CHAPTER 1 ty ty
The Role of the Public
ty ty ty ty ty
Accountant in the ty ty
American Economy ty
Reviewt y Questions
1-1 Thety―crisisty oftycredibility‖tylargelytyarosetyfromtythetynumbertyoftycompaniestythatty restatedtytheirtypreviouslyt y issuedty fin
ancialty statementst y ast y aty resultty oft y accountingty irregularitiest y andty fraud.tyt y Especiallytyresponsibletyweret y thety verytyvis
iblety Enronty andty WorldComty fraudty cases.ty Bothty companiest y filedty forty bankruptcytyandty constitutedt y thetylargestty comp
aniesty inty Americanty historytytoty dotyso.tyt y Thetyextentty ofty thetyaccountingty irregularitiesty andty fraudt y beingty investigatedty
andty disclosedty broughtt y intoty questionty thety effectivenessty ofty financialty statementt y audits.tyt y Int y addition,ty thetycriminalty
convictionty ofty Arthurty Andersen,ty LLP,ty onetyofty thetythentyBigty 5ty accountingtyfirms,ty ont y chargesty ofty destroyingty docum
entsty relatedty toty thetyEnronty casetybroughtty intotyquestionty thetyethicst y standardsty oft y thet y profession.
1-2 Assurancetyservicesty aretyprofessionalty servicesty thatty enhancetythetyqualitytyofty information,ty orty itsty context,ty fort y de
cision-
making.t y Thetytwotytypesty are:ty(a)ty thosetythatt y increasetythetyreliabilitytyofty informationtyandty(b)ty thoset y thatty involvet
y puttingty informationty inty aty formty orty contextt y thatt y facilitatest y decision-making.
1-3 Aty financialty statementty auditty is,ty bytyfar,ty thetymostty commonty typetyofty attestty engagement.tyt y Thetyoverallty assertion,t y
madety bytymanagement,ty mostt y frequentlytyist y thatt y thety financialty statementst y followtygenerallytyacceptedt y accountingt y
principles.
1-4 Atylargetycorporationty withty securitiesty listedty ontyaty stocktyexchangetyisty requiredtybytythetyrulesty ofty thetystockt y exchanget
y andty bytythetyrulesty ofty thety Securitiesty andty Exchangety Commissionty toty providety anty auditty reportty withty thet y annualty fin
ancialty statementsty furnishedty toty itsty stockholders.tyt y Itty alsoty isty requiredty toty engagetythetyauditorsty tot y providetyanty opi
nionty onty itsty internalty control.tyt y Apartty fromtylegalty requirements,ty however,ty aty largetylistedt y corporationty recognizesty th
att y itty mustt y maintainty investorty confidencetyint y thetyreliabilitytyofty itst y financialt y statementsty andty internalty controlty overty fi
nancialty reportingty ifty itty isty toty continuetytoty betyabletytoty securetycapitalty fromt y thetypublic.tyt y Thetyreportt y bytyaty firmtyofty ce
rtifiedtypublictyaccountantsty addsty credibilitytytoty thetyfinancialtyt y t y statementsty preparedty bytythetycorporation.tyt y Whenty aty
smallty family-
ownedty enterprisetyelectsty toty havetyanty audit,t y thetypurposetyusuallytyisty totyusetythetyauditors'ty reportty totysupportty antya
pplicationt y forty aty bankty loan.
Solutionst y Manual,t y Chaptert y 6,t y Paget y 1
t y oft y 357
Copyrightty©ty2022tyMcGrawtyHill.tyAlltyrightstyreserved.tyNotyreproductiontyortydistributiontywithouttythetypriortywrittentyc
onsentt y oftyMcGrawtyHill.
,1-5 Aty reportt y bytyanty independentt y publicty accountantt y concerningty thety fairnesst y ofty aty company'sty financialty statementst y is
t y commonlyty requiredty inty thety followingty situations:
(1) Applicationty forty aty bankty loan.
(2) Establishingty creditt y forty purchasety oft y merchandise,ty equipment,ty orty otherty assets.
(3) Reportingty operatingty results,ty financialty position,ty andty cashty flowst y toty absenteety ownerst y (stockholderst y o
rt y partners).
(4) Issuancety ofty securitiest y bytyaty corporation.
(5) Annualty financialty statementsty bytyaty corporationty withty securitiesty listedty onty aty stockty exchangetyorty tradedt y o
verty thety counter.
(6) Saletyofty antyongoingty business.
(7) Terminationty oft y at y partnership.
1-6 Toty addty credibilitytytoty financialty statementsty isty toty increasetythetylikelihoodty thatty theytyhavetybeenty preparedt y followingty
thety appropriatety criteria,ty usuallytygenerallytyacceptedty accountingty principles.tyt y Ast y such,ty anty increaset y inty credibilityt
y resultsty inty financialty statementsty thatty canty bety believedty andty reliedty uponty byty thirdty parties.
1-7 Businessty riskty isty thetyriskty thatty thetyinvestmentty willty betyimpairedty becausetyaty companytyinvestedty intyisty unabletytot
y meett y itst y financialty obligationst y duety toty economicty conditionst y orty poorty managementt y decisions.tyt y Informationt y ris
ktyisty thetyrisktythatty thetyinformationtyusedtytoty assessty businessty risktyisty notty accurate.tyt y Auditorsty cantydirectlyt y redu
cetyinformationty risk,ty butty havetyonlytylimitedty effectt y ontybusinessty risk.
