CHAPTER 4 PUBLIC ACCOUNTING PROFESSION

I. Review Questions 1. a. Major auditing developments in the 20th century (5 required) include the following: b. A shift in emphasis to the determination of fairness of financial statements. Increased responsibility of the auditor to third parties, such as governmental agencies, stock exchanges, and the investing public. A change in auditing method from detailed examination of individual transactions to use of sampling techniques, including statistical sampling. Recognition of the need to consider the effectiveness of internal control as a guide to the direction and amount of testing and sampling to be performed. Development of new auditing procedures applicable to electronic data processing systems, and use of the computer as an auditing tool. Recognition of the need for auditors to find means of protecting themselves from the current wave of litigation. An increase in demand for prompt disclosure of both favorable and unfavorable information concerning any publicly owned company. Increased concern with compliance by organizations with laws and regulations.

Compliance audits and operational audits. Compliance audits An audit to determine whether verifiable data, such as income tax returns or other financial reports, are in compliance with established criteria, such as laws and regulations. Operational audits An examination of a department or other unit of a business or governmental organization to measure the efficiency and effectiveness of its operations. Management has primary responsibility for the fairness of the financial statements. The auditors are responsible for performing an independent audit of the financial statements and issuing a report on them in accordance with generally accepted auditing standards. The statement is false. The notes to the financial statements should contain only representations of management. The auditors should express

2.

a. b.

c.

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Solutions Manual - Principles of Auditing and Other Assurance Services

their reservations in their report. a. Audits add credibility to the financial statements of the company. The individual can invest in the company knowing that there is a low probability that the financial statements depart materially from generally accepted accounting principles. Audited financial statements facilitate this transaction by reducing risk related to the investment. Specifically, audits reduce information risk--the risk that information used to make the investment decision is misstated--related to the financial statements. Audited financial statements do not directly affect business risk, which is the risk that the company will not be able to meet its financial obligations. The potential consequences of not having an audit are: If the investor is particularly risk averse, he or she may not invest in the company at all. If the investor decides to invest in the company, he or she will not be willing to pay as high a price because the investor will want to be compensated for the additional risk that is involved in relying upon unaudited financial statements.

b.

4.

Generally, to be a CPA one must meet certain education requirements, and pass the CPA exam. The CPA examination is prepared and graded twice each year. It is generally recognized as an academic examination. It includes multiple-choice questions in the following subjects namely, Theory of Accounts, Practical Accounting I, Practical Accounting II, Auditing Theory, Auditing Problems, Management Services, Business Law and Taxation.

5. 6. 7. 8.

Refer to pages 88 to 94 of the textbook. Refer to page 103 (Section 14 of the Philippine Accountancy Act of 2004) of the textbook. Refer to pages 106 to 107 (Section 28 of the Philippine Accountancy Act of 2004) of the textbook. Refer to pages 108 to 109 (Sections 34 & 35 of the Philippine Accountancy Act of 2004) of the textbook.

9. Refer to page 112, 2nd paragraph of the textbook. 10. Refer to pages 113 to 114 of the textbook. 11. Refer to pages 114 to 116 of the textbook. 12. Refer to pages 132 to 133 of the textbook.

Public Accounting Profession

13. Refer to page 134 of the textbook. 14. Refer to pages 140 to 143 of the textbook. II. Multiple Choice Questions 1. 2. 3. 4. 5. d c b a d 6. 7. 8. 9. 10. d b c b a

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III. Comprehensive Case MORALES, CABRERA, & CO., CPAs 1. a. b. c. 2. a. b. c. a. b. c. 4. a. b. c. 5. a. b. c. a. b. c. Hiring / Professional requirements To ensure that personnel who will be performing audits have adequate technical training and proficiency. New accountants hired must have an accounting degree from an accredited school. Advancement / Professional requirements To ensure personnel are qualified to do the tasks they are assigned. An in-charge accountant must have served as a staff auditor on an audit in the clients industry. Skills and Competence To ensure that personnel continue to be updated on changes in accounting or auditing standards. Personnel will participate in forty hours of continuing education per year. Consultation To ensure that personnel have access to persons with more experience in dealing with problems they have encountered. For each industry for which the office has a client, a specialist will be identified. Independence To ensure that personnel meet PICPA guidelines for independence. Firm personnel must list their investments. Personnel must report any stock acquisitions. Supervision To ensure that work performed meets the firms standard of quality. Staff personnel are to follow firm guidelines for working paper development.

3.

6.

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Solutions Manual - Principles of Auditing and Other Assurance Services

a. b. c. a. b. c. a. b. c. Inspection / Review To verify that quality control procedures are being followed. Inspect the audit programs for all engagements. Acceptance and retention of clients To minimize the risk associated with clients. New clients must be investigated by a private investigative agency. Assigning personnel to engagements To ensure that personnel posses the degree of technical training and proficiency required for an engagement. To be eligible to be senior on an engagement, a person must have had experience in the industry.

8.

9.