Compare the rights of plaintiffs under common law with the rights of persons who purchase securities registered under the Securities Act of 1933 and sustain losses. In your answer, emphasize the issue of who must bear the burden of proof.
> Jenko Corp. is an audit client of the Phoenix office of Williams and Co., CPAs. Williams and Co. has offices in Arizona, including ones in Phoenix, Tucson, and Tombstone. For purposes of independence, the AICPA requires that no “covered member” may have
> Roger Royce, CPA, has encountered a situation that he thinks may pose a threat to his independence with respect to Watson, Inc., an audit client. The situation is not addressed by an independence rule or regulation. Using the AICPA Conceptual Framework f
> Sally Adams is an audit manager for the firm of Jones & Smith, CPAs, and is assigned to the audit of Libra Fashions, Inc. Near the middle of the audit, Sally was offered the job of Libra’s chief financial officer. Required: a. Discuss the implications o
> Provide an example in which a data analytics technique applied in financial statement auditing could serve as both a test of a control and a substantive procedure.
> Reed, CPA, accepted an engagement to audit the financial statements of Smith Company. Reed’s discussions with Smith’s new management and the predecessor auditor indicated the possibility that Smith’s financial statements may be misstated due to the possi
> Jane Lee, a director of a nonpublic corporation with a number of stockholders and lines of credit with several banks, suggested that the corporation appoint as controller John Madison, a certified public accountant on the staff of the auditing firm that
> An attitude of independence is a most essential element of an audit by a firm of certified public accountants. Describe several situations in which the CPA firm might find it somewhat difficult to maintain this independent point of view.
> What does an operational audit attempt to measure? Does an operational audit involve more or fewer subjective judgments than a compliance audit or an audit of financial statements? Explain. To whom is the report usually directed after completion of an op
> Various organizations develop standards for audits and regulate CPA firms. Compare and contrast the roles of the AICPA, the PCAOB, and the state boards of accountancy along the following dimensions: Required: a. Standard setting. b. Regulation of CPA fi
> While the AICPA administers a peer review program for CPA firms, the PCAOB staff performs practice inspections. Required: a. Identify the two basic types of peer review. b. On what part of a firm’s practice does the PCAOB staff focus its inspections? c.
> The self-interest of the provider of financial information (whether an individual or a business entity) often runs directly counter to the interests of the user of the information. Required: a. Give an example of such opposing interests. b. What may be
> The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board. Explain the major responsibilities of this board.
> A corporation is contemplating issuing debenture bonds to a group of investors. Required: a. Explain how independent audits of the corporation’s financial statements facilitate this transaction. b. Describe the likely effects on the transaction if the c
> As a result of a number of events that caused Congress to doubt the ability of the accounting profession to regulate itself, a number of reforms were made to the accounting profession’s system of self-regulation. Required: a. Provide a brief overview of
> When in the course of an audit might the auditors find it useful to apply analytical procedures?
> Evaluate the following statement: A canceled check is not considered particularly reliable evidence because the check was prepared within the client’s organization.
> As part of the verification of accounts receivable as of the balance sheet date, the auditors might inspect copies of sales invoices. Similarly, as part of the verification of accounts payable, the auditors might inspect purchase invoices. Which of these
> The best means of verification of cash, inventory, office equipment, and nearly all other assets is a physical count of the units; only a physical count gives the auditors complete assurance as to the accuracy of the amounts listed on the balance sheet.”
> In a conversation with you, Mark Rogers, CPA, claims that both the sufficiency and the appropriateness of audit evidence are a matter of judgment in every audit. Do you agree? Explain.
> Contrast the objectives of auditing at the beginning of this century with the objectives of auditing today.
> Distinguish between the component of audit risk that the auditors gather evidence to assess versus the component of audit risk that they collect evidence to restrict.
> Distinguish among routine, non-routine, and estimation transactions. Include an example of each.
> I have finished my testing of footings of the cash journals,” said the assistant auditor to the senior auditor. “Shall I state in the working papers the periods for which I verified footings, or should I just list the totals of the receipts and disbursem
> Describe the relationship between detection risk and audit risk.
> List several rules to be observed in the preparation of working papers that reflect current professional practice.
> Explain the meaning of the term permanent file as used in connection with audit working papers. What kinds of information are usually included in the permanent file?
> Define inherent risk. Can the auditors reduce inherent risk by performing audit procedures?