1-8 Atty thetybeginningty ofty thetycentury,ty thetyprincipalty objectivetyofty auditingty wasty thetypreventionty andty detectionty oft y fraud.
tyt y Auditty workty centeredty onty thety balancety sheet,ty becausety thety incomety statementty wasty regardedty asty highlyt y confide
ntialty andty notty forty publictydisclosure.tyt y Today,ty thetyprincipalty objectivetyofty auditingty isty totyformtyantyt y opinionty onty thety f
airnesst y ofty financialty statementst y andty theirty conformitytywithty generallytyacceptedty accountingt y principles.tyt y Butt y thetyp
rofessionalty standardsty alsoty requiretythatty anty auditty betydesignedty toty providetyreasonablet y assurancetyofty detectingty
materialty misstatements,ty duetytoty errorsty orty fraud.tyt y Particularty emphasisty ist y placedty ontyt y thetyincometystatementty wh
ichty isty ofty greatty importancetytoty investors.tyt y Auditingty todaytyalsoty hasty thetyobjectivesty oft y meetingty thety requirementst
y ofty thety Securitiest y andty Exchangety Commissionty (SEC)t y andty thety Publicty Companyt y Accountingty Oversightt y Boardt y f
ort y publicty companies.
1-9 Thetystatementt y ist y incorrect.ty Thety increasingty integratedty databasest y oft y today,ty alongty withty availablety auditt y p
rocedurest y makety auditedty entirety populationst y at y possibilitytyinty manytysituations.
1-10 Anty operationalty auditty attemptsty toty measuretythetyeffectivenessty andty efficiencytyofty aty specifictyunitty ofty ant y organiz
ation.tyt y Itty involvesty moretysubjectivetyjudgmentsty thanty aty compliancetyauditty orty anty auditty ofty financialt y statementst
y becausety thety criteriaty ofty effectivenesst y andty efficiencyty ofty departmentalty performancety arety nott y ast y clearlyty estab
lishedty ast y arety manytylawst y andty regulationst y ort y generallytyacceptedty accountingty principles.
Thetyreportt y preparedty afterty completionty ofty anty operationalty auditt y ist y usuallytydirectedty toty managementt y of
ty thety organizationty inty whichty thety auditty workty wasty done.
1-11 Atycompliancetyauditty isty anty auditty toty determinetywhetherty financialty reportsty orty otherty assertionsty arety int y compliancet
y withty establishedty criteria.tyt y Thety necessaryty ingredientst y arety verifiablety dataty andty thety existencety oft y standardsty est
ablishedty bytyantyauthoritativetybody.tyt y Antyoperationalty audit,ty ontythetyotherty hand,ty isty aty reviewtyofty at y departmentty o
rty otherty unitt y ofty aty businesst y orty governmentalty organizationty toty measurety thetyeffectivenessty andt y efficiencytyofty op
erations.tyt y Internalty auditorst y oftenty performty operationalty auditst y ast y doty auditorst y employedty byt y thety Governmentt y
Accountabilityty Officety (GAO)t y oft y thety federalty government.
1-12 Internalty auditorst y mustty betyindependentty ofty thetydepartmentt y headsty andty otherty linetyexecutivesty whosetyworkty theyt y
review.tyt y However,ty internalty auditorsty aretynotty independentty inty thetysametysensetyasty aty publictyaccountingty firm.
Solutionst y Manual,t y Chaptert y 6,t y Paget y 2
t y oft y 357
Copyrightty©ty2022tyMcGrawtyHill.tyAlltyrightstyreserved.tyNotyreproductiontyortydistributiontywithouttythetypriortywrittentyc
onsentt y oftyMcGrawtyHill.
, Thetypublictyaccountingty firmtyservesty manytyclientsty andty thetyrevenuetyobtainedtyfromtyanytyonetyclientty isty onlytyat y small
ty partty ofty thetyrevenuetyofty thety firm.tyt y Internalty auditors,ty onty thety otherty hand,ty arety employeesty ofty onety company,t y andty
aretysubjectt y toty thetyrestraintsty inherentty inty thety employer-
employeetyrelationship.tyt y Internalty auditorsty cant y achievetyaty greatty dealty ofty independencetybytyreportingty toty thetyauditty
committeetyofty thetyboardty ofty directors,ty buttyt y theytycannotty achievetythetysametydegreetyofty independencety asty ist y poss
essedty bytythetyexternalty publictyaccountingt y firm.
1-13 Thety internalty auditorst y arety employeest y ofty Spacecraft,ty Inc.,ty andty maytybety influencedty bytycorporatety management.
Thetypublictyaccountingtyfirmtyisty independentty ofty thetycompanytyandty isty inty aty betterty positionty totytaketypositionst y oppo
sedty toty thosetyofty companytymanagement.tyt y Thetyworkty ofty thetyinternalty auditt y staffty emphasizest y measurementt y ofty th
etyefficiencytyandty effectivenessty ofty varioust y operatingty unitsty ofty thetycompanytyandty compliancetywithty alltyt y typest y ofty c
ontrols,ty whereast y thety publicty accountingty firmty ist y primarilytyconcernedty withty determiningty thety fairnesst y oft y Spacecraf
t'st y financialt y statements.
