1. Discuss the differences and similarities between the roles of accountants and auditors.

What additional expertise must an auditor possess beyond that of an accountant?

Answer

 The role of accountants is to record, classify, and summarize economic events in a logical
manner for the purpose of providing financial information for decision making. To do this,
accountants must have a sound understanding of the principles and rules that provide the basis
for preparing the financial information. In addition, accountants are responsible for developing
systems to ensure that the entity's economic events are properly recorded on a timely basis and at
a reasonable cost.
 The role of auditors is to determine whether the financial information prepared by accountants
properly reflects the economic events that occurred. To do this, the auditor must not only
understand the principles and rules that provide the basis for preparing financial information, but
must also possess expertise in the accumulation and evaluation of audit evidence. It is this latter
expertise that distinguishes auditors from accountants.

2. Discuss the Causes of Information Risk. And the ways of Reducing Information Risk?
Answer
Information risk is the possibility that information upon which a business decision is made is
inaccurate. Four causes of information risk are:

 Causes of Information Risk

1. Remoteness of information: It is nearly impossible for a decision maker to have much firsthand
knowledge about the organization with which they do business.
- Information from others must be relied upon.
2. Biases and motives of the provider: If information is provided by someone whose goals are
inconsistent with those of the decision maker, the information may be biased in favor of the
provider.
3. Voluminous data: The higher the volume of transactions, the greater the risk that improperly
recorded information is included in the records.
4. Complex exchange transactions: Exchange transactions between organizations have become
increasingly complex and therefore more difficult to record properly.
 Reducing Information Risk
1. User verifies information: The user may go to the business premises to examine records and
obtain information about the reliability of the statements.
2. User shares information risk with management There is considerable legal precedent that
management is responsible for providing reliable information to users.
3. Audited financial statements are provided
 3. Discuss the similarities and differences between financial statement audits, operational
audits, and compliance audits. Give an example of each type?
Answer
Financial statement audits, operational audits, and compliance audits are similar in that each
type of audit involves accumulating and evaluating evidence about information to ascertain and
report on the degree of correspondence between the information and established criteria.
The differences between each type of audit are the information being examined and the
criteria used to evaluate the information. An example of a financial statement audit would be
the annual audit of IBM Corporation, in

4. Discuss the four types of auditors and their relation with the types of audit?

Answer
1. Certified public accounting firms (External Auditor)
2. Governmental accountability office auditors
3. Internal Revenue agents
4. Internal auditors

The roles of all four types of auditors are similar in that they involve the accumulation and
evaluation of evidence about information to ascertain and report on the degree of
correspondence between the information and established criteria.
The differences in their roles center around the information audited and the criteria used to
evaluate that information.
Independent auditors primarily audit companies' financial statements.
GAO auditors' primary responsibility is to perform the audit function

5. Describe the standard unqualified report to be issued for an audit of a private company.
Begin by specifying the eight parts of the report, and then discuss the contents of each
part?

Answer
1. Report title: Title should include the word independent (e.g., independent audit
2. Audit report address: Report is usually addressed to the company, its stockholders or board of
directors.
3. Introductory paragraph : The intro paragraph does 3 things:
1. States the CPA firm has done an audit
2. It lists the financial statements that were audited
3. It defines responsibilities between management and the auditor
4. Management’s Responsibility
5. Auditor’s Responsibility: The scope paragraph is a factual statement about what the auditor did in
the audit and sets the expectation about reasonable assurance.
6. Opinion Paragraph: The opinion paragraph states the auditor’s conclusions.
7. Name and Address of CPA firm: The name identifies the CPA firm who performed the audit.
8. Audit report date: The report date indicates the last day audit procedures were performed in the field.

