Deck 1: Assurance and Auditing

Question 1

The demand for auditing can develop naturally or can be mandated by government regulation. Which do you think is most important in the evolution of auditing through history?

Answer 1

Clearly, over long periods of history, the need for auditing has arisen naturally from economic activity (empire needing to collect taxes, family interests demanding stewardship of wealth, stakeholders needing earnings and profitability information, creditors desiring information on the financial condition of borrowers) and is not solely the by-product of government regulation.

Question 2

Why is the effectiveness of internal auditors potentially limited?

Answer 2

The effectiveness of internal auditors may be limited if they actually work for the managers they audit.

Question 3

Explain why the financial statement audit is important to stakeholders.

Answer 3

a. Honesty and competence: An audit helps keep management honest and motivated to do a good job, because they are being checked.
b. Expertise: Many stakeholders (employees, casual investors, politicians, etc.) are not sufficiently knowledgeable to evaluate the quality of financial statements.
c. Cost of capital: The audit reduces the risk of unreliable information and, therefore, also reduces the risk of surprises and improves investment decisions.
d. Insurance: An audit provides stakeholders with insurance against significant problems with the financial statements, i.e. stakeholders who rely on misstated financial reports may be able to recover some of their losses form the auditor.

Question 4

Explain the importance of reliable information for a large manufacturing company, a small business, a not-for-profit entity and a government organization

Question 5

Describe different ways an individual may react when faced with decisions that are ethically questionable?

Question 6

Why does full and complete disclosure discourage unethical decisions?

Question 7

Describe the important information risks that investors face when making decisions based on financial reports.

Question 8

What three conditions must be met before an auditor undertakes an assurance engagement?

Question 9

What four conditions affect an auditor's attestation engagement?

Question 10

Briefly explain the natural demand for auditing.

Question 11

Explain the importance of and the difference between financial literacy and financial experts with regard to the audit committee.

Question 12

How does the modern business environment impact the need for relevant and reliable data?

Question 13

Explain the role and importance of the compensation committee.

Question 14

Information asymmetry may impact managers and stakeholders. Define this term and explain two situations where incentives and information asymmetry may create potentially dysfunctional distrust.

Question 15

Describe the history of auditing prior to the modern era, explaining the evolution of the focus of audits over time.

Question 16

Explain the requirements and limitations of external auditors.

Question 17

Why should stakeholders be knowledgeable about an organization's approach to ethics?

Question 18

What two competing forces influence managers' decisions to misstate (or not misstate) financial results for their own benefit?

Question 19

What are the potential consequences of relying on information that is misleading, incomplete, or confusing?

Question 20

What powerful lesson did the auditing profession learn from the Enron/Andersen tragedy?

Question 21

Which of the following claims is amenable to attestation? What problems does each assertion cause with regard to attestation?
a. "Smith Company's total assets grew 13% compared to last year."
b. "Diet Rite's market share in 2005 increased 46%."
c. "We, the Islamic Republic of Iran meet the requirements of the International Atomic Energy Agency."
d. "Pepsi's products are the best soft drinks available."
e. "My business lunch expenses today were $43.29."
f. "The Jones Manufacturing Company is in compliance with all OSHA standards."
g. "Our new drug will provide the best chance for cancer patients."
h. "Our lotion reduces the appearance of wrinkles due to aging better than competing products."

Question 22

Explain the role of the internal auditors and external auditors in corporate governance.

Question 23

Consider the information needs of a locally owned convenience store and a national grocery chain.
a. What information needs are similar?
b. What information needs are different?
c. How does each company collect and process information?

Question 24

How are audits regulated in the USA?

Question 25

What are the general requirements (legal and otherwise) for becoming a licensed public accountant?

Question 26

Describe examples of assurance services and give an illustrative example.

Question 27

Describe the CPA licensing process in the United States.

Question 28

Using the examples of Enron, describe different ways individuals react when faced with decisions that are ethically questionable.
a. Note to Professors: This question can be broadened or narrowed, depending on what actual cases you have discussed or assigned.

Question 29

Compare and contrast assurance, attestation and financial statement audit.