1-14 ThetyGovernmentt y AccountabilitytyOfficety (GAO)ty isty aty staffty ofty professionalty auditorst y whichty reportst y tot y Congress.tyt
y Itsty functionty isty toty determinetythatty programsty carriedty outty byty federalty agenciesty conformty toty thet y financialty authorizat
ionty ofty thetyCongress.tyt y Itt y ist y alsoty concernedty withty thety cost-
effectivenesst y ofty governmentt y programs.tyt y Thety auditt y activitiest y includety investigationty ofty thetycostst y andty performan
cety ofty corporationst y holdingt y governmentt y contracts.
1-15 Amongty thetymanytyimportantty contributionsty toty auditingty literaturetybytythetyAICPAty aretythetyseriest y ofty Statementst y onty
Auditingty Standardsty (SASs),ty Statementsty onty Standardst y forty Attestationty Engagementst y (SSAEs),ty Industryt y Auditty a
ndtyAccountingty Guides,ty Auditty Guides,ty Auditty Riskty Alerts,ty Statementsty onty Standardsty forty Accountingt y andtyReviewty
Servicest y (SSARSs),ty ,ty andty thetyCodety ofty Professionalty Conductt y (onlytytwoty required).
1-16 Aty peerty reviewtyisty aty criticalty reviewtyofty aty publictyaccountingty firm'sty practicesty bytyanotherty publictyaccountingt y firmt
y (orty otherty CPAsty functioningty asty aty peerty reviewtyteam).tyt y Thetypurposety ofty aty peerty reviewtyisty toty encouraget y adhe
rencety toty qualitytycontrolty standardst y establishedty bytythety accountingty firmtyandty thetyprofession.
1-17 ThetySecuritiest y andty ExchangetyCommissionty (SEC)ty isty anty agencytyofty thetyfederalty governmentty andty ist y responsiblet
y forty administeringty aty numberty ofty acts,ty includingty thety Securitiest y Actty ofty 1933ty andty thety Securitiest y Exchangety Actty
ofty 1934.tyt y Inty meetingty thisty responsibility,ty thetySECty reviewsty financialty statementsty oftyt y t y companiesty offeringty securit
iesty forty saletytoty thetypublic.tyt y Itty isty particularlytyconcernedty withty requiringty fullt y disclosurety oft y financialty informationty a
ndty withty preventingty misrepresentation.tyt y Throughty thety Publicty Companyt y Accountingty Oversightt y Board,ty thetySECty
nowtyoverseest y publictyaccountingty firmst y thatt y auditt y publicty companies.t y Includedty inty thist y oversightt y processt y include
st y developmentt y oft y auditing,ty independence,ty andty qualityty controlt y standards;t y inspectionty oft y performance;t y andty enf
orcementt y oft y thety standards.
ThetyAICPAty isty thetynationalty organizationty ofty certifiedty publictyaccountants.tyt y Itty hasty longty beenty aty leadert y i
nty accountingty andty auditingty research,ty inty publicationty ofty authoritativety accountingty andty auditingt y pronouncementst y a
ndty studies,ty andty inty promotingty highty professionalty standardst y oft y practice.
1-18 Servicesty offeredty bytypublictyaccountingty firmst y inty additionty toty auditingty includetyotherty formsty ofty attestation,ty taxt y wor
k,ty consultingty services,t y litigationty supportt y services,t y fraudty investigationty services,t y personalty financialt y planningty and
ty accountingty services.tytyt y Thisty lastty categoryty includest y preparationty ofty financialty statementst y fort y smallerty companies
t y thatty havety limitedty accountingty personnelty andty varioust y typest y ofty write-
upt y work.tyt y Publict y accountingty firmsty alsoty performtyaty varietytyofty otherty services.tyt y Consultingty servicesty includetyaidi
ngty clientsty int y thety designty oft y accountingty systems,ty conversionty tot y Informationty Technologyty(IT)t y systems,ty preparati
onty oft y budgets,ty planningty businesst y combinationst y withty othert y companies,ty executivety search,ty andty numeroust y oth
ert y projects.ty Publictyaccountingty firmst y aretyrestrictedty ast y totythetyconsultingty servicest y thatty theytymaytyprovidetytot y au
ditt y clientst y thatt y aretypublicty companies.
Solutionst y Manual,t y Chaptert y 6,t y Paget y 3
t y oft y 357
Copyrightty©ty2022tyMcGrawtyHill.tyAlltyrightstyreserved.tyNotyreproductiontyortydistributiontywithouttythetypriortywrittentyc
onsentt y oftyMcGrawtyHill.
, 1-19 Thetypartnershipt y formty ofty organizationty forty aty publictyaccountingty firmtyoffersty severalty advantagesty overty aty solet y pr
oprietorship.tyt y Aty partnershipt y offersty thetyopportunitytyforty specializationty bytythetypartnersty inty areast y suchty ast y taxati
on,ty auditing,ty andty consultingty services.tyt y Partnerst y canty discusst y difficultt y technicalty problemst y amongt y themselves,t
y andty benefitty fromty differentt y perspectives.tyt y Also,ty thety partnershipty mayty bety betterty ablety toty attractt y andty retainty hi
ghty qualitytyprofessionalty staff,ty becausetytheytymaytybety rewardedty bytyacceptancetyintoty thet y partnership.
