AUDITING QUESTIONS

1) Define assurance, attestation, and auditing in the context of “lending credibility.”?
Assurance refers to the lending credibility to information and it may be nonfinancial or
financial. Assurance may include the accuracy to advertisements and statistics on investment
performance. Auditing refers to lending credibility to the financial statement. Auditing is a form
of assurance that accounts and audits financial statements in large and medium companies.
Attestation is the lending credibility to nonfinancial statements. It is a type of assurance services
that deals with non-audit services mainly in small companies.
2) What is the difference between a significant deficiency and a material weakness? 
Significant deficiencies refer to the control weaknesses which require to be reported.
They include conditions considered important to warrant the management’s attention from the
auditor. Significant deficiencies prevent the employees or the management from detecting or
preventing misstatements that may be in financial statements. Material weakness is a critical
form of control weakness that refers to a deficiency where there is a possibility that material
misstatement on financial statement may not be corrected or detected on time. The main
difference between significant deficiency and material deficiency is the magnitude of the
potential misstatement to financial statements.
3) Donna Prima, CPA, was engaged to review the unaudited financial statements of Rooster
Restaurants Inc., a nonpublic company. During her review, Donna found that Rooster
had not capitalized leases as required by GAAP. The result was so material, that Donna
modified the standard review report to state that “the financial statements are not in
conformity with GAAP.”
Required:

AUDITING QUESTIONS 3
Is Donna’s report in accordance with professional standards? If not, what should she
have done under the circumstances? Explain. 
Donna’s report is in accordance with the professional standards. Donna had found out
that leases were not capitalized as required by GAAP which requires that all leases be capitalized
accordingly. This was so material and it would have been prevented. According to the standards
of reporting, the auditor must state in his report whether they financial statements that are
presented are in accordance to the generally accepted principles of accounting. In this case,
Donna, as required by GAAP reported that the financial statements were not in conformity.

4. During the audit of a corporation’s major division, an auditor interviewed an accounting
   clerk. The clerk told the auditor that she believes that the division has been capitalizing
   research and development expenses (GAAP requires that all R&D costs be charged to
   ordinary expense in the period in which they are incurred). R&D is a significant part of
   the division’s budget. If this information is found to be true, the division may have to
   expense millions of dollars previously capitalized and significantly reduce its operating
   profit. The auditor has not performed any testing to determine whether this problem
   actually exists but has discussed the potential problem with the division controller and
   you, the director of internal audit.
   The following day, you received the following e-mail from the company president:
   The controller of Division B informs me that you have discovered a questionable account
   classification dealing with research and development expense. I am aware of the issue.
   You are directed to discontinue any further investigation of this matter until I inform you
   to proceed. Under the confidentiality standard of your profession, I also direct you not to
   discuss this matter with other managers, the audit committee, or the outside auditors.

AUDITING QUESTIONS 4

As the director of internal audit, write a short memo in response to the president’s e-mail.
Be sure to explain the position you are taking and why this position is appropriate. 
As an auditor to your organization, I am obligated to carry out audits as per the
company’s request and I hereby discontinue the investigation on the matter at hand. However, as
a requirement of exercising my professional and ethical duty, I have an obligation to discuss with
the managers and the audit committee on matters concerning the work I have been doing.

5. List and discuss at least six groups or parties who might be interested in the quality of an
   organization’s internal control structure?
   There are different parties interested in the quality of an internal control structure of an
   organization. They include company directors, owner of the company, the government, GAAS
   organization, the auditing standards board and PCAOB.
   The quality of the internal control structure enables the directors to determine policies,
   take corrective action on implementation or on a defective policy and monitor performance. The
   owner of the company is able to tell how the company is doing by observing the internal control
   structure. Form the financial reports, the government is able to tell whether a company complies
   with the taxation system in the region. GAAS ensures that the accounting standards are the same
   in all the companies. The auditing standards board also ensures that the standards of auditing are
   followed. PCAOB is the accounting oversight board that provide independent external oversight
   on audits in the public sector.
6. Identify and discuss four reasons for the rise of assurance services?

AUDITING QUESTIONS 5
The rise of assurance services is as a result of the required assurance function in an attribute
for information such as reliability, relevance, fair and true representation as well as
comparability. These attributes are a requirement on top of quality information as required by the
users of assurance services. The need for financial report audit that calls for assurance services
arise because of the following conditions: conflict of interest, consequence, complexity and
remoteness.
In the conflict of interest, the organization’s owner may perceive potential or actual conflict
with the management and assurance services are sought for to eliminate uncertainty between the
two. When the organization requires to make decisions with consequence, the assurance services
would be required. In the presence of complexity in subject matter and the process through
which the data is converted to information, such as in financial reports, assurance services are
very important. Finally, remoteness occurs when the owner of a company and the manager are
further apart and assurance services are required to ensure that the information reaching the
owner is the correct one.