Chapter 1: The Practitioner's Engagements

• Stewarship or Agency Theory - implies that the manager wants the credibility an audit adds to the financial statement assertions. The manager is the agent or steward of the owners or investors, but each party acts in his or her own self-interest and the goals or objectives of each party are different.
• Motivational Theory - prepares of financial statements know that their assertions will be subjected to an audit; thus, the financial statements will be brought more in line with accounting standards
• Information Theory - an assurance services is a means of improving the quality of information. Also states that investors benefit through the increased confidence of external users of the information
• Insurance Theory - states that demand for assurance occurs from those who may suffer loss when things go wrong
• Economic benefits of a FS Audit

  • Access to Capital Markets
  • Lower cost of capital
  • Deterrent to the inefficiency and fraud
  • Control and operational improvements
• External or independent auditors also perform compliance and operational audit
• The internal auditing reports to the president and audit committee which are board of directors
• Compliance audit - obtaining and evaluating evidence to determine whether certain financial or operating activities of an entity conform to established policies, procedures, conditions, laws, rules or regulations
• Operational audit- study of a specific unit of an organization for the purpose of measuring its performance
• Account means to answer for and the reckoning of money held in trust
• Auditor - latin "audire" means "to hear - the one who satisfies himself as to the truth of the accounting of another"
• Auditing in ancient Egypt and Babylonia- two or more officials keeping separate records and checking the accuracy of these records by comparing them with each other
• Auditing in ancient Greece and Rome - audit of public accounts. All public officials apparently had to submit their accounts to designated auditors
• Auditing in Medieval Period - high officials accountable to heads of state compared independent tallies of monies collected by sheriffs for the crown. Today, we refer to independent tallies as controls and the verification of these tallies by a high official as auditing
• Auditing during the industrial period - produced early examples of english corporations registered with the state leading to laws mandating the preparation of statements by BOD and provisions for shareholders auditis
• Early auditing in US - cost consideration forced auditors to shift their techniques from detailed examinations to sampling and testing
• 1970 -to affirm the truthfulness nd ensure the fair presentation of the FS
• True


  The demand for assurance engagement arises because the interests of the users of information may be different from that of the interests of those responsible for providing information.
• True


  Independence is an attribute necessary to perform assurance engagements and is only required for assurance engagements providers.
• True


  The purpose of assurance engagements is to improve the quality of the information provided.
• False


  Independence standards are required for audits of public companies, but not for audits for public companies.
• True


  The criteria by which an auditor evaluates the information under audit may vary with the information being audited.
• False


  Whether a particular engagement is an assurance engagement will depend upon whether it exhibits all the following three elements - a three party relationship, a subject matter and suitable criteria.
• False


  The practitioner normally expresses limited assurance in a positive manner.
• False


  Under direct reporting assurance engagement, the evaluation or measurement of the subject matter is performed by the responsible party, and the subject matter information is in the form of assertion (representation) by the responsible party that is made available to the intended users.
• False


  The responsible party can be one of the intended users, and may be the only one.
• False


  CPAs are the exclusive providers of assurance engagements as the subject matter of assurance engagements is limited only to financial information of a business entity.
• B

  Which one of the following is not part of the attest process?A. Gathering evidence about assertionsB. Providing the accuracy of the books and recordsC. Evaluating evidence against objective criteriaD. Communicating the conclusions reached
• C

  Which of the following would best be described as an assurance service?A. Preparing a report representing a client's position during a BIR auditB. Working with a client to develop a more efficient method of processing financial transactionsC. Offering an opinion concerning the accuracy of statements made on a client's web site relating to the client's online privacy policiesD. Assisting a client in identifying potential sources of capital for potential sources of capital for potential acquisitions
• B


  The need for assurance services arises for all of the following reasons except:A. Potential bias in providing informationB. Closeness between a user and organizationC. Complexity of the processing systemsD. Remoteness between a user and the organization
• B


  It is the risk that the practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated.A.Business RiskB. Assurance Engagement RiskC. Detection RiskD. Audit Risk
• C


  The highest level of assurance that may be provided by the practitioner is reasonable assurance (less than absolute) as a result of the following factors, exceptA. Less than 100% testingB. Human ErrorC. Conclusive EvidenceD. Imperfect internal control
• B

  Which of the following is broadest in scopeA. Audits of FSB. Assurance servicesC. Operations auditD. Review of FS
• A

  Which of the following statements is not true with respect to assurance, assertion-based assurance, and audit services?A. These services are applied only to FS and FS AccountsB. These services all involve obtaining and evaluating evidenceC. These services all involve determining the correspondence of some information to a set of criteriaD. These services all involve issuing a report
• C


  In performing an attestation engagement, a CPA typicallyA. Supplies litigation support servicesB. Assesses control risk at a low levelC. Expresses a conclusion about an assertionD. Provides management consulting advice
• D

  Which of the following criteria is unique to the independent auditor's attest function?A. General CompetenceB. Familiarity with the particular industry of each clientC. Due professional careD. Independence
• D


  A service that always requires that a report is provided to a third party isA. AssuranceB. AttestationC. AuditD. Both B and C
• B

  Which of the following refers to "evidence" element of assurance engagement?A. Benchmarks used to evaluate or measure the subject matterB. Information obtained by the practitioner in arriving at the conclusions on which the opinion is basedC. Contains a conclusion that conveys the assurance obtained about the subject matter informationD. The subject matter, and subject matter information (assertion), of an assurance engagement
• A


  Which of the following is incorrect regarding the "three-party relationship" element of assurance engagements?A. Professional accountants are those persons who are members of PICPA, who should be in public practice.B. The responsible party and the intended user will often be from separate organizations but need not be.C. The responsible party is the person or persons, either as individuals or representatives of an entity, responsible for the subject matter.D. The intended user is the person or class of persons for whom the professional accountant prepares the report for a specific use or purpose.
• D

  Which one of the following is not a key attribute needed to perform assurance?A. subject matter knowledgeB. independenceC. established criteria or standardsD. accounting skills