AUDITING ESSAY TEST

27. Discuss the three primary requirements for becoming a CPA.

easy
Answer:
The three primary requirements for becoming a CPA are:
 Educational requirement. An undergraduate degree with a major in accounting is
required. Most states now require 150 semester hours for licensure and some states
require 150 semester hours before taking the CPA exam.
 Uniform CPA examination requirement. This is a four-part exam with components on
auditing and attestation, financial accounting and reporting, regulation, and business
environment and concepts.
 Experience requirement. The experience requirement varies from state to state with
some states requiring no experience, while other states require up to two years of audit
experience.

28. Two types of attestation services provided by CPA firms are audits and reviews. Discuss the
easy similarities and differences between these two types of attestation services. Which type provides
the least assurance?

Answer:
Two primary types of attestation services are: audits of historical financial statements and
reviews of historical financial statements. While both services involve the accumulation
and evaluation of evidence regarding assertions made by management in the company’s
financial statements, a review involves a less extensive examination and provides a lower
level of assurance about the client’s financial statements than an audit.

29. Discuss the differences and similarities between the roles of accountants and auditors. What
medium 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.

30. Discuss the similarities and differences between financial statement audits, operational audits,
medium 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 which the external
auditors examine IBM’s financial statements to determine the degree of correspondence
between those financial statements and generally accepted accounting principles. An
example of an operational audit would be an internal auditor’s evaluation of whether the
company’s computerized payroll-processing system is operating efficiently and
effectively. An example of a compliance audit would be an IRS auditor’s examination of
an entity’s federal tax return to determine the degree of compliance with the Internal
Revenue Code.

31. Discuss the similarities and differences between the roles of independent auditors, GAO
medium auditors, internal revenue agents, and internal auditors.

Answer:
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 for Congress. IRS auditors
are responsible for the enforcement of federal tax laws. Internal auditors primarily perform
operational and compliance audits for their employing company.

32. (SOX) What is an engagement to attest on internal control over financial reporting?
medium
Answer:
Section 404 of the Sarbanes-Oxley Act requires public companies to report management’s
assessment of the effectiveness of internal control over financial reporting. The Act further
requires auditors to attest to the effectiveness of internal control over financial reporting.
This evaluation, which is integrated with the audit of financial statements, provides
forward-looking information, because effective internal controls reduce the likelihood of
future misstatements in the financial statements.

33. To do an audit, it is necessary for information to be in a verifiable form and some criteria by
challenging which the auditor can evaluate the information. (A) What information and criteria would an
independent CPA firm use when auditing a company’s historical financial statements? (B) What
information and criteria would an Internal Revenue Service auditor use when auditing that same
company’s tax return? (C) What information and criteria would an internal auditor use when
performing an operational audit to evaluate whether the company’s computerized payroll
processing system is operating efficiently and effectively?

Answer:
(A) The information used by a CPA firm in a financial statement audit is the financial
information in the company’s financial statements. The most commonly used criteria are
accounting principles generally accepted in the United States.

(B) The information used by an IRS auditor is the financial information in the company’s
federal tax return. The criteria are the internal revenue code and interpretations.

(C) The information used by an internal auditor when performing an operational audit of
the payroll system could include various items such as the number of errors made, costs
incurred by the payroll department, and number of payroll records processed each month.
The criteria would consist of company standards for departmental efficiency and
effectiveness.