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ACCT 203 Chapter Notes - Chapter 4: Internal Revenue Service, Chief Financial Officer, Management Accounting

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brownduck883
25 May 2018
School
George Mason University
Department
Accounting
Course
ACCT 203
Professor
Harley

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Audit & Cash Flow
Institute of Internal Auditors
a professional accounting organization that is dedicated to the promotion and
development of the practice of internal auditing
Institute of Management Accountants
a profession accounting organization that intends to influence the concepts and
ethical practice of management accounting and financial management
Integrity
the qualities of being complete, unbroken, unimpaired, sound, honest, and
sincere
Internal control
a process designed to provide reasonable assurance that the organization
produces reliable financial reports, complies with applicable laws and regulations,
and conducts its operations in an efficient and effective manner
Internal Revenue Service
a government organization that handles millions of income tax returns filed by
individuals and businesses and performs audit functions to verify the data
contained in those returns
Internal users
individuals who use accounting information from within an organization (for
example, board of directors, chief financial officer, plant managers, store
managers)
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Document Summary

Institute of internal auditors a professional accounting organization that is dedicated to the promotion and development of the practice of internal auditing. Institute of management accountants a profession accounting organization that intends to influence the concepts and ethical practice of management accounting and financial management. Integrity the qualities of being complete, unbroken, unimpaired, sound, honest, and sincere. Internal control a process designed to provide reasonable assurance that the organization produces reliable financial reports, complies with applicable laws and regulations, and conducts its operations in an efficient and effective manner. Internal revenue service a government organization that handles millions of income tax returns filed by individuals and businesses and performs audit functions to verify the data contained in those returns. Internal users individuals who use accounting information from within an organization (for example, board of directors, chief financial officer, plant managers, store managers) International accounting standards board (iasb) the group responsible for creating and promoting international financial.

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Related Questions

1–28. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following best describes the relationship between assurance services and
attest services?
(1) While attest services involve fi nancial data, assurance services involve nonfi nancial data.
(2) While attest services require objectivity, assurance services do not require objectivity.
(3) Both attest and assurance services require independence.
(4) Attest and assurance services are different terms referring to the same types of services.
b. Which of the following has primary responsibility for the fairness of the representations
made in fi nancial statements?
(1) Client’s management.
(2) Independent auditor.
(3) Audit committee.
(4) AICPA.
c. The most important benefi t of having an annual audit by a public accounting fi rm is to:
(1) Provide assurance to investors and other outsiders that the fi nancial statements are reliable.
(2) Enable offi cers and directors to avoid personal responsibility for any misstatements in
the fi nancial statements.
(3) Meet the requirements of government agencies.
(4) Provide assurance that illegal acts, if any exist, will be brought to light.
d. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board
(PCAOB). Which of the following is not one of the responsibilities of that board?
(1) Establish independence standards for auditors of public companies.
(2) Review fi nancial reports fi led with the SEC.
(3) Establish auditing standards for audits of public companies.
(4) Sanction registered audit fi rms.
e. Which of these organizations has the responsibility to perform inspections of auditors of
public companies?
(1) American Institute of Certifi ed Public Accountants.
(2) Securities and Exchange Commission.
(3) Financial Accounting Standards Board.
(4) Public Company Accounting Oversight Board.
f. Governmental auditing, in addition to including audits of fi nancial statements, often
includes audits of effi ciency, effectiveness, and:
(1) Adequacy.
(2) Evaluation.
(3) Accuracy.
(4) Compliance.
g. In general, internal auditors’ independence will be greatest when they report directly to the:
(1) Financial vice president.
(2) Corporate controller.
(3) Audit committee of the board of directors.
(4) Chief executive offi cer.
h. Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002
to regulate public accounting fi rms:
(1) Disclosures related to accounting irregularities at Enron and WorldCom.
(2) Restatements of fi nancial statements by a number of public companies.