1-20 Thety followingty characteristicst y oft y at y professionalty corporationty distinguishty itt y fromty thety traditionalty corporation:
(1) Allty shareholderst y mustt y bety engagedty inty thetypracticetyofty publictyaccounting.
(2) Toty thety extentt y possible,ty directorst y andty officerst y shouldty bety certifiedty publicty accountants.
(3) Sharesty ofty aty professionalty corporationty maytybety transferredtyonlytytoty thosety engagedty inty publict y a
ccountingty orty toty thety corporationty itself.
(4) Thety corporation'st y shareholderst y andty employeest y havety liabilitytyequivalentt y toty otherty formst y oft y organizatio
nst y (i.e.,ty thety corporatetyformty ofty organizationty doest y nott y reducetyliability).tyt y Note,ty however,t y thatt y CPAst y m
aytychoosety toty purchasety liabilitytyinsurancety toty limitty potentialty liability.
1-21 Localtyfirmsty usuallytyhavetyonlytyonetyorty twotyoffices,ty aretyheadedtybytyaty singletyCPAtyorty havetyaty fewtyCPAsty ast y p
artners,tyandtyservetyclientsty intyaty singletycitytyorty area.tyt y Thetyservicesty providedtyaretymostlytyincometytaxty work,t y c
onsultingty services,ty andty accountingty services.tyt y Auditingty isty oftenty onlytyaty smallty partty ofty thetypractice.
Regionaltyfirmsty oftenty arisetyfromtythetymergerty andtyexpansiontyofty localtyfirms.t y Theytytypicallytymaintaint y sever
altyofficesty intyneighboringtycitiesty andtystates.t y Auditingtyisty aty moretyimportantty functiontyforty regionaltyfirmst y thanty forty t
hetylocalty firms,ty becausetylargerty businessest y aretyincludedty amongty thetyclients.
Nationaltyfirmsty havetyofficesty intymostty majorty citiesty intythetyUnitedtyStatesty andty sometyoperatetyintyothert y cou
ntriesty asty well.tyt y Thesetyfirmsty offerty aty fullty rangetyofty services,ty withty auditingty oftenty representingtythetylargestt y singl
etyportionty ofty thety practice.
Internationaltyfirmsty havetyofficesty intymostty ofty thetyworld’sty majorty cities.tyt y Thesetyfirmsty offerty aty fulltyrange
ofty services,ty withty auditingty oftenty representingty thetylargestt y singletyportionty ofty thety practice.
1-22 Thetyvariousty levelst y ofty accountingty personnelty inty aty largety publictyaccountingty firmtyarety staffty auditors,ty seniort y au
ditors,ty managerst y ort y supervisors,ty andty partnerst y (andty principals).
Thety staffty auditorty performst y auditty proceduresty suchty ast y thetyobservationty ofty physicalty inventoriest y andt y c
onfirmationty ofty receivablest y underty thetysupervisionty ofty aty senior.tyt y Thetyseniorty auditorty plansty andty coordinatest y the
ty auditty andty draftsty thety auditty report.tyt y Thety seniorty alsoty reviewst y workingty papers,ty controlsty thety allocationty oft y auditt
y time,ty andty trainsty assistantsty onty thetyjob.tyt y Thety managerty orty supervisorty usuallytyisty responsiblety fort y supervisingty
andty reviewingty severalty auditt y engagementst y concurrently,ty andty resolvingty significantt y problemst y withty thetyclient.tyt y
Thetypartnersty maintainty contactsty withty clients,ty developty newtybusiness,ty establishty policiesty oft y thetyfirm,ty reviewtyth
etyadequacytyofty auditty work,ty andty signty auditty reports.tyt y Thetyengagementty partnerty ist y responsibletyforty performancet
y ofty thety auditty inty accordancetywithty professionalty standards.tyt y Aty partnerty alsot y devotesty timety toty thety recruitmentty an
dty developmentt y ofty staff,ty toty AICPAty andty otherty professionalty groupt y activities,ty toty educationalty andty otherty civicty acti
vities,ty andty generallytytoty promotingty anty environmentt y inty whicht y thetyfirmtycantyprosper.tyt y Thetypositionty ofty principal,t
y whichty isty oftenty heldty byty top-
rankingty consultingty personnelt y whoty doty notty holdty thetyCPAty certificate,ty hasty responsibilitiesty similarty totythosetyofty at
y partner.
1-23 Thetymostty significantt y responsibilitiest y ofty aty partnerty inty aty publictyaccountingty firmtyincludety(onlytythreetyrequired:
• Assumetyultimatety responsibilitytyforty thetyauditst y assignedty tot y himtyorty her
• Signty auditt y reports
• Reviewtythety auditt y workty forty compliancetywithty firmtyandty professionalty standards
• Maintainty relationst y withty auditt y clients
Solutionst y Manual,t y Chaptert y 6,t y Paget y 4
t y oft y 357
Copyrightty©ty2022tyMcGrawtyHill.tyAlltyrightstyreserved.tyNotyreproductiontyortydistributiontywithouttythetypriortywrittentyc
onsentt y oftyMcGrawtyHill.
