Introduction and Overview of Audit and Ch1 Test Bank Docx

Chapter 1

Introduction and Overview of Audit and Assurance

Question Type: True or False

GAAP and IFRS are examples of applicable financial reporting framework.

A. True

B. False

Review of financial forecasts falls under attestation services.

A. True

B. False

Within a U.S. context, the applicable financial reporting framework is typically Generally Accepted Accounting Principles (GAAP).

A. True

B. False

Private companies, or non-issuers, are not required by the U.S. government to have an annual financial statement audit

A. True

B. False

One of the reasons there is a demand for financial statement audits is that users of financial statements often lack accounting and legal knowledge to fully understand complex accounting and disclosure choices.

A. True

B. False

In financial accounting, the balance sheet is a statement of financial position

A. True

B. False

Business valuation falls within the purview of non-assurance services.

A. True

B. False

Securities Exchange Act of 1934 regulates the ongoing trading of securities after the initial public offering and requires the annual audit of a public company’s financial statements.

A. True

B. False

The Securities Act of 1933 enhances annual financial disclosures for public companies and placed more emphasis on corporate responsibility.

A. True

B. False

Neither client characteristics nor actions of the auditor affect the audit risk.

A. True

B. False

Materiality is a relative concept, and it differs from company to company and from year to year for a given company.

A. True

B. False

When auditors determine that the financial statements of a public company are presented fairly in accordance with the applicable financial reporting framework, they issue a type of report that PCAOB standards call “the standard clean report.”

A. True

B. False

In an unqualified audit report on the financial statements of a public company, the concluding statement of the scope paragraph mentions reasonable basis for the audit firm’s opinion.

A. True

B. False

In an audit report on the effectiveness of ICFR for a public company, the scope paragraph states the different responsibilities of management and auditors.

A. True

B. False

In an audit report on the effectiveness of ICFR for a public company, the scope paragraph mentions that auditors are only required to obtain reasonable assurance about whether the company maintained, in all material respects, effective ICFR.

A. True

B. False

A financial statement user’s expectations are only impacted by legislation.

A. True

B. False

The audit expectation gap is caused by user expectations such as: The auditor will catch all instances of fraud.

A. True

B. False

Question Type: Multiple choice

Identify a service that falls under audit services.

A. examination of historical financial statements

B. compilation of historical financial statements

C. inspection of website security

D. review of financial forecast

Examination of internal controls is a service that comes under _______ services, which fall under _______ services.

A. attestation; assurance

B. assurance; attestation

C. acceptable; assurance

D. attestation; audit

Compared to an audit of historical financial statements, a review engagement is _______.

A. less extensive and also less expensive

B. more extensive and also more expensive

C. less extensive but more expensive

D. more extensive but less expensive

Who are the only licensed accounting professionals in the United States?

A. Certified Public Accountants (CPA)

B. Chartered Accounts (CA)

C. Financial Accountants (FA)

D. Chief financial and operating officer (CFOO)

As attestation services encompass more than just the inspection of historical financial statements, the term _______ is used rather than _______.

A. practitioner; auditor

B. auditor; practitioner

C. intended user; auditor

D. intended user; practitioner

What services are defined as independent professional services that improve the quality of information, or its context, for decision makers?

A. assurance services

B. attestation services

C. absolute assurance

D. audit services

The most common assurance service is the ________.

A. audit of a company’s historical financial statements

B. compilation of financial statements

C. review of a company’s financial controls

D. review of a company’s historical financial statements

A review of historical financial statements is an example of ________.

A. attestation service

B. absolute assurance

C. financial forecast

D. applicable financial reporting framework

Assurance, attestation, and auditing are similar because all three represent a common process of _______.

A. taking information prepared by someone else and comparing that information to an established set of criteria.

B. compiling and reviewing historical financial statements and providing non-financial information.

C. compiling historical financial statements and providing non-financial information and web security.

D. reviewing financial forecast, examining internal controls, and providing website security.

Which of the following is true of assurance services?

