Auditing: A Risk Based-Approach to Conducting a Quality Audit
10th Edition
ISBN: 9781305080577
Author: Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg
Publisher: South-Western College Pub
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Chapter 2, Problem 49RSCQ
To determine
Introduction: Corporate governance refers to keeping an oversight over the organizations operations and financial reporting. Corporate governance ensures that operations are in accordance with organizations objectives and meet the stakeholders’ needs.
To explain: Whether or not the factors describing the audit clients, indicate poor corporate governance. Also, explain the associated risks.
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The following factors describe a potential audit client. For each factor, indicate whether it is indicative of poor corporate governance. Explain the reasoning for your assessment. Finally, determine the risks to reliable financial reporting that are associated with each factor.
a.The company is in the financial services sector and has a large number of consumer loans, including mortgages, outstanding.
b.The CEO’s and CFO’s compensation is based on three components: (a) base salary, (b) bonus based on growth in assets and profits, and (c) significant stock options.
c.The company has an internal auditor who reports directly to the CFO and makes an annual report to the audit committee.
Which choice is the best example of an independent auditor?
A. CPA who has a significant investment in the company being audited.
B. A CPA who currently performs payroll services at the company it's auditing
C. A CPA who is the best friend of upper financial management at the company being audited.
D. None of these are independent auditors.
Match each of the following provisions of the Sarbanes-Oxley Act (SOX) with its description.
Major Provisions of the Sarbanes-Oxley Act
Descriptions
1. Oversight board
2. Corporate executive accountability
3. Auditor rotation
4. Nonaudit services
5. Internal control
a. Executives must personally certify the company’s financial statements. b. Audit firm cannot provide a variety of other services to its client, such as investment advising. c. PCAOB establishes standards related to the preparation of audited financial reports. d. Lead audit partners are required to change every five years. e. Management must document the effectiveness of procedures that could affect financial reporting.
Chapter 2 Solutions
Auditing: A Risk Based-Approach to Conducting a Quality Audit
Ch. 2 - The Great Salad Oil Swindle of 1963 is an asset...Ch. 2 - Prob. 2TFQCh. 2 - The three elements of the fraud triangle include...Ch. 2 - Prob. 4TFQCh. 2 - Prob. 5TFQCh. 2 - Prob. 6TFQCh. 2 - Prob. 7TFQCh. 2 - Prob. 8TFQCh. 2 - Prob. 9TFQCh. 2 - Prob. 10TFQ
Ch. 2 - Prob. 11TFQCh. 2 - Prob. 12TFQCh. 2 - Prob. 13MCQCh. 2 - Prob. 14MCQCh. 2 - Prob. 15MCQCh. 2 - Prob. 16MCQCh. 2 - Prob. 17MCQCh. 2 - Prob. 18MCQCh. 2 - Prob. 19MCQCh. 2 - Prob. 20MCQCh. 2 - Prob. 21MCQCh. 2 - Prob. 22MCQCh. 2 - Prob. 23MCQCh. 2 - Prob. 24MCQCh. 2 - Prob. 25RSCQCh. 2 - Prob. 26RSCQCh. 2 - Prob. 27RSCQCh. 2 - Refer to Exhibit 2.1 a. What is a Ponzi scheme? b....Ch. 2 - Prob. 29RSCQCh. 2 - Prob. 30RSCQCh. 2 - Prob. 31RSCQCh. 2 - Prob. 32RSCQCh. 2 - Prob. 33RSCQCh. 2 - Prob. 34RSCQCh. 2 - Prob. 35RSCQCh. 2 - Prob. 36RSCQCh. 2 - Prob. 37RSCQCh. 2 - Prob. 38RSCQCh. 2 - Many consider the Enron fraud to be one of the...Ch. 2 - Prob. 40RSCQCh. 2 - Prob. 41RSCQCh. 2 - Refer to Exhibit 2.5 and answer the following...Ch. 2 - Prob. 43RSCQCh. 2 - Prob. 44RSCQCh. 2 - Prob. 45RSCQCh. 2 - Prob. 46RSCQCh. 2 - Prob. 47RSCQCh. 2 - Prob. 48RSCQCh. 2 - Prob. 49RSCQCh. 2 - Prob. 50FFCh. 2 - Prob. 51FFCh. 2 - Prob. 52FF
