Write a brief response, 30 to 90 words for each question.
Text Problem 1-20
• Distinguish between auditing and accounting.
Text Problem 1-21
• Differentiate between the three main types of audits and auditors.
Text Problem 2-18
Text Problem 2-21
Text Problem 2-20
1-20 (Objective 1-7) Five college seniors with majors in accounting are discussing alternative career plans. The first senior plans to become an internal revenue agent because his primary interest is income taxes. He believes the background in tax auditing will provide him with better exposure to income taxes than will any other available career choice. The second senior has decided to go to work for a CPA firm for at least 5 years, possibly as a permanent career. She believes the variety of experience in auditing and related fields offers a better alternative than any other available choice. The third senior has decided on a career in internal auditing with a large industrial company because of the many different aspects of the organization with which internal auditors become involved. The fourth senior plans to become an auditor for the GAO because she believes that this career will provide excellent experience in computer risk assessment techniques. The fifth senior would like to ultimately become a certified fraud examiner but is not sure where the best place is to begin his career so that he can achieve this long-term goal.
• a. What are the major advantages and disadvantages of each of the four types of auditing careers?
b. What do you think is the best early career choice for the senior interested in ultimately becoming a certified fraud examiner?
c. What other types of auditing careers are available to those who are qualified?
1-21 (Objectives 1-6, 1-7) In the normal course of performing their responsibilities, auditors often conduct audits or reviews of the following:
• 1. Federal income tax returns of an officer of the corporation to determine whether he or she has included all taxable income in his or her return.
2. Financial statements for use by stockholders when there is an internal audit staff.
3. A bond indenture agreement to make sure a company is following all requirements of the contract.
4. Internal controls at a casino to ensure the casino is in compliance with federal and state regulations.
5. Computer operations of a corporation to evaluate whether the computer center is being operated as efficiently as possible.
6. Annual statements for the use of management.
7. Operations of the IRS to determine whether the internal revenue agents are using their time efficiently in conducting audits.
8. Statements for bankers and other creditors when the client is too small to have an audit staff.
9. Financial statements of a branch of the federal government to make sure that the statements present fairly the actual disbursements made during a period of time.
10. Federal income tax returns of a corporation to determine whether the tax laws have been followed.
11. The computer operations of a large corporation to evaluate whether the internal controls are likely to prevent misstatements in accounting and operating data.
12. Disbursements of a branch of the federal government for a special research project to determine whether the expenditures were consistent with the legislative bill that authorized the project.
2-18 (Objective 2-6) Sarah O’Hann enjoyed taking her first auditing course as part of her undergraduate accounting program. While at home during her semester break, she and her father discussed the class and it was clear that he didn’t really understand the nature of the audit process as he asked the following questions:
a. What is the main objective of the audit of an entity’s financial statements?
b. The audit represents the CPA firm’s guarantee about the accuracy of the financial statements, right?
c. Isn’t the auditor’s primary responsibility to detect all kinds of fraud at the client?
d. Given the CPA firm is auditing financial statements, why would they need to understand anything about the client’s business?
e. What does the auditor do in an audit other than verify the mathematical accuracy of the numbers in the financial statements?
2-21 (Objective 2-6) Ray, the owner of a small company, asked Holmes, a CPA, to conduct an audit of the company’s records. Ray told Holmes that an audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to provide an auditor’s report within 3 weeks. Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted.
Holmes hired two accounting students to conduct the audit and spent several hours telling them exactly what to do. Holmes told the students not to spend time reviewing internal controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and summarizing the data in the accounting records that support Ray’s financial statements. The students followed Holmes’s instructions and after 2 weeks gave Holmes the financial statements, which did not include footnotes. Holmes reviewed the statements and prepared an unqualified auditor’s report. The report did not refer to generally accepted accounting principles or to the consistent application of such principles.