A. Both attestation and auditing services fall under the term of assurance services.

B. The term information refers to subject matter that is an entire system, not standalone data.

C. The services are performed by someone who was involved with the creation of the information.

D. The intended user is an independent Certified Public Accountant qualified to perform the auditing service.

When CPAs are hired to report on the integrity of financial forecasts and reports on financial reporting processes, it is called an ______________.

A. attestation service

B. absolute assurance

C. applicable financial reporting framework

D. audit service

In assurance services, the term “information” refers to subject matter that is _____________.

A. historical or prospective

B. created by independent or in-house services

C. financial and outside the purview of the non-financial

D. internal to a company only

Which terms does the textbook claim are used interchangeably, but actually represent different types of services?

• 1. assurance, attestation, and auditing
  2. accounting, auditing, and assurance
  3. accounting, attestation, and auditing
  4. assurance, attestation, and accounting

Which of the following is included as a focus of assurance services?

• 1. Compilation of historical financial statements
  2. Examination of internal controls
  3. Review of historical financial statements
  4. Review of financial forecast

A key similarity between assurance, attestation, and auditing services is ________.

• 1. the comparison of information prepared by someone else against an established set of criteria
  2. the comparison of actual output to projected output
  3. the comparison of financial accounting data to managerial accounting data
  4. the comparison of financial audit data to tax audit data

The purpose of audit services is to provide ________.

• 1. financial statement users with an opinion as to the fair presentation of the financial reporting
  2. management with an opinion as to the fairness of the company’s managerial accounting procedures
  3. investment advice to the company
  4. limited assurance that no material modifications need to be made to the financial statements

Which are the most specific services provided by the auditor?

• 1. Compilation services
  2. Audit services
  3. Attestation services
  4. Assurance services

Which is the most inclusive or broadest service provided by the auditor?

• 1. Audit services
  2. Attestation services
  3. Assurance services
  4. A review of historical financial statements

The only professional who can audit a set of historical financial statements for a public or private company in the United States is ________.

• 1. a Certified Public Accountant (CPA)
  2. a Certified Fraud Examiner (CFE)
  3. the IRS
  4. a loan officer

The set of standards used in preparing the historical financial statements, such as GAAP or IFRS, is referred to as ________.

• 1. the applicable financial reporting framework
  2. Generally Accepted Auditing Standards (GAAS)
  3. material modifications
  4. a review of historical financial statements

Any group that will be using the financial statements to make decisions, such as investors and creditors, is known as ________.

• 1. intended users
  2. groups of standing
  3. decision-makers
  4. practitioners

Which of the following is not one of the three E’s needed to become a licensed CPA?

• 1. Education
  2. Examination
  3. Experience
  4. Efficiency

The only licensed accounting professionals in the United States are:

• 1. Certified Public Accountants
  2. Chartered Accountants
  3. Certified Internal Auditors
  4. Certified Fraud Examiners

Assurance services are defined as ________.

• 1. independent professional services that improve the quality of information, or its context, for decision makers
  2. individual provisional services to improve internal controls for financial statement users
  3. individual prospective financial statement quality
  4. independent information improvement

Which type of entity generally finds a review of historical financial statements to be the most useful?

• 1. Large public corporations
  2. Small public corporations
  3. Large private corporations
  4. Small private corporations

Which of the following is a characteristic of an audit of historical financial statements?

• 1. It provides limited assurance that no material modifications need to be made to the financial statements.
  2. It expresses an opinion on the fair presentation of the financial statements.
  3. It is the same as an examination of internal controls.
  4. It is broader than a review engagement.

Which of the following is not one of the four sections tested on the CPA exam?

• 1. Auditing and Attestation
  2. Business Environment and Concepts
  3. Regulation
  4. Internal Controls

What is the final step in becoming a licensed CPA?

