and individuals. Not only do they offer audit services but they offer bookkeeping services, tax services and management consulting services as well. In addition to conducting audits, CPA firms also provide bookkeeping and accounting services, tax services, and advisory services.
9. Briefly explain Sarbanes-Oxley (SOX) and the role the Securities and Exchange Commission (SEC) plays in regulating audits.
Due to the bankruptcies and large corporations, such as Enron and WorldCom who have committed fraud, Sarbanes-Oxley Act (SOX) was passed to improve financial disclosures. The Securities and Exchange Commission (SEC) oversees the orderly conduct of securities market and helps provide investors with reliable information.
10. What is the role of the AICPA? The PCAOB? The Institute of Internal Auditors (IIA)?
The AICPA sets standards and rules that all CPAs must follow. The PCAOB provides oversight for auditors, establishes auditing and quality control standards, and performs inspections of the quality controls, for public companies. According to The Institute of Internal Auditors (2017), the mission of IIA is to provide leadership of the global profession of internal auditing.
11. Summarize the 10 components of Generally Accepted Auditing Standards (GAAS)
The 10 components of Generally Accepted Auditing Standards are found in three categories. The first category, General Standards, requires: 1) the audit to be performed by a technically trained and proficient auditor, 2) and auditor to have independent mental attitude in all subject matters, and 3) be professional while conducting the audit and preparing the report. The next category, Standards of Field Work, requires: 1) work to be adequately planned and supervised, 2) enough understanding of internal controls, and 3) obtain sufficient appropriate evidence. Finally, the third category, Reporting Standards, involves: 1) indicating financial statements presented in accordance with GAAP, 2) identify circumstances not reported in the current period, 3) include informative disclosures, and 4) contain an expression or opinion regarding the financial statement.
12. What are SAS, and for what are they used?
Statements on Auditing Standards (SAS) are authoritative literature, providing guidance for those completing the audit
13. True or False – CPA firms are required to engage in quality control efforts of its audits? Why or Why not?
True, CPA firms are required to engage in quality control efforts when conducting audits. Quality control systems provide assurance that auditing standards are being followed as it is not guaranteed that will be done so.
14. What is a Peer Review and how and when are they performed?
Peer reviews are reviews by CPAs of a CPA firm’s compliance with its quality control system. A firm that is a member of the AICPA are subject for peer reviews every three years.
15. Why does government often have different auditing and accounting standards?
I believe the government has different auditing and accounting standards due to the different nature of the overall business, as well as, the internal and external users involved. For example, the government earns revenue from taxpayers, therefore, accounting and auditing must be properly stated and conducted in a diligent manner to represent information in a well-mannered form.
Arens, A. A., Elder, R. J., & Beasley, M. S. (2013). Auditing & Assurance Services: An Integrated Approach (15th ed.). : Pearson. Retrieved from https://phoenix.vitalsource.com/#/books/9781323008591
The Institute of Internal Auditors. (2011). Independence and Objectivity. Retrieved from https://www.iia.org.uk/media/57156/independence_and_objectivity.pdf
TechTarget. (2017). IT Audit (Information Technology Audit). Retrieved from http://searchcompliance.techtarget.com/definition/IT-audit-information-technology-audit
The Institute of Internal Auditors. (2017). About the IIA. Retrieved from https://na.theiia.org/about-us/Pages/About-The-Institute-of-Internal-Auditors.aspx