The Role of the Public
ty ty ty ty ty
Accountant in the ty ty
American Economy ty
Reviewt y Questions
1-1 Thety―crisisty oftycredibility‖tylargelytyarosetyfromtythetynumbertyoftycompaniestythatty restatedtytheirtypreviouslyt y issuedty fin
ancialty statementst y ast y aty resultty oft y accountingty irregularitiest y andty fraud.tyt y Especiallytyresponsibletyweret y thety verytyvis
iblety Enronty andty WorldComty fraudty cases.ty Bothty companiest y filedty forty bankruptcytyandty constitutedt y thetylargestty comp
aniesty inty Americanty historytytoty dotyso.tyt y Thetyextentty ofty thetyaccountingty irregularitiesty andty fraudt y beingty investigatedty
andty disclosedty broughtt y intoty questionty thety effectivenessty ofty financialty statementt y audits.tyt y Int y addition,ty thetycriminalty
convictionty ofty Arthurty Andersen,ty LLP,ty onetyofty thetythentyBigty 5ty accountingtyfirms,ty ont y chargesty ofty destroyingty docum
entsty relatedty toty thetyEnronty casetybroughtty intotyquestionty thetyethicst y standardsty oft y thet y profession.
1-2 Assurancetyservicesty aretyprofessionalty servicesty thatty enhancetythetyqualitytyofty information,ty orty itsty context,ty fort y de
cision-
making.t y Thetytwotytypesty are:ty(a)ty thosetythatt y increasetythetyreliabilitytyofty informationtyandty(b)ty thoset y thatty involvet
y puttingty informationty inty aty formty orty contextt y thatt y facilitatest y decision-making.
1-3 Aty financialty statementty auditty is,ty bytyfar,ty thetymostty commonty typetyofty attestty engagement.tyt y Thetyoverallty assertion,t y
madety bytymanagement,ty mostt y frequentlytyist y thatt y thety financialty statementst y followtygenerallytyacceptedt y accountingt y
principles.
1-4 Atylargetycorporationty withty securitiesty listedty ontyaty stocktyexchangetyisty requiredtybytythetyrulesty ofty thetystockt y exchanget
y andty bytythetyrulesty ofty thety Securitiesty andty Exchangety Commissionty toty providety anty auditty reportty withty thet y annualty fin
ancialty statementsty furnishedty toty itsty stockholders.tyt y Itty alsoty isty requiredty toty engagetythetyauditorsty tot y providetyanty opi
nionty onty itsty internalty control.tyt y Apartty fromtylegalty requirements,ty however,ty aty largetylistedt y corporationty recognizesty th
att y itty mustt y maintainty investorty confidencetyint y thetyreliabilitytyofty itst y financialt y statementsty andty internalty controlty overty fi
nancialty reportingty ifty itty isty toty continuetytoty betyabletytoty securetycapitalty fromt y thetypublic.tyt y Thetyreportt y bytyaty firmtyofty ce
rtifiedtypublictyaccountantsty addsty credibilitytytoty thetyfinancialtyt y t y statementsty preparedty bytythetycorporation.tyt y Whenty aty
smallty family-
ownedty enterprisetyelectsty toty havetyanty audit,t y thetypurposetyusuallytyisty totyusetythetyauditors'ty reportty totysupportty antya
pplicationt y forty aty bankty loan.
Solutionst y Manual,t y Chaptert y 6,t y Paget y 1
t y oft y 357
Copyrightty©ty2022tyMcGrawtyHill.tyAlltyrightstyreserved.tyNotyreproductiontyortydistributiontywithouttythetypriortywrittentyc
onsentt y oftyMcGrawtyHill.
,1-5 Aty reportt y bytyanty independentt y publicty accountantt y concerningty thety fairnesst y ofty aty company'sty financialty statementst y is
t y commonlyty requiredty inty thety followingty situations:
(1) Applicationty forty aty bankty loan.
(2) Establishingty creditt y forty purchasety oft y merchandise,ty equipment,ty orty otherty assets.
(3) Reportingty operatingty results,ty financialty position,ty andty cashty flowst y toty absenteety ownerst y (stockholderst y o
rt y partners).
(4) Issuancety ofty securitiest y bytyaty corporation.
(5) Annualty financialty statementsty bytyaty corporationty withty securitiesty listedty onty aty stockty exchangetyorty tradedt y o
verty thety counter.
(6) Saletyofty antyongoingty business.
(7) Terminationty oft y at y partnership.
1-6 Toty addty credibilitytytoty financialty statementsty isty toty increasetythetylikelihoodty thatty theytyhavetybeenty preparedt y followingty
thety appropriatety criteria,ty usuallytygenerallytyacceptedty accountingty principles.tyt y Ast y such,ty anty increaset y inty credibilityt
y resultsty inty financialty statementsty thatty canty bety believedty andty reliedty uponty byty thirdty parties.
1-7 Businessty riskty isty thetyriskty thatty thetyinvestmentty willty betyimpairedty becausetyaty companytyinvestedty intyisty unabletytot
y meett y itst y financialty obligationst y duety toty economicty conditionst y orty poorty managementt y decisions.tyt y Informationt y ris
ktyisty thetyrisktythatty thetyinformationtyusedtytoty assessty businessty risktyisty notty accurate.tyt y Auditorsty cantydirectlyt y redu
cetyinformationty risk,ty butty havetyonlytylimitedty effectt y ontybusinessty risk.