• 1. Taking the CPA exam
  2. Meeting the educational requirements
  3. Work experience
  4. Evidence of personal integrity

Independent professional attestation services improve the quality of information. Quality is best described as an improvement in informational ________.

• 1. relevance and reliability.
  2. financial and nonfinancial qualities
  3. historical and prospective qualities
  4. internal and external qualities

The term practitioner would be least likely to be used when referring to the performance of ________.

• 1. audit services
  2. attestation services
  3. assurance services
  4. bookkeeping services

A review of historical financial statements as compared to an audit of historical financial statements ________.

• 1. is more extensive in terms of the work product required
  2. is typically less expensive
  3. provides greater assurance
  4. provides an opinion

The term independent with respect to assurance services implies that the service is ________.

• 1. performed by someone who was not involved with the creation of the information.
  2. performed by someone who was involved with the creation of the information and, therefore, fully understands it.
  3. performed by a company employee.
  4. is subjective.

Examination of non-financial information falls under _______ services and outside of_______ services.

A. assurance; audit

B. attestation; assurance

C. audit; assurance

D. attestation; audit

Among the various processes relating to auditing and assurance standards, the largest umbrella represents ________ services.

A. assurance

B. attestation

C. audit

D. review

Within a U.S. context, the applicable financial reporting framework is typically _______.

A. Generally Accepted Accounting Principles (GAAP)

B. International Standard on Quality Control (ISQC)

C. Auditing and Assurance Standards Board (AASB)

D. International Financial Reporting Standards (IFRS)

Which two audits does an integrated audit combine?

A. A financial statement audit and an audit of the effectiveness of ICFR

B. A financial statement audit and a compliance audit

C. A compliance audit and an audit of the effectiveness of ICFR

D. A performance audit and an environmental audit

The audit related to which of the following is specifically meant to express an opinion on the effectiveness of the company’s system of internal controls over financial reporting?

A. ICFR

B. GAAP

C. FASB

D. AICPA

Which audit involves gathering evidence to determine whether the person or entity under review has followed the rules, policies, procedures, laws and regulations with which they must conform?

A. A compliance audit

B. A performance audit

C. An integrated audit

D. An internal audit

What is a compliance audit?

A. an audit to determine whether the entity has conformed with regulations, rules or processes

B. an assessment of the economy, efficiency and effectiveness of an organization’s operations

C. an evaluation and improvement of risk management, internal control procedures and elements of the governance process

D. an assessment of the company’s financial statements

What is the applicable financial reporting framework in the U.S. known as?

• 1. GAAP
  2. GAAS
  3. IFRS
  4. The Internal Revenue Code

Public companies, or issuers, in the U.S. are ________.

• 1. required by the federal government to have quarterly financial statement audits
  2. required by the federal government to have annual financial statement audits
  3. required by the federal government to have semi-annual financial statement audits
  4. not required by the federal government to have financial statement audits

Private companies, or non-issuers, in the U.S. are ________.

• 1. required by the federal government to have quarterly financial statement audits
  2. required by the federal government to have annual financial statement audits
  3. required by the federal government to have semi-annual financial statement audits
  4. not required by the federal government to have financial statement audits

Which of the following statements is true?

• 1. Often interested users, like banks, ask private companies or non-users to provide audited financial statements.
  2. Public users are required to have three audits a year.
  3. Public users are required to have an audit of internal financial forecast reports (IFFRs).
  4. For efficiency purposes, the three required audits for public companies are performed at the same time.

ICFR stands for:

• 1. internal controls over financial reporting.
  2. internal controls for reporting.
  3. international controls over financial reporting.
  4. internal controls over forecast reports.

The limitations of an audit are NOT caused by ________.

• 1. the nature of financial reporting.
  2. the nature of audit procedures.
  3. the need for the audit to be conducted within a reasonable period of time at a reasonable cost.
  4. a guarantee that the financial statements are free from error

The nature of audit procedures refers to the ________.

