ACCY360_Exam_1_SG (1)

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Accounting

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Apr 3, 2024

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Chapter 1 Concepts Define audit risk and information risk. Briefly describe how these concepts differ.  Audit Risk o Risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated  Information Risk o Risk that the information is false, misleading, or unreliable  Difference o The audit opinion can be correct about the false information, the information risk is only about the information being false. Management pays the auditor to reduce informational risk What is the role of the Public Company Accounting Oversight Board (PCAOB) and why does the PCAOB have significant influence over the CPA profession?  Role of PCAOB o Oversees the audits of public companies to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports  Why does PCAOB have significant influence over CPA profession? o They issue the standards for public companies o Can impose sanctions on registered firms to deter rule violations and enhance the quality of future audits o Conduct regular inspections to assess the degree of compliance of registered public companies with SOX, PCAOB, and SEC rules and professional standards o PCAOB audits the auditors – investigate the work of public auditors Define information asymmetry.  Information Asymmetry o The manager (agent) generally has more information about the true financial position and results of operations of the entity than the absentee owner (principal) does. Discuss the principal-agent relationship.  Principal-Agent Relationship o Appoint agents and delegate some decision-making authority to them o Place trust in their agents to act in the principals’ best interests o Because of information asymmetries between principles and agents, principals may lack trust in their agents and need to put in place mechanisms, such as audit to reinforce trust

List the different types of audit opinions and when each one might be used.  Unqualified o Indicates that the information presented in the F/S report is clean, presumed to be free from misstatements  Qualified o When a client’s financial statements contain a misstatement that the auditor considers material and the client refuses to correct the misstatement o The auditor will qualify the report, explaining that the financial statements are fairly stated “except for” the misstatement identified by the auditor  Adverse o Suppose a client’s financial statements contain a misstatement that the auditor considers so material that it pervasively affects the interpretation of the financial statements o The auditor will issue an adverse opinion, indicating that the financial statements are not fairly stated and should not be relied upon Chapter 2 Concepts What auditing standards are used to conduct an audit for a privately-held corporation? What auditing standards are used to conduct an audit for a publicly held-and-traded corporation? What organization is responsible for setting each of these sets of standards?  The PCAOB oversees publicly held companies and they use Auditing Standards and reorganized Auditing Standadrds  The AICPA oversees private companies and they use SASs, AU sections, and AU-C

With respect to an entity's financial statements, internal controls, and the associated audit report, describe both the responsibility of management and of the auditor.  Management is responsible for creating the financial statements and attesting to the internal controls  The auditor is responsible for creating the audit report after auditing the financial statements and internal controls  Management pays the auditor to reduce its informational risk Mike has just graduated from State University with a bachelor's degree in accounting. He would like to pursue a career in auditing. What options does Mike have? Describe three auditing career options, including a description of the organization Mike would work for, the type of certification he might have and the professional organization to which he might belong.  External o Working for a CPA firm providing audits for private or public companies o Would need his CPA and belong to the AICPA  Internal o Working for the business he is performing the audits for o Need a CIA for this and would belong to the LIA  Governmental o Would be employed by the federal, local, or state government agencies o Could be working for the IRS  Forensic Auditor o Certified Fraud Examiner Chapter 2/3 Concepts Name three Sarbanes-Oxley Act requirements of the members (i.e. characteristics) and/or duties of the audit committee of a public company.  Pre-approve any non-audit services  Hire, compensate, fire auditor (Sec. 301)  Process to receive and treat anonymous complains from employees regarding accounting or controls Briefly describe the Sarbanes-Oxley Act of 2002 (SOX). Be sure to mention (1) its primary objectives (i.e. why was it passed? - you should be able to name three), and (2) 4 major aspects of the act. (3) Some critics of SOX have stated that it will not deter fraud – do you agree or disagree? Defend your perspective on this claim with at least two factors that support your viewpoint.

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 The three main objectives are to restore investor confidence, to deter future corporate fraud, and to increase corporate reporting responsibilities  The four major aspects of the act are the creation of the PCAOB, stricter independence rules, audits of internal control, and increased reporting responsibilities  I believe that it will not completely deter fraud, people will always find a way to commit fraud. The penalties for committing fraud are not short enough

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