1-8 Atty thetybeginningty ofty thetycentury,ty thetyprincipalty objectivetyofty auditingty wasty thetypreventionty andty detectionty oft y fraud.
tyt y Auditty workty centeredty onty thety balancety sheet,ty becausety thety incomety statementty wasty regardedty asty highlyt y confide
ntialty andty notty forty publictydisclosure.tyt y Today,ty thetyprincipalty objectivetyofty auditingty isty totyformtyantyt y opinionty onty thety f
airnesst y ofty financialty statementst y andty theirty conformitytywithty generallytyacceptedty accountingt y principles.tyt y Butt y thetyp
rofessionalty standardsty alsoty requiretythatty anty auditty betydesignedty toty providetyreasonablet y assurancetyofty detectingty
materialty misstatements,ty duetytoty errorsty orty fraud.tyt y Particularty emphasisty ist y placedty ontyt y thetyincometystatementty wh
ichty isty ofty greatty importancetytoty investors.tyt y Auditingty todaytyalsoty hasty thetyobjectivesty oft y meetingty thety requirementst
y ofty thety Securitiest y andty Exchangety Commissionty (SEC)t y andty thety Publicty Companyt y Accountingty Oversightt y Boardt y f
ort y publicty companies.
1-9 Thetystatementt y ist y incorrect.ty Thety increasingty integratedty databasest y oft y today,ty alongty withty availablety auditt y p
rocedurest y makety auditedty entirety populationst y at y possibilitytyinty manytysituations.
1-10 Anty operationalty auditty attemptsty toty measuretythetyeffectivenessty andty efficiencytyofty aty specifictyunitty ofty ant y organiz
ation.tyt y Itty involvesty moretysubjectivetyjudgmentsty thanty aty compliancetyauditty orty anty auditty ofty financialt y statementst
y becausety thety criteriaty ofty effectivenesst y andty efficiencyty ofty departmentalty performancety arety nott y ast y clearlyty estab
lishedty ast y arety manytylawst y andty regulationst y ort y generallytyacceptedty accountingty principles.
Thetyreportt y preparedty afterty completionty ofty anty operationalty auditt y ist y usuallytydirectedty toty managementt y of
ty thety organizationty inty whichty thety auditty workty wasty done.
1-11 Atycompliancetyauditty isty anty auditty toty determinetywhetherty financialty reportsty orty otherty assertionsty arety int y compliancet
y withty establishedty criteria.tyt y Thety necessaryty ingredientst y arety verifiablety dataty andty thety existencety oft y standardsty est
ablishedty bytyantyauthoritativetybody.tyt y Antyoperationalty audit,ty ontythetyotherty hand,ty isty aty reviewtyofty at y departmentty o
rty otherty unitt y ofty aty businesst y orty governmentalty organizationty toty measurety thetyeffectivenessty andt y efficiencytyofty op
erations.tyt y Internalty auditorst y oftenty performty operationalty auditst y ast y doty auditorst y employedty byt y thety Governmentt y
Accountabilityty Officety (GAO)t y oft y thety federalty government.
1-12 Internalty auditorst y mustty betyindependentty ofty thetydepartmentt y headsty andty otherty linetyexecutivesty whosetyworkty theyt y
review.tyt y However,ty internalty auditorsty aretynotty independentty inty thetysametysensetyasty aty publictyaccountingty firm.
Solutionst y Manual,t y Chaptert y 6,t y Paget y 2
t y oft y 357
Copyrightty©ty2022tyMcGrawtyHill.tyAlltyrightstyreserved.tyNotyreproductiontyortydistributiontywithouttythetypriortywrittentyc
onsentt y oftyMcGrawtyHill.
, Thetypublictyaccountingty firmtyservesty manytyclientsty andty thetyrevenuetyobtainedtyfromtyanytyonetyclientty isty onlytyat y small
ty partty ofty thetyrevenuetyofty thety firm.tyt y Internalty auditors,ty onty thety otherty hand,ty arety employeesty ofty onety company,t y andty
aretysubjectt y toty thetyrestraintsty inherentty inty thety employer-
employeetyrelationship.tyt y Internalty auditorsty cant y achievetyaty greatty dealty ofty independencetybytyreportingty toty thetyauditty
committeetyofty thetyboardty ofty directors,ty buttyt y theytycannotty achievetythetysametydegreetyofty independencety asty ist y poss
essedty bytythetyexternalty publictyaccountingt y firm.
1-13 Thety internalty auditorst y arety employeest y ofty Spacecraft,ty Inc.,ty andty maytybety influencedty bytycorporatety management.
Thetypublictyaccountingtyfirmtyisty independentty ofty thetycompanytyandty isty inty aty betterty positionty totytaketypositionst y oppo
sedty toty thosetyofty companytymanagement.tyt y Thetyworkty ofty thetyinternalty auditt y staffty emphasizest y measurementt y ofty th
etyefficiencytyandty effectivenessty ofty varioust y operatingty unitsty ofty thetycompanytyandty compliancetywithty alltyt y typest y ofty c
ontrols,ty whereast y thety publicty accountingty firmty ist y primarilytyconcernedty withty determiningty thety fairnesst y oft y Spacecraf
t'st y financialt y statements.