• 1. reliance on evidence provided by the client and its management
  2. use of judgment when preparing financial statements due to the subjectivity required when arriving at accounting estimates
  3. materiality of misstatement
  4. pressures auditors face to complete their audit within a certain time frame at a reasonable cost

A financial statement audit is conducted to ________.

• 1. enhance the reliability and credibility of the information included in the financial statements
  2. guarantee that the financial statements are free from error or fraud
  3. determine whether financial documents were altered by those committing a fraud
  4. focus on finding all misstatements in the financial records

Answer A Taxonomy, Taxonomy: C, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning Objective: 1.2 Solution: A financial statement audit is conducted to enhance the reliability and credibility of the information included in the financial statements.

An integrated audit refers to two audits performed at the same time, or ________.

• 1. an audit on the effectiveness of internal controls and an audit of the financial statements for external purposes.
  2. an internal audit and an external audit with the same identical objectives.
  3. an audit for intentional material misstatements and an audit for errors.
  4. an audit based on time constraints and an audit based on cost constraints.

Answer A, Taxonomy: Comprehension, Difficulty: Easy, AICPA FC: Reporting, AACSB: Analytic, Learning Objective: 1.2 Solution: An integrated audit refers to an audit on the effectiveness of internal controls and an audit of the financial statements for external purposes.

The nature of audit procedures can refer to the concept of ________.

• 1. consistency
  2. timeliness
  3. effectiveness
  4. materiality

Pressures of time and money may affect the audit due to all of the following EXCEPT ________.

• 1. clients want to issue their financial statements by a certain date
  2. clients refusing to pay additional fees for additional audit effort and time
  3. pressures within the CPA firm to complete all audits on a timely basis to avoid incurring costs that may not be recovered
  4. pressures by shareholders to find all misstatements in the financial reports

If the auditors do not have access to all the information relevant to the audit, this is known as a(an) ________.

• 1. material misstatement
  2. limitation in scope
  3. estimate
  4. sampling technique

What type of audit involves gathering evidence to determine whether the person or entity under review has followed the rules?

• 1. A compliance audit
  2. An operational audit
  3. A financial statement audit
  4. An integrated audit

What type of audit is concerned with the economy, efficiency and effectiveness of an organization’s activities?

• 1. A compliance audit
  2. An operational audit
  3. A financial statement audit
  4. An integrated audit

What type of audit provides an opinion by the auditor about whether the financial statements are presented fairly in accordance with an applicable financial reporting framework?

• 1. A compliance audit
  2. An operational audit
  3. A financial statement audit
  4. An audit on the effectiveness of ICFR

What type of audit is conducted to provide assurance about various aspects of an organization’s activities rather than the reliability of financial statements? a(an)

• 1. compliance audit
  2. operational audit
  3. financial statement audit
  4. internal audit

Those charged with governance are the ________.

• 1. CEO, CFO, and COO
  2. board of directors and management of an entity
  3. stockholders
  4. auditors

In the United States, what entities are required by the federal government to have an annual financial statement audit?

A. public companies or issuers

B. private companies or issuers

C. public companies or non-issuers

D. private companies or non-issuers

Who among the following users of the financial statement of a company may be particularly interested in evaluating whether the company is paying a fair amount of taxes given its reported earnings, and to gain a better understanding of the company’s activities?

A. government

B. general pubic

C. employees

D. investors

Since users of financial statements make financial decisions that have real consequences, it is very important that users can depend on the information contained in the financial statements. What term captures this problem?

A. reliability

B. competing incentives

C. complexity

D. remoteness

Most financial accounting and disclosure choices being made by the company are complicated and often require significant technical knowledge and experience in order to understand. What term captures this problem?

A. Complexity

B. Remoteness

C. Competing incentives

D. Reliability

Among the reasons why users demand an audit of financial statements, what is the problem of competing incentives?