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- Auditors often earn considerable fees from a company for examining (auditing) its financial statements. In addition, it’s not uncommon for auditors to earn additional fees from the company by providing consulting, tax, and other advisory services.Required:1. Which party has primary responsibility—auditors or company executives—for properly applying accounting standards when communicating with investors and creditors through financial statements?2. Are auditors considered employees of the company?arrow_forward34) Which threat may occur as a result of the financial or other interests of a professional accountant or of an immediate or close family member? a) Familiarity threats b) Self-review threats c) Advocacy threats d) Self-interest threatsarrow_forwardImagine that you are the new department manager of a corporation within your chosen field: you discover that your predecessor had been using cash basis of accounting, which has resulted in many errors and misinformation. What measures would you take to remediate the issue? Propose a high-level plan to implement a proper accounting system for your department using specific principles. For example, which financial statements would you investigate first? What sort of internal controls would you implement?arrow_forward
- Which of the following statements is CORRECT? O a. The CFO generally reports to the firm's chief accounting officer, who is normally the controller. O b. By law in most companies, the chairman of the board must also be the CEO. O c. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility. O d. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though…arrow_forwardSince auditors have to attest to the validity of a company's financial statements, what among the following is the most important characteristic for an auditor to have? A-Huge personal wealth B-Knowing a good lawyer C-Independence D-Personal relationships with the company's managersarrow_forwardIn an attestation engagement, a CPA practitioner is engaged toa. Compile a company’s financial forecast based on management’s assumptions without expressing any form of assurance.b. Prepare a written report containing a conclusion about the reliability of a management assertion.c. Prepare a tax return using information the CPA has not audited or reviewed.d. Give expert testimony in court on particular facts in a corporate income tax controversy.arrow_forward
- Generally Accepted Accounting Principles, or GAAP, is a set of accounting procedures, standards, and procedures that companies use to compile their financial statements. Select THREE of the following items that demonstrate why GAAP is important for accounting and finance professionals. it allows CPAs to make a good salary the consistent use of methods and procedures allows for fair comparisons between companies it allows persons reading the financial statements to rely on them it ensures that audits are completed in a standard mannerarrow_forwardThe Sarbanes-Oxley Act A. requires the firm's CFO to personally vouch for the firm's accounting statements. B. All of the above. C. requires corporations to have more independent directors. D. prohibits auditing firms from providing other services to clients. E. requires corporations to have more independent directors and requires the firm's CFO to personally vouch for the firm's accounting statements.arrow_forwardIn respect of the company’s directors, what does the concept of stewardship mean ?Select one: a. They safeguard the company’s assets and manage them on behalf of the shareholders b. They are responsible for ensuring that the company complies with the law c. They are responsible for ensuring that the company pays its tax by the due date d. They report suspected fraud and money laundering to the authoritiesarrow_forward
- Fraudulent financial reporting is most likely to be committed by whom? Select one: a. company management b. outside members of the company's board of directors c. employees of the company d. the company's auditorsarrow_forwardMr. Bader is leaving the accounting practice to become the Finance Director of a client company. The ethical dilemma he is most likely to face would be a. Objectivity b. Integrity c. Professional Behavior d. Confidentialitarrow_forwardFinancial reports are the primary means by which corporations report their performance and financial condition.Financial statements are one component of the annual report mailed to their shareholders and to interested others.Required:Obtain an annual report from a corporation with which you are familiar. Using techniques you learned in thischapter and any analysis you consider useful, respond to the following questions:1. Do the firm’s auditors provide a clean opinion on the financial statements?arrow_forward
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