> Should the auditors prepare adjusting journal entries to correct all errors they discover in the accounting records for the year under audit? Explain.
> Why are the final figures from the prior year’s audit included in a working trial balance or lead schedule?
> The overall risk of the investment in a business includes both business risk and information risk. Contrast these two types of risk. Which one is most directly affected by the auditors?
> Compare auditors’ common law liability to clients and third-party beneficiaries with their common law liability to other third parties.
> Should the working trial balance prepared by the auditors include revenue and expense accounts if the balances of these accounts for the audit year have been closed into retained earnings prior to the auditors’ arrival? Explain.
> What landmark case was embraced by the court in the case of Credit Alliance Corp. v. Arthur Andersen & Co.? Identify the two factors that the court stated must be proved for the auditors to be held liable for ordinary negligence to a third party.
> Briefly describe the different common law precedents set by the Ultramares v. Touche & Co. case and the Rosenblum v. Adler case.
> Briefly describe the differences in liability to third parties under the known user, foreseen user, and foreseeable user approaches to CPA liability.
> Distinguish between common law and statutory law.
> Define the term third-party beneficiary.
> What is meant by the term privity? How does privity affect the auditor’s liability under common law?
> Distinguish between ordinary negligence and gross negligence within the context of the CPAs’ work.
> Rogers and Green, CPAs, admit they failed substantially to follow generally accepted auditing standards in their audit of Martin Corporation. “We were overworked and understaffed and never should have accepted the engagement,” said Rogers. Does this situ
> Comment on the following statement: While engagement letters are useful for audit engagements, they are not necessary for compilation and review engagements.
> What are the principal use and significance of an audit report to a large corporation with securities listed on a stock exchange? To a small family-owned enterprise?
> Describe a situation in which a set of audit working papers might be used by third parties to support a charge of gross negligence against the auditors.
> In the 1136 Tenants’ Corporation case, what was the essential difference in the way the client and the CPAs viewed the work to be done in the engagement?
> How does the SEC regulate auditors who appear and practice before the commission?
> Why did Congress enact the Racketeer Influenced and Corrupt Organizations Act? Why has it been of concern to auditors? What subsequent developments have reduced this concern?
> How was the Continental Vending case unusual with respect to penalties levied against auditors?
> Why was the Ernst & Ernst v. Hochfelder decision considered a “victory” for the accounting profession?
> State briefly a major distinction between the Securities Act of 1933 and the Securities Exchange Act of 1934 with respect to the type of transactions regulated.
> Contrast joint and several liability with proportionate liability.
> Explain why the potential liability of auditors for professional “malpractice” exceeds that of physicians or other professionals.
> Three months ago, a national public accounting firm hired Greg Scott to work as a staff auditor in its New York office. Yesterday, Scott’s father was hired to be the chief financial officer of one of the public accounting firm’s New York office clients.
> Audit working papers are the property of the auditors, who may destroy the papers, sell them, or give them away.” Criticize this quotation.
> What is the most common type of attest engagement? What is most frequently being “asserted” by management on this type of engagement?
> Bill Scott works as a manager in the Phoenix office of an international public accounting firm. His father has just taken a position as a purchasing agent for one of the public accounting firm’s Phoenix clients. Has Bill’s independence been impaired with
> Explain how a CPA might have an indirect financial interest in an audit client. Does the AICPA Code of Professional Conduct prohibit such interests?
> How does the AICPA Code of Professional Conduct relate, if at all, to Statements on Auditing Standards?
> List the broad categories of threats to independence included in the AICPA Conceptual Framework for Independence Standards.
> Describe the relationships among the AICPA Code of Professional Conduct’s principles, rules, and interpretations.
> What is the basic purpose of a code of ethics for a profession?
> Since internal auditors are employees, they have no ethical responsibilities to others beyond their employers.” Comment on this statement.
> What board establishes international ethical standards for accountants? How do these standards compare to the AICPA Code of Professional Conduct?
> In preparing a client’s income tax return, a CPA feels that certain expenses are unreasonably high and probably are overstated. Explain the CPA’s responsibilities in this situation.
> List the major types of audit working papers and give a brief explanation of each. For example: One type of audit working paper is an account analysis. This working paper shows the changes that occurred in a given account during the period under audit. B
> Describe several business situations that would create a need for a report by an independent public accountant concerning the fairness of a company’s financial statements.