A. The company has a reason to disclose information in a way that presents it in favorable light.

B. Financial statement users lack accounting and legal knowledge to understand accounting and disclosure choices.

C. Financial statement users to not have access to the company under review and thus face difficulty in determining whether the statements are fair.

D. Financial statement users need reliable information in order to make decisions that have real consequences.

Which of the following falls within the purview of financial accounting?

A. Changes in equity

B. Management consulting

C. Business valuation

D. Mergers and acquisitions

Which of the following comes under the purview of the Public Company Accounting Oversight Board?

A. Auditing Standards (AS)

B. Statements on Auditing Standards (SAS)

C. Statements on Standards for Attestation Engagement (SSAE)

D. Statements on Quality Control Standards (SQCS)

Which of the following is a private professional membership organization of CPAs representing the accounting profession?

A. AICPA

B. PCAOB

C. ASB

D. IAASB

Which act created the Public Company Accounting Oversight Board, which oversees the audits of public companies?

A. The SOX Act of 2002

B. The Securities Act of 1933

C. The Securities Exchange Act of 1934

D. The Companies Act 2006

The responsibility for creating and grading the Uniform CPA Exam lies with the ________.

A. AICPA

B. COSO

C. FASB

D. IAASB

Which of the following is true of the PCAOB?

A. It can impose punishment on accounting firms that do not adhere to standards.

B. Prior to its creation, the audit profession was highly unregulated.

C. In 2015, it reorganized its auditing standards using several numbering systems.

D. When it was created, it rejected nearly all the then standards of the audit profession.

Which statement is correct as to financial statement audit reports for public versus private companies?

A. There is a standard report for the audit of public company financial statements and a standard report for the audit of private company financial statements.

B. There is a standard report for the audit of public company financial statements but none for auditing private company financial statements.

C. There is a standard report for the audit of private company financial statements but none for auditing public company financial statements.

D. There is no distinction between standard reports for the audit of financial statements, regardless of whether the company is private or public.

In an unqualified audit report on the financial statements of a public company, what does the first statement of the opinion paragraph state?

A. An audit was conducted, which financial statements were audited, and the dates of the financial statements.

B. PCAOB audit standards were followed since it is a public company.

C. The audit firm believes that its audit provides a reasonable basis for its opinion.

D. Management is responsible for the fair presentation of the financial statements.

With regard to financial statements, the auditor is required to obtain reasonable assurance, which is a level of assurance that is _______.

A. high, but not absolute

B. guaranteed, but not absolute

C. 100%, but not objective

D. objective, and not subjective

When auditors determine that the financial statements of a private firm are presented fairly in accordance with the applicable financial reporting framework, they issue the standard _______ report, which is often referred to as a “_______” report.

A. unmodified, clean

B. qualified, clean

C. modified, rough

D. unqualified, rough

In an audit report on the effectiveness of ICFR for a public company, what does the scope paragraph explain?

A. The auditors conducted their audit in accordance with the standards of the PCAOB.

B. An internal control system does not eliminate all risk associated with the preparation of financial statements.

C. A material misstatement of the financial statements will not be prevented or detected on a timely basis.

D. Circumstances may change in the future and render controls ineffective if the controls are not modified appropriately.

In an audit report on the effectiveness of ICFR for a public company, which paragraph cautions not to use the current year opinion to assume that future internal controls will be effective?

A. definition and inherent limitations paragraph

B. scope paragraph

C. opinion paragraph

D. paragraph referencing the financial statement audit

In an audit report on the effectiveness of ICFR for a public company, what does the definition and inherent limitations paragraph provide?

A. definition of ICFR that is taken directly from PCAOB AS 2201

B. indication that the firm is registered with the PCAOB

C. different responsibilities of management and auditors

D. process of conducting an audit of the effectiveness of ICFR

In an audit report on the effectiveness of ICFR for a public company, to what does the basis of opinion paragraph make a reference?

