Question

90 Chapter 9 The Role of the Outside Auditor Test Your Knowledge 1. What is the purpose of an audit per- 4. How do the auditor management leter 5. What is the opinion letter? What are the 6. What are the primary reasons for au and opinion letter differ from each other? different opinions that can be rendered? formed by a CPA? Do audits signify to financial statement users that no fraud and embezzlement occurred at the organization? failures and the financial scandals that sometimes accompany them? Describe government efforts to reduce 2. 3. 7. How does sampling financial transac- tions help an auditor identify account- audit failures. ing errors?

Answer 1

1. CPAs are known for their role in income tax preparation but can specialize in many other areas, such as auditing, bookkeeping, forensic accounting, managerial accounting and information technology. A certified public accountant (CPA) will audit the contents of certified financial statements using generally accepted accounting principles (GAAP) to ensure the details are all accurate.In performing an audit, the CPA, as the external auditor, checks for arithmetic accuracy. In performing this check, the CPA focuses on the system rather than the individual . Since the cost of reexamining every financial transaction is prohibitive, the auditor doesn’t check for every error. The auditor really wants just to determine how often errors occur and how large these errors tend to be. The primary goal of an audit is to express an opinion on two aspects of the financial statements of the church or organization: the financial statements are fairly presented, and they are in accordance with generally accepted accounting principles (GAAP). The primary purpose of a set of audited financial statements is for the benefit of outside users of the organization’s financial statements such as banks, government agencies, and membership organizations and make an assessment of the risk of fraud and perform steps to detect the presence of fraud. Also a part of audit includes evaluating the accounting control system as a basis on which to plan and perform audit.
2. Yes, it signifies to financial statement users that no fraud and embezzlement occurred at the organization. The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. In an organization with good internal control, fraud and embezzlement are made difficult through a system of checks and balances . There are many cases of fraud and embezzlement that are almost impossible to uncover. It would require a partner to look over large embezzlements if they go undetected.
3. By sampling financial transactions, the auditor can determine how often errors occur and how large errors are and the goal is to see if a material error exists. A sampling plan applied to substantive tests of details is designed either (a) to estimate an account balance that is not recorded in the accounting records, or (b) test the reasonableness of a recorded amount While performing substantive tests the objective is to detect a material misstatement as regards financial statement assertions of existence, ownership occurrence, completeness, valuation, measurement, and presentation and disclosure.
4. An auditor management letter indicates that management has prepared the financial statement without traces of fraud in a fair manner. On the other hand, an opinion letter will indicate if there is fraud or not fraud. The results of a financial statement audit are reported by the auditor to a company’s management by issuing an opinion letter. The opinion letter, otherwise known as the independent auditors report, states whether the financial statements are presented in accordance with accounting principles accepted in the United States. The management letter, also known as the internal control letter, communicates deficiencies and weaknesses in a company’s organizational structure.
5. The opinion letter is the result of conducting an entire audit of a company. The results of a financial statement audit are reported by the auditor to a company’s management by issuing an opinion letter. It states whether the financial statements are presented in accordance with accounting principles The different opinions that can be rendered are the following:

• Unqualified Opinion: An unqualified opinion is an audit report that is issued when an auditor determines that each of the financial records provided is free of any misrepresentations.
• Qualified Opinion: In situations when a company’s financial records have not been maintained in accordance with GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion.
• Adverse Opinion: This indicates that the firm’s financial records do not conform to GAAP.
• Disclaimer of Opinion: When auditor is unable to complete an accurate audit report , auditor issues a disclaimer of opinion.

     6. The four primary reasons for audit failures and the financial scandals that sometimes accompany them are following:

• internal accounting systems
• disclosure rules
• auditor oversight
• ethics.

7. There are several steps needed to reduce the likelihood of such audit failures occurring again. The government passed the Sarbanes-Oxley Act in 2002 which helped after the Enron scandal in 2001. Also, with the establishment of the SOX, there was the Public Company Accounting Oversight Board established as well.