> In what circumstances are the various conceptual frameworks within the Code of Professional Conduct considered by accountants?
> Define assurance services. What are the two distinct types?
> The AICPA Code of Professional Conduct includes rules in various areas. Which of those rules apply to CPAs not in public practice but in business or other positions (e.g., retired or unemployed)?
> Must a CPA maintain independence and an impartial mental attitude when preparing a client’s income tax return? Explain.
> In what organizational forms may CPAs practice public accounting?
> What are the two major types of constraints on decisions that involve ethical issues? Provide examples of each type.
> Laura Clark, wife of Jon Clark, CPA, is a life insurance agent. May Jon Clark refer audit clients needing officer life insurance to Laura Clark or to another life insurance agent who will share a commission with Laura Clark? Explain.
> Sandy Schultz, CPA, has performed a consulting services job in which she made recommendations that ultimately resulted in one of her audit clients purchasing a computer manufactured by the AMZ Computer Corporation. Shortly thereafter, Ms. Schultz was sur
> Jian Zhang is a CPA who often serves as an expert witness in court cases. Is it proper for Zhang to receive compensation in a damage suit based on the amount awarded to the plaintiff? Discuss.
> Use the AICPA Code of Professional Conduct (available at pub.aicpa.org/code of conduct) to identify the circumstances under which a CPA may not perform professional services on a contingent fee basis. Cut and paste the most directly relevant rule from th
> Why are the prior year’s audit working papers a useful reference to staff assistants during the current audit?
> Comment on the following: In performing a consulting engagement for a client, a CPA may perform any services that the client requests.
> Which rules of the AICPA Code of Professional Conduct recognize the PCAOB as a body authorized to issue technical standards?
> In late 2001 through 2002, the accounting profession faced a “crisis of credibility.” Describe the events that led up to this crisis.
> How do the rules for the audit of public versus nonpublic companies differ with respect to the independence of a CPA who performs routine accounting services for a client?
> Describe what is meant by the term “covered member.”
> With respect to ethics, what are the responsibilities of the Public Company Accounting Oversight Board? What is the source of the Board’s authority?
> Sara Kole, CPA, has been requested by the president of Noyes Company, a closely held corporation and audit client, to cosign Noyes Company checks with the Noyes treasurer when the president is away on business trips. Use the Code of Professional Conduct
> What is meant by the term ethical dilemma? Describe an ethical dilemma that you have faced.
> Draft the standard form of audit report commonly issued after a satisfactory audit of a public client’s financial statements. Assume that the auditors issued a separate report on internal control and that the company is not required to present critical a
> Pike Company has had an annual audit performed by the same firm of certified public accountants for many years. The financial statements and copies of the audit report are distributed to stockholders each year shortly after completion of the audit. Who i
> What are the major functions of audit working papers?
> Evaluate the following quotation: “If a CPA firm completes a nonpublic company audit of Adam Company’s financial statements following AICPA generally accepted auditing standards and is satisfied with the results of the audit, an unmodified audit report m
> Explain briefly the auditors’ responsibility for detecting noncompliance with laws by clients.
> In the context of an audit of financial statements, explain what is meant by professional skepticism.
> You are the partner on the audit of Datasave, Inc., a small publicly held corporation that manufactures high-speed disk drives for the computer industry. The audit of Datasave had been progressing satisfactorily until you were about a month away from iss
> What relationship exists between AICPA generally accepted auditing standards (GAAS) and the Statements on Auditing Standards (SASs)?
> What is a financial reporting framework? Why is a financial reporting framework important to a financial statement audit?
> Comment on the following: The SEC's acceptance of the use of International Financial Reporting Standards in filings replaces use of PCAOB Auditing Standards for audits of international companies.
> Distinguish between the system review and the engagement review types of peer reviews.
> What are the duties and responsibilities of the Public Company Accounting Oversight Board?
> Do the AICPA’s Statements on Quality Control Standards require every CPA firm to implement similar quality control procedures? Explain.
> Evaluate the following statement: “Identifying related parties and obtaining a client representation letter are two required audit procedures normally performed on the last day of fieldwork.”
> Explain the basic objective of establishing quality control procedures in the following areas. a. Engagement performance. b. Human resources. c. Monitoring.
> What is the difference between generally accepted accounting principles (GAAP) and AICPA generally accepted auditing standards (GAAS)?