A. Registration with the PCAOB and independence requirements of the SEC and other federal securities laws

B. The financial statement audit report and the type of opinion that was given on the financial statements.

C. The COSO Internal Control-Integrated Framework as the criteria used as the basis for determining if ICFR are effective.

D. A definition of ICFR that is taken directly from PCAOB AS 2201.

Which of the following is the discovery of material weakness?

A. conclusion that the company did not maintain effective ICFR over the period under audit.

B. risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

C. identification of accounts and related assertions most at risk of material misstatement.

D. high, but not absolute, level of assurance in a judgment about matters that are subjective.

If auditors conclude the company did not maintain effective ICFR over the period under audit, it would mean the auditors discovered a/an _______ in the client’s ICFR.

A. material weakness

B. audit risk

C. reasonable assurance

D. professional skepticism

Which of the following beliefs will narrow the audit expectation gap?

A. There is no guarantee the auditor will find all material fraud, should fraud have occurred.

B. The auditor is providing complete assurance.

C. The auditor is guaranteeing the future viability of the entity.

D. An unmodified audit opinion is an indicator of complete accuracy of the financial statements.

Economic conditions impact _______.

A. financial statement user’s expectations

B. auditor performance

C. both financial statement user’s expectations and auditor performance

D. neither financial statement user’s expectations not auditor performance

Legislation impacts _______.

A. auditor performance

B. financial statement user’s expectations

C. both financial statement user’s expectations and auditor performance

D. neither financial statement user’s expectations not auditor performance

Education of financial statement users as to the responsibilities of preparers and auditors of financial statements will _________.

A. reduce the audit expectation gap

B. ensure the auditor will find all material fraud

C. guarantee the future viability of the entity

D. increase audit firm reputation and independence

The audit expectation gap is narrowed by realistic user expectations such as that the auditor ________.

A. tests a sample of transactions

B. is providing complete assurance

C. is guaranteeing the future viability of the entity

D. will definitely find any and all fraud

The audit expectation gap occurs when there is a difference between the expectations of the ________.

A. auditors and financial statement users

B. auditors and company under review

C. company under review and financial statement users

D. generally accepted accounting principles and auditors

Question Type: Text Entry

In the context of auditing and assurance standards, _______are the most specific and narrow.

A. Audit services | Assurance services

As attestation services encompass more than just the inspection of historical financial statements, the term _______ is used rather than _______.

A. practitioner

B. auditor

Website security and IT operations are services that come under _______ services but fall outside _______ services.

A. assurance

B. attestation

_______is an assurance service but not an attestation service.

review of historical financial statements | compilation of non-financial information | examination of internal control | review of a financial forecast

According to Financial Accounting Standards Board (FASB), information that is omitted or misstated could influence decisions that users make on the basis of the financial information of a specific reporting entity; in such a case, information is _______.

material

The Internal Revenue Service (IRS) may conduct an audit of an individual or a company to determine if tax laws have been followed and the correct amount of tax paid. Thus an income tax audit is the best example of a/an _______.

compliance audit

_______ are users of financial statements who are particularly interested in the capacity of the company to pay a dividend

Investors

_______ are users of financial statements who are particularly interested in determining whether the company is sufficiently credit worthy.

Lenders

_______ relates to the application of relevant training, knowledge, and experience that auditors use while making informed audit decisions in conducting an audit.

Professional judgment

_______relates to auditors remaining independent of the entity, its management and its staff when completing the audit work and thoroughly investigating all evidence presented by their client.

Professional skepticism

The accounting firm CBIZ/Mayer Hoffman McCann PC is one of the ________ firms.

mid-tier

The paragraph of an unmodified audit report on the financial statements of a private firm explains that an audit was conducted and identifies the financial statements and the date of the financial statements is the _______ paragraph.

introductory

In an unmodified audit report on the financial statements of a private firm, the _______ paragraph states that the auditor believes that the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework.