(3) Conviction of the accounting fi rm of Arthur Andersen LLP.
(4) Ethical scandals at the AICPA.
i. Which of the following organizations establishes accounting standards for U.S. government
agencies?
(1) The Financial Accounting Standards Board.
(2) The Governmental Accounting Standards Board.
(3) The Federal Accounting Standards Advisory Board.
(4) The Public Company Accounting Oversight Board.
j. Which of the following is correct about forensic audits?
(1) All audit engagements are forensic in nature.
(2) Forensic audits are performed by law fi rms; they are not performed by CPA fi rms.
(3) Forensic audits are equivalent to compliance audits.
(4) Forensic audits are usually performed in situations in which fraud has been found or is
suspected.
k. What best describes the purpose of the auditors’ consideration of internal control in a
fi nancial statement audit for a nonpublic company?
(1) To determine the nature, timing, and extent of audit testing.
(2) To make recommendations to the client regarding improvements in internal control.
(3) To train new auditors on accounting and control systems.
(4) To identify opportunities for fraud within the client’s operations.
l. Which of the following is an example of a compliance audit?
(1) An audit of fi nancial statements.
(2) An audit of a company’s policies and procedures for adhering to environmental laws
and regulations.
(3) An audit of a company’s internal control over fi nancial reporting.
(4) An audit of the effi ciency and effectiveness of a company’s legal department.

2-30 2–30. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
A a. Which of the following organizations can revoke the right of an individual to practice as a
CPA?
(1) The Public Company Accounting Oversight Board.
(2) The American Institute of Certifi ed Public Accountants.
(3) The Securities and Exchange Commission.
(4) The applicable state board of accountancy.
B b. The AICPA over time has played an important role in standards setting. Which of the following
standards are currently established by the AICPA?
(1) Accounting standards applicable to nonpublic companies.
(2) Auditing standards applicable to audits of nonpublic companies.
(3) Quality control standards applicable to audits of public companies.
(4) Standards for reviews of the interim fi nancial information issued by public companies.
C c. Which of the following does the FASB consider a source of nonauthoritative guidance for
use when there is no authoritative guidance available?
(1) The FASB Codifi cation.
(2) FASB Concepts Statements.
(3) SEC Rules.
(4) SEC Interpretive Releases
D d. Financial statement audits performed under PCAOB requirements are designed to provide
which type(s) of assurance with respect to the detection of material misstatements due to
errors or fraud?
Reasonable Absolute
1 Yes Yes
2 Yes No
3 No Yes
4 No No
E e. A basic objective of a CPA fi rm is to provide professional services that conform with professional
standards. Reasonable assurance of achieving this basic objective is provided through:
(1) Compliance with generally accepted reporting standards.
(2) A system of quality control.
(3) A system of peer review.
(4) Continuing professional education.
F f. Which of the following is not explicitly included in a standard report for a nonpublic
company?
(1) The CPA’s opinion that the fi nancial statements comply with generally accepted
accounting principles.
(2) That generally accepted auditing standards were followed during the audit.
(3) That internal control of the client was satisfactory.
(4) An identifi cation of the fi nancial statements audited.
G g. The general group of the 10 PCAOB Auditing Standards requires that:
(1) The auditors maintain an independent mental attitude.
(2) The audit be conducted in conformity with generally accepted accounting
principles.
(3) Assistants, if any, be properly supervised.
(4) The auditors obtain an understanding of internal control.
H h. Which AICPA quality control standard would most likely be satisfi ed when a CPA fi rm
maintains records indicating which partners or employees of the fi rm were previously
employed by the CPA fi rm’s clients?
(1) Professional relationship.
(2) Engagement performance.
(3) Relevant ethical requirements.
(4) Monitoring.
I i. An audit provides reasonable assurance of detecting material:
Fraudulent Financial Misappropriation
Reporting of Assets
1 Yes Yes
2 Yes No
3 No Yes
4 No No
J j. Which of the following is not included in an integrated audit report on the fi nancial statements
of a public company?
(1) The report states that the audit was performed in accordance with AICPA standards.
(2) The report indicates that the fi nancial statements are the responsibility of management.
(3) The report indicates that the auditors have also audited the effectiveness of the company’s
internal control.
(4) The report is signed in the name of the CPA fi rm.
K k. Audit fi rms that are subject to inspections by the PCAOB staff include:
(1) All audit fi rms.
(2) Audit fi rms that are registered with the SEC.
(3) Audit fi rms that are registered with the PCAOB.
(4) Audit fi rms that are registered with a state board of accountancy.
L l. Which of the following is not a difference noted when comparing the AICPA audit report
to the international audit report?
(1) The international audit report may use the phrase “true and fair view.”
(2) The international audit report may be signed using the personal name of the audit
partner, the audit fi rm, or both.
(3) The international audit report requires inclusion of the city of the CPA fi rm offi ce that
performed the audit.
(4) The international audit report includes an opinion on internal control.