6. Discuss each of the five circumstances when an auditor would issue an unqualified
audit report with an explanatory paragraph or modified wording.
Answer
A. Lack of consistent application of generally accepted accounting principles
- Auditors must note circumstances in which accounting principles are not consistently
applied
- Auditor should modify the report when a material change occurs by adding an
explanatory paragraph in the report
B. Substantial doubt about going concern
- Significant operating losses or working capital deficiencies.
- Inability of the company to pay its obligations as they come due.
- Loss of major customers, the occurrence of uninsured catastrophes.
- Legal proceedings, legislation that might jeopardize the entity’s ability to operate.
C. Auditor agrees with a departure from promulgated accounting principles
- Circumstances are unusual
- Departure may not require a qualified or adverse opinion
- The auditor must separately explain in the audit report that adhering to the principle
would have produced a misleading result.
D. Emphasis of a matter

Under certain circumstances, the CPA may want to emphasize specific matters regarding the financial
statements, even though the CPA intends to express an unqualified opinion.
- Subsequent Events
- Related Party Transactions
E. Reports involving other auditors

- Make no reference in the audit report

- Make reference in the report (modified wording report)
- Qualify the opinion

7. There are three conditions necessitating a departure from an unqualified audit report.
Name, discuss and state the appropriate audit report for each of these three conditions.

Answer
 1. Scope limitation: Scope limitations are when the auditor has not accumulated sufficient
appropriate evidence to conclude whether the financial statements are stated in accordance
with GAAP.
2. GAAP departure: Client insists on using a method that is not consistent with GAAP.
3. . Auditor not independent

8. Explain why there is a special need for ethical conduct in the auditing profession.

Answer
Professionals are expected to conduct themselves at a higher level than most other members of society.
CPA firms are engaged and paid by the company issuing the financial statements. Primary beneficiaries
of the audit are statement users.

9. Describe an ethical dilemma that an auditor or an accountant might face in his or her
business career, then illustrate how the auditor or accountant might use the six-step
approach presented in the text to resolve that dilemma. Be specific.
Answer

An ethical dilemma defined as a situation a person faces in which a decision must be made about
appropriate behavior.
6 steps Resolving dilemma through
1. Obtain the relevant facts
A. A staff person has been informed that he will work hours without recording them as hours
worked.
B. Firm policy prohibits this practice
C. Another staff person has stated that this is common practice in the firm.
2. Identify the ethical issues from the facts

- Is it ethical for the staff person to work hours and not record them as hours worked in this situation?
3. Determine who is affected
4. Identify the alternatives available to the person who must resolve the dilemma
5. Identify the likely consequence of each alternative
6. Decide the appropriate action

10. Explain why the failure of financial statement users to differentiate among business
failure, audit failure, and audit risk

Answer
Business failure occurs when a business is unable to repay its lenders or meet expectations of its
investors because of economic or business conditions, such as recession, poor management decisions,
or unexpected competition in the industry.
Audit failure occurs when the auditor issues an incorrect audit opinion because it failed to comply with
the requirements of auditing standards.
audit risk: Information risk reflects the possibility that the information upon which the business decision
was made was inaccurate

11. Describe how the profession and individual CPAs can reduce the threat of
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the profession and individual CPAs can reduce the threat of
litigation.
Answer

 The profession response to legal liability

1. Seek protection from litigation
2. Improve auditing to better meet user’s needs
3. Educate users about the limits of auditing
 Protecting individual CPAS From legal liability
1. Deal only with clients possessing integrity
2. Maintain independence
3. Understand the client’s business
4. Perform quality audits
5. Document the work properly
6. Exercise professional skepticism

Q13. What are six characteristics of reliable evidence ?

Answer
1. Independence of provider
2. Effectiveness of client’s internal controls
3. Auditor’s direct knowledge
4. Qualification of individuals providing the information
5. Degree of objectivity
6. Timeliness
Q14. Identify and apply the eight types of evidence used in auditing?
1. Physical Examination: It is the inspection or count by the auditor of a tangible asset
- This type of evidence is most often associated with inventory and cash.
2. Confirmation:
3. Inspection: It is the auditor’s examination of the client’s documents and records.
Internal documents or External documents
4. Analytical procedures:
A. Understand the client s industry and business
B. Assess the entity s ability to continue as a going concern
C. Indicate the presence of possible misstatements in the financial statements
D. Reduce detailed audit tests
5. Inquires of client: It is the obtaining of written or oral information from the client in response to
questions from the auditor.
6. Recalculation: Involves rechecking a sample of calculations made by the client.
7. Reperformace: The auditor’s independent tests of client accounting procedures or controls that
were originally done as part of the entity’s accounting and internal control system.
8. Observations: Use one’s senses to assess client activities.
- Tour plant to obtain a general impression of client’s facilities.
- Observation is rarely sufficient by itself.
- Often need to corroborate with another kind of evidence.