Chapter 03 Ans
Chapter 03 Ans
Chapter 03 Ans
I. Review Questions
Internal auditors are employees of the organization for which they do audits.
They may perform financial auditing, compliance auditing, or operational
auditing. They are not independent in the sense that external auditors are,
although they may attain a degree of independence by their position in the
organization.
8. There is always a chance something will slip by the auditor, even when the
auditor does the best audit possible. Auditors focus on the areas where the risk
of material errors and irregularities is greatest, which provides a high level of
assurance that all material misstatements will be detected. However, it does
not provide a perfect guarantee that the audit will discover all material
misstatements.
1. b 7. c 13. d 19. b
2. c 8. a 14. c 20. a
3. b 9. a 15. d 21. b
4. b 10. d 16. b
5. c 11. b 17. c
6. d 12. a 18. a
Case 3. a. The higher the level of reporting, the greater the authority possessed
by the unit to which the report is directed. Greater authority enhances the
probability to prompt implementation of the auditor’s recommendations.
To this end, many companies have their internal auditors report directly to
the chief executive officer.
Case 5. a. Objectivity means that the internal auditor must have and maintain an
unbiased and independent viewpoint in the performance of audit tests,
evaluation of the results, and issuance of the audit findings. Objectivity
would not exist if the internal auditor were to audit his or her own work.
Objectivity implies that the internal auditor’s judgment is not subordinate
to the judgment of another and that others do not exert an influence over
the internal auditor.
2. No, the responses for b would not be affected by the internal audit
staff’s reporting to an audit committee rather than the controller. To
maintain objectivity, the internal audit staff should refrain from
performing nonaudit functions, such as management decision making,
design and installation of systems, and recordkeeping. Ideally, to
avoid being called on to evaluate its own performance, the internal
audit staff should perform only audit functions. This is true without
regard to organizational reporting relationships.
d. Dear President:
We recommend that the manager of internal audit report to
the vice president rather than the controller. A large part of
the work of the internal auditors do involves an
examination of the accounting system and related
transactions which are functions for which the controller is
directly responsible. If the manager of internal audit
reports to the controller, the controller may prevent the
internal auditors from looking at issues that need to be
examined. Further, the internal audit manager may feel
compelled to avoid being completely candid about matters
under the supervision of the controller.
We will be pleased to discuss these and any other issues
with you at your convenience.
Sincerely,
Case 6. Perez is taking a very narrow view of the CPA’s role in the economy. The
reserved, aloof attitude recommended by Perez was perhaps justified a half-
century