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Complete Solution manual for The Role of the Public Accountant in the American Economy 22ND EDITION. ALL CHAPTERS COVERED WITH THEIR ANSWERS$13.99
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The Solutions Manual Of The Role of the
Public Accountant in the American
Economy
B
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CHAPTER 1
1-1
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Review Questions
The ―crisis of credibility‖ largely arose from the number of companies that
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restated their previously issued financial statements as a result of accounting
irregularities and fraud. Especially responsible were the very visible Enron and
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WorldCom fraud cases. Both companies filed for bankruptcy and constituted the
largest companies in American history to do so. The extent of the accounting
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irregularities and fraud being investigated and disclosed brought into question the
effectiveness of financial statement audits. In addition, the criminal conviction of
Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of
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destroying documents related to the Enron case brought into question the ethics
standards of the profession.
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1-2 Assurance services are professional services that enhance the quality of
information, or its context, for decision-making. The two types are: (a) those that
increase the reliability of information and (b) those that involve putting
information in a form or context that facilitates decision-making.
,1-3 A financial statement audit is, by far, the most common type of attest
engagement. The overall assertion, made by management, most frequently is that
the financial statements follow generally accepted accounting principles.
1-4 A large corporation with securities listed on a stock exchange is required by
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the rules of the stock exchange and by the rules of the Securities and Exchange
Commission to provide an audit report with the annual financial statements
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furnished to its stockholders. It also is required to engage the auditors to provide an
opinion on its internal control. Apart from legal requirements, however, a large
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listed corporation recognizes that it must maintain investor confidence in the
reliability of its financial statements and internal control over financial reporting if
it is to continue to be able to secure capital from the public. The report by a firm of
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certified public accountants adds credibility to the financial statements prepared by
the corporation. When a small family-owned enterprise elects to have an audit, the
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purpose usually is to use the auditors' report to support an application for a bank
loan.
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1-5 A report by an independent public accountant concerning the fairness of a
company's financial statements is commonly required in the following situations:
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(1) Application for a bank loan.
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(2) Establishing credit for purchase of merchandise, equipment, or other assets.
(3) Reporting operating results, financial position, and cash flows to absentee
owners (stockholders or partners).
(4) Issuance of securities by a corporation.
,(5) Annual financial statements by a corporation with securities listed on a stock
exchange or traded over the counter.
(6) Sale of an ongoing business.
(7) Termination of a partnership.
1-6 To add credibility to financial statements is to increase the likelihood that
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they have been prepared following the appropriate criteria, usually generally
accepted accounting principles. As such, an increase in credibility results in
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financial statements that can be believed and relied upon by third parties.
1-7
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Business risk is the risk that the investment will be impaired because a
company invested in is unable to meet its financial obligations due to economic
conditions or poor management decisions. Information risk is the risk that the
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information used to assess business risk is not accurate. Auditors can directly
reduce information risk, but have only limited effect on business risk.
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1-8 At the beginning of the century, the principal objective of auditing was the
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prevention and detection of fraud. Audit work centered on the balance sheet,
because the income statement was regarded as highly confidential and not for
public disclosure. Today, the principal objective of auditing is to form an opinion
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on the fairness of financial statements and their conformity with generally accepted
accounting principles. But the professional standards also require that an audit be
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designed to provide reasonable assurance of detecting material misstatements, due
to errors or fraud. Particular emphasis is placed on the income statement which is
of great importance to investors. Auditing today also has the objectives of meeting
the requirements of the Securities and Exchange Commission (SEC) and the Public
Company Accounting Oversight Board for public companies.
, 1-9 The statement is incorrect. The increasing integrated databases of today,
along with available audit procedures make audited entire populations a possibility
in many situations.
1-10 An operational audit attempts to measure the effectiveness and efficiency of
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a specific unit of an organization. It involves more subjective judgments than a
compliance audit or an audit of financial statements because the criteria of
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effectiveness and efficiency of departmental performance are not as clearly
established as are many laws and regulations or generally accepted accounting
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principles.
The report prepared after completion of an operational audit is usually directed to
management of the organization in which the audit work was done.
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1-11 A compliance audit is an audit to determine whether financial reports or
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other assertions are in compliance with established criteria. The necessary
ingredients are verifiable data and the existence of standards established by an
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authoritative body. An operational audit, on the other hand, is a review of a
department or other unit of a business or governmental organization to measure the
effectiveness and efficiency of operations. Internal auditors often perform
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operational audits as do auditors employed by the Government Accountability
Office (GAO) of the federal government.
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1-12 Internal auditors must be independent of the department heads and other line
executives whose work they review. However, internal auditors are not
independent in the same sense as a public accounting firm.
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