2–30. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following organizations can revoke the right of an individual to practice as a
CPA?
(1) The Public Company Accounting Oversight Board.
(2) The American Institute of Certifi ed Public Accountants.
(3) The Securities and Exchange Commission.
(4) The applicable state board of accountancy.
b. The AICPA over time has played an important role in standards setting. Which of the following
standards are currently established by the AICPA?
(1) Accounting standards applicable to nonpublic companies.
(2) Auditing standards applicable to audits of nonpublic companies.
(3) Quality control standards applicable to audits of public companies.
(4) Standards for reviews of the interim fi nancial information issued by public companies.
c. Which of the following does the FASB consider a source of nonauthoritative guidance for
use when there is no authoritative guidance available?
(1) The FASB Codifi cation.
(2) FASB Concepts Statements.
(3) SEC Rules.
(4) SEC Interpretive Releases
d. Financial statement audits performed under PCAOB requirements are designed to provide
which type(s) of assurance with respect to the detection of material misstatements due to
errors or fraud?
LO 2-1
LO 2-2
LO 2-2
LO 2-1
Objective
Questions
Reasonable Absolute
(1) Yes Yes
(2) Yes No
(3) No Yes
(4) No No

She proposed to give the controller, if appointed, an internal auditing staff to carry on such
continuing investigations of accounting data as appeared necessary. Evaluate this proposal.
2–28. Reed, CPA, accepted an engagement to audit the fi nancial statements of Smith Company.
Reed’s discussions with Smith’s new management and the predecessor auditor indicated the
possibility that Smith’s fi nancial statements may be misstated due to the possible occurrence
of errors, fraud, and illegal acts.
a. Identify and describe Reed’s responsibilities to detect Smith’s errors and fraud. Do not
identify specifi c audit procedures.
b. Describe Reed’s responsibilities to detect Smith’s material noncompliance with laws. Do
not identify specifi c audit procedures.
c. Identify and describe Reed’s responsibilities to report Smith’s noncompliance with laws.
(AICPA, adapted)
2–29. While the AICPA administers a peer review program for CPA fi rms, the PCAOB staff performs
practice inspections.
a. Identify the two basic types of peer review.
b. On what part of a fi rm’s practice does the PCAOB staff focus its inspections?
c. Describe a PCAOB inspection.
d. Describe how the PCAOB staff selects an audit engagement for inspection.
LO 2-3
Required:
LO 2-7
Required:
e. A basic objective of a CPA fi rm is to provide professional services that conform with professional
standards. Reasonable assurance of achieving this basic objective is provided through:
(1) Compliance with generally accepted reporting standards.
(2) A system of quality control.
(3) A system of peer review.
(4) Continuing professional education.

f. Which of the following is not explicitly included in a standard report for a nonpublic
company?
(1) The CPA’s opinion that the fi nancial statements comply with generally accepted
accounting principles.
(2) That generally accepted auditing standards were followed during the audit.
(3) That internal control of the client was satisfactory.
(4) An identifi cation of the fi nancial statements audited.
g. The general group of the 10 PCAOB Auditing Standards requires that:
(1) The auditors maintain an independent mental attitude.
(2) The audit be conducted in conformity with generally accepted accounting
principles.
(3) Assistants, if any, be properly supervised.
(4) The auditors obtain an understanding of internal control.
h. Which AICPA quality control standard would most likely be satisfi ed when a CPA fi rm
maintains records indicating which partners or employees of the fi rm were previously
employed by the CPA fi rm’s clients?
(1) Professional relationship.
(2) Engagement performance.
(3) Relevant ethical requirements.
(4) Monitoring.
i. An audit provides reasonable assurance of detecting material:

Fraudulent Financial Misappropriation
Reporting of Assets
(1) Yes Yes
(2) Yes No
(3) No Yes
(4) No No
j. Which of the following is not included in an integrated audit report on the fi nancial statements
of a public company?
(1) The report states that the audit was performed in accordance with AICPA standards.
(2) The report indicates that the fi nancial statements are the responsibility of management.
(3) The report indicates that the auditors have also audited the effectiveness of the company’s
internal control.
(4) The report is signed in the name of the CPA fi rm.
k. Audit fi rms that are subject to inspections by the PCAOB staff include:
(1) All audit fi rms.
(2) Audit fi rms that are registered with the SEC.
(3) Audit fi rms that are registered with the PCAOB.
(4) Audit fi rms that are registered with a state board of accountancy.
l. Which of the following is not a difference noted when comparing the AICPA audit report
to the international audit report?
(1) The international audit report may use the phrase “true and fair view.”
(2) The international audit report may be signed using the personal name of the audit
partner, the audit fi rm, or both.
(3) The international audit report requires inclusion of the city of the CPA fi rm offi ce that
performed the audit.
(4) The international audit report includes an opinion on internal control.
(AICPA, adapted)
2–31. Simulation
Casa Royale, Inc., a nonpublic company, retained Ying and Company CPA to perform an
audit of the fi nancial statements for the current year. Howard Smythe, the partner in charge of
the audit, drafted the following unmodifi ed report:

To the Management of Casa Royale, Inc.:
We have examined the accompanying consolidated balance sheet of Casa Royale, Inc., and
its subsidiaries, as of December 31, 20X1, and the related consolidated statements of income,
retained earnings, and cash fl ows for the years then ended.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
fi nancial statements in accordance with accounting principles generally accepted in the United
States of America; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of consolidated fi nancial statements that are
free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these fi nancial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated fi nancial statements are free of material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated fi nancial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the consolidated
fi nancial statements, whether due to fraud or illegal acts. In making those risk assessments, the
auditor considers internal control relevant to the entity’s preparation and fair presentation of
the consolidated fi nancial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of signifi cant accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated fi nancial statements.
We believe that the audit evidence we have obtained is adequate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated fi nancial statements referred to above present fairly, in all material
respects, the fi nancial position of Casa Royale, Inc., and its subsidiaries as of December 31,
20X1, and the results of their operations and their cash fl ows for the years then ended in accordance
with auditing standards generally accepted in the United States of America.
Howard Smythe , Partner
Phoenix, Arizona
February 12, 20X2
Reviewer’s Comments
Comment Is
Correct (yes or no)
a. The report should not be addressed to management.
b. The report should indicate that we have “audited,” rather than “examined,”
the fi nancial statements (fi rst paragraph after introduction).
c. The report should not indicate anything concerning management’s
responsibility for internal control.
d. The report should state that the auditors’ responsibility is to express
“reasonable assurance,” not an opinion (fi rst paragraph under “auditor’s”
responsibility).
e. The audit is designed to assess risks of material misstatements due to
errors or fraud; the term “illegal acts” is incorrect (second paragraph
under auditor’s responsibility).
f. The report should not refer to the auditors “evaluating the appropriateness
of accounting policies,” since those are the responsibility of management.
g. The evidence should be suffi cient and appropriate rather than “adequate”
(third paragraph under auditor’s responsibility).

Reviewer’s Comments
Comment Is
Correct (yes or no)
h. The opinion should not include “in all material respects” since the auditors
are providing an opinion on the accuracy of the fi nancial statements
(opinion paragraph).
i. The opinion should be on “accounting principles generally accepted in the
United States of America,” not on auditing standards (opinion paragraph).
j. The signature on the report should be that of the CPA fi rm, not that of
the partner.