Opinion

In the title of an audit report on the effectiveness of ICFR for a public company, the term _______ emphasizes that the auditors are external to the company and therefore can provide an objective opinion.

independent

In an audit report on the effectiveness of ICFR for a public company, report _______ indicates that the firm is registered with the PCAOB.

title

One of the factors that impacts auditor performance is _______.

audit standards, ethical standards, regulations, legislation, or firm policy and procedures.

Briefly describe the similarities between assurance, attestation, and audit services.

The terms assurance, attestation, and auditing are sometimes used interchangeably, but they actually represent different types of services. They are similar in that they all represent a common process of an independent accounting firm taking information prepared by someone else and comparing that information to an established set of criteria. At the end of the service, the independent accounting firm provides a written report about the results of the service performed. This process is important because it adds credibility, or integrity, to the information, which makes it more useful for decision making.

In an attestation engagement, what is a CPA is engaged to provide?

Attestation services are performed when an independent practitioner, or CPA, is engaged to issue a report on subject matter that is the responsibility of another party.

What is the primary goal of the CPA in performing the attest function?

The CPA's primary goal is to determine whether the client's assertions are fairly stated.

Question Type: Short Answer

Briefly describe the focus of each of the following professional engagements:

1- Auditing Engagement

2- Attestation Engagement

3 - Assurance Engagement

A. 1- Auditing Engagement - financial statements

2- Attestation Engagement - financial information about the entity

3 - Assurance Engagement - any information as requested by the entity

Your client, McCoy Manufacturing, wants an audit so he can tell his bank that his financial statements have been certified to be 100% accurate. Explain why you, the auditor, are unable to provide absolute assurance on the accuracy of the financial statements.

Solution: The responsibility of the auditor is to provide an opinion on whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. An opinion is defined as a judgment about matters that are subjective. The preparation of financial statements is considered somewhat subjective because management must make some estimates and choose between different accounting methods. Therefore, the auditor is only required to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high, but not absolute, level of assurance (AU-C 200.06). In other words, the auditor does not “guarantee” or “certify” that the financial statements are 100% accurate because that is considered absolute assurance which is not possible with content that is subjective.

Below is a sample of the first section of a standard audit report for Gawronski's Hockey Manufacturing Company, a private company. There are two errors in this report. Describe the errors.

Auditor's Report

To the creditors of Gawronski's Hockey Manufacturing Company:

Report on the Financial Statements

We have audited the accompanying financial statements of Gawronski's Hockey Manufacturing Company, which comprises the balance sheets as of December 31, 2022 and 2021, and the related statements of income, changes in equity and cash flows for the years then ended, and the related notes to the financial statements.

Solution: [1] Title – the term independent is missing in the title of the report

[2] Address – The report is addressed to the creditors of the company rather than the owners or shareholders of the company and to the board of directors, if applicable.

Below is a sample of the auditor's responsibility section of a standard audit report for Gawronski's Hockey Manufacturing Company, a private company. There are two errors in this report. Describe the errors.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted accounting principles. Those standards require that we plan and perform the audit to obtain absolute assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Solution: Both errors are in the first paragraph

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain absolute assurance about whether the financial statements are free from material misstatement.

1) The appropriate audit standards would be those issued by the ASB since the company is a private company.

2) Audits provide reasonable assurance, not absolute.

Below is a sample of the auditor's opinion section of a standard audit report for Gawronski's Hockey Manufacturing Company, a private company. There are two errors in this report. Describe the errors.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gawronski's Hockey Manufacturing Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with auditing standards generally accepted in the United States of America.

Keith Christy, Partner

Adrian, Michigan

February 15, 2023

Solution: Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gawronski's Hockey Manufacturing Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Christy and Quinlan, LLP

February 15, 2023

1) The financial statements are in accordance with GAAP, not GAAS

2) The firm name is used in the signature, not the individual partner's name

The standard "clean" audit reports for audits of public companies have several differences to reports for audits of private companies. Describe at least three of those differences noted in the audit reports for public companies.