1-14 ThetyGovernmentt y AccountabilitytyOfficety (GAO)ty isty aty staffty ofty professionalty auditorst y whichty reportst y tot y Congress.tyt
y Itsty functionty isty toty determinetythatty programsty carriedty outty byty federalty agenciesty conformty toty thet y financialty authorizat
ionty ofty thetyCongress.tyt y Itt y ist y alsoty concernedty withty thety cost-
effectivenesst y ofty governmentt y programs.tyt y Thety auditt y activitiest y includety investigationty ofty thetycostst y andty performan
cety ofty corporationst y holdingt y governmentt y contracts.
1-15 Amongty thetymanytyimportantty contributionsty toty auditingty literaturetybytythetyAICPAty aretythetyseriest y ofty Statementst y onty
Auditingty Standardsty (SASs),ty Statementsty onty Standardst y forty Attestationty Engagementst y (SSAEs),ty Industryt y Auditty a
ndtyAccountingty Guides,ty Auditty Guides,ty Auditty Riskty Alerts,ty Statementsty onty Standardsty forty Accountingt y andtyReviewty
Servicest y (SSARSs),ty ,ty andty thetyCodety ofty Professionalty Conductt y (onlytytwoty required).
1-16 Aty peerty reviewtyisty aty criticalty reviewtyofty aty publictyaccountingty firm'sty practicesty bytyanotherty publictyaccountingt y firmt
y (orty otherty CPAsty functioningty asty aty peerty reviewtyteam).tyt y Thetypurposety ofty aty peerty reviewtyisty toty encouraget y adhe
rencety toty qualitytycontrolty standardst y establishedty bytythety accountingty firmtyandty thetyprofession.
1-17 ThetySecuritiest y andty ExchangetyCommissionty (SEC)ty isty anty agencytyofty thetyfederalty governmentty andty ist y responsiblet
y forty administeringty aty numberty ofty acts,ty includingty thety Securitiest y Actty ofty 1933ty andty thety Securitiest y Exchangety Actty
ofty 1934.tyt y Inty meetingty thisty responsibility,ty thetySECty reviewsty financialty statementsty oftyt y t y companiesty offeringty securit
iesty forty saletytoty thetypublic.tyt y Itty isty particularlytyconcernedty withty requiringty fullt y disclosurety oft y financialty informationty a
ndty withty preventingty misrepresentation.tyt y Throughty thety Publicty Companyt y Accountingty Oversightt y Board,ty thetySECty
nowtyoverseest y publictyaccountingty firmst y thatt y auditt y publicty companies.t y Includedty inty thist y oversightt y processt y include
st y developmentt y oft y auditing,ty independence,ty andty qualityty controlt y standards;t y inspectionty oft y performance;t y andty enf
orcementt y oft y thety standards.
ThetyAICPAty isty thetynationalty organizationty ofty certifiedty publictyaccountants.tyt y Itty hasty longty beenty aty leadert y i
nty accountingty andty auditingty research,ty inty publicationty ofty authoritativety accountingty andty auditingt y pronouncementst y a
ndty studies,ty andty inty promotingty highty professionalty standardst y oft y practice.
1-18 Servicesty offeredty bytypublictyaccountingty firmst y inty additionty toty auditingty includetyotherty formsty ofty attestation,ty taxt y wor
k,ty consultingty services,t y litigationty supportt y services,t y fraudty investigationty services,t y personalty financialt y planningty and
ty accountingty services.tytyt y Thisty lastty categoryty includest y preparationty ofty financialty statementst y fort y smallerty companies
t y thatty havety limitedty accountingty personnelty andty varioust y typest y ofty write-
upt y work.tyt y Publict y accountingty firmsty alsoty performtyaty varietytyofty otherty services.tyt y Consultingty servicesty includetyaidi
ngty clientsty int y thety designty oft y accountingty systems,ty conversionty tot y Informationty Technologyty(IT)t y systems,ty preparati
onty oft y budgets,ty planningty businesst y combinationst y withty othert y companies,ty executivety search,ty andty numeroust y oth
ert y projects.ty Publictyaccountingty firmst y aretyrestrictedty ast y totythetyconsultingty servicest y thatty theytymaytyprovidetytot y au
ditt y clientst y thatt y aretypublicty companies.
Solutionst y Manual,t y Chaptert y 6,t y Paget y 3
t y oft y 357
Copyrightty©ty2022tyMcGrawtyHill.tyAlltyrightstyreserved.tyNotyreproductiontyortydistributiontywithouttythetypriortywrittentyc
onsentt y oftyMcGrawtyHill.
, 1-19 Thetypartnershipt y formty ofty organizationty forty aty publictyaccountingty firmtyoffersty severalty advantagesty overty aty solet y pr
oprietorship.tyt y Aty partnershipt y offersty thetyopportunitytyforty specializationty bytythetypartnersty inty areast y suchty ast y taxati
on,ty auditing,ty andty consultingty services.tyt y Partnerst y canty discusst y difficultt y technicalty problemst y amongt y themselves,t
y andty benefitty fromty differentt y perspectives.tyt y Also,ty thety partnershipty mayty bety betterty ablety toty attractt y andty retainty hi
ghty qualitytyprofessionalty staff,ty becausetytheytymaytybety rewardedty bytyacceptancetyintoty thet y partnership.
1-20 Thety followingty characteristicst y oft y at y professionalty corporationty distinguishty itt y fromty thety traditionalty corporation:
(1) Allty shareholderst y mustt y bety engagedty inty thetypracticetyofty publictyaccounting.
(2) Toty thety extentt y possible,ty directorst y andty officerst y shouldty bety certifiedty publicty accountants.
(3) Sharesty ofty aty professionalty corporationty maytybety transferredtyonlytytoty thosety engagedty inty publict y a
ccountingty orty toty thety corporationty itself.
(4) Thety corporation'st y shareholderst y andty employeest y havety liabilitytyequivalentt y toty otherty formst y oft y organizatio
nst y (i.e.,ty thety corporatetyformty ofty organizationty doest y nott y reducetyliability).tyt y Note,ty however,t y thatt y CPAst y m
aytychoosety toty purchasety liabilitytyinsurancety toty limitty potentialty liability.
1-21 Localtyfirmsty usuallytyhavetyonlytyonetyorty twotyoffices,ty aretyheadedtybytyaty singletyCPAtyorty havetyaty fewtyCPAsty ast y p
artners,tyandtyservetyclientsty intyaty singletycitytyorty area.tyt y Thetyservicesty providedtyaretymostlytyincometytaxty work,t y c
onsultingty services,ty andty accountingty services.tyt y Auditingty isty oftenty onlytyaty smallty partty ofty thetypractice.
Regionaltyfirmsty oftenty arisetyfromtythetymergerty andtyexpansiontyofty localtyfirms.t y Theytytypicallytymaintaint y sever
altyofficesty intyneighboringtycitiesty andtystates.t y Auditingtyisty aty moretyimportantty functiontyforty regionaltyfirmst y thanty forty t
hetylocalty firms,ty becausetylargerty businessest y aretyincludedty amongty thetyclients.
Nationaltyfirmsty havetyofficesty intymostty majorty citiesty intythetyUnitedtyStatesty andty sometyoperatetyintyothert y cou
ntriesty asty well.tyt y Thesetyfirmsty offerty aty fullty rangetyofty services,ty withty auditingty oftenty representingtythetylargestt y singl
etyportionty ofty thety practice.
Internationaltyfirmsty havetyofficesty intymostty ofty thetyworld’sty majorty cities.tyt y Thesetyfirmsty offerty aty fulltyrange
ofty services,ty withty auditingty oftenty representingty thetylargestt y singletyportionty ofty thety practice.
1-22 Thetyvariousty levelst y ofty accountingty personnelty inty aty largety publictyaccountingty firmtyarety staffty auditors,ty seniort y au
ditors,ty managerst y ort y supervisors,ty andty partnerst y (andty principals).
Thety staffty auditorty performst y auditty proceduresty suchty ast y thetyobservationty ofty physicalty inventoriest y andt y c
onfirmationty ofty receivablest y underty thetysupervisionty ofty aty senior.tyt y Thetyseniorty auditorty plansty andty coordinatest y the
ty auditty andty draftsty thety auditty report.tyt y Thety seniorty alsoty reviewst y workingty papers,ty controlsty thety allocationty oft y auditt
y time,ty andty trainsty assistantsty onty thetyjob.tyt y Thety managerty orty supervisorty usuallytyisty responsiblety fort y supervisingty
andty reviewingty severalty auditt y engagementst y concurrently,ty andty resolvingty significantt y problemst y withty thetyclient.tyt y
Thetypartnersty maintainty contactsty withty clients,ty developty newtybusiness,ty establishty policiesty oft y thetyfirm,ty reviewtyth
etyadequacytyofty auditty work,ty andty signty auditty reports.tyt y Thetyengagementty partnerty ist y responsibletyforty performancet
y ofty thety auditty inty accordancetywithty professionalty standards.tyt y Aty partnerty alsot y devotesty timety toty thety recruitmentty an
dty developmentt y ofty staff,ty toty AICPAty andty otherty professionalty groupt y activities,ty toty educationalty andty otherty civicty acti
vities,ty andty generallytytoty promotingty anty environmentt y inty whicht y thetyfirmtycantyprosper.tyt y Thetypositionty ofty principal,t
y whichty isty oftenty heldty byty top-
rankingty consultingty personnelt y whoty doty notty holdty thetyCPAty certificate,ty hasty responsibilitiesty similarty totythosetyofty at
y partner.
1-23 Thetymostty significantt y responsibilitiest y ofty aty partnerty inty aty publictyaccountingty firmtyincludety(onlytythreetyrequired:
• Assumetyultimatety responsibilitytyforty thetyauditst y assignedty tot y himtyorty her
• Signty auditt y reports
• Reviewtythety auditt y workty forty compliancetywithty firmtyandty professionalty standards
• Maintainty relationst y withty auditt y clients
Solutionst y Manual,t y Chaptert y 6,t y Paget y 4
t y oft y 357
Copyrightty©ty2022tyMcGrawtyHill.tyAlltyrightstyreserved.tyNotyreproductiontyortydistributiontywithouttythetypriortywrittentyc
onsentt y oftyMcGrawtyHill.