Solution: Some differences that may be noted include:

Title -The term registered is included to emphasize the firm is registered with the PCAOB.

Paragraph order - The opinion paragraph comes at the beginning of the report, along with other differences in the order of paragraphs

Paragraph referencing the audit of internal control – This paragraph is unique to the public company audit report. Public companies are required to have an audit of ICFR and auditors issue a separate opinion for that audit, which is discussed in the next section.

Basis for opinion paragraph –The private company report goes into more detail regarding the responsibilities of management and auditors. One key difference is this paragraph references registration with the PCAOB and independence requirements of the SEC and other federal securities laws.

Scope paragraph - It includes an explicit statement that PCAOB audit standards were followed since it is a public company.

Auditor tenure – The final component of the report is a sentence that states the year in which the firm began serving consecutively as the company’s auditor.

Describe the auditor’s responsibility regarding the detection of fraud.

A. The auditor should design audit procedures that will provide reasonable assurance that
the financial statements are free from material misstatement due to errors and/or fraud.

You are auditing Gray Enterprises, a public company. During the audit, a material weakness was discovered during the audit of internal controls over financial reporting. Discuss how the auditors should handle this situation in the audit report and reference the appropriate PCAOB auditing standard.

Solution: If one or more material weaknesses are discovered during the audit, then auditors issue an adverse opinion on the effectiveness of ICFR that explicitly states the company did not maintain effective ICFR during the period under audit. PCAOB AS 2201 dictates how auditors would modify the audit report to express an adverse opinion.

Smith Corp. orally engaged TRA CPAs, to audit its financial statements. The management of Smith Corp. informed TRA CPAs that it suspected that the accounts receivable was materially overstated. Although the financial statements audited by TRA CPAs did, in fact, include a materially overstated accounts receivable balance, TRA issued an unqualified opinion. Smith Corp then relied on the financial statements in deciding to obtain a loan from Town Bank to expand its operations and Town Bank relied on the financial statements in making the loan to Smith Corp. As a result of the overstated accounts receivable balance, Smith Corp. has defaulted on the loan and has incurred a substantial loss. If Smith Corp sues TRA CPAs for negligence in failing to discover the overstatement, what is TRA CPA's best defense?

A. TRA CPAs best defense is that the audit was performed by Dex in accordance with generally accepted auditing standards.

You are a staff auditor at Broman, LLP. You have been assigned to an audit engagement with a new intern. The intern mentions the client stated, "he was glad the auditors were there to guarantee the future success of the business so that his lousy banker would get off his back". You explain that the audit firm does not guarantee anything. Explain the audit expectation gap to the intern and provide several ways that the audit expectation gap can be reduced.

Solution: The audit expectation gap occurs when there is a difference between the expectations of auditors and financial statement users. The gap occurs when user beliefs do not align with what an auditor has actually done. In particular, the gap is caused by unrealistic user expectations such as:

• • the auditor is providing complete assurance
  • the auditor is guaranteeing the future viability of the entity
  • an unmodified audit opinion is an indicator of complete accuracy of the financial statements
  • the auditor will definitely find any and all fraud
  • the auditor has checked all transactions.
  • an auditor provides reasonable assurance
  • the audit does not guarantee the future viability of the entity
  • an unmodified opinion indicates the auditor believes there are no material misstatements in the financial statements
  • the auditor will assess the risk of fraud and conduct tests to try to uncover any fraud, but there is no guarantee the auditor will find all material fraud, should one have occurred
  • the auditor tests a sample of transactions.
  • auditors performing their duties appropriately, complying with auditing standards and meeting the minimum standards of performance that should be expected of all auditors
  • inspections of audits to ensure that auditing standards have been applied correctly
  • auditing standards being reviewed and updated on a regular basis to enhance the work being done by auditors
  • education of financial statement users as to the responsibilities of preparers and auditors of financial statements
  • assurance providers reporting accurately the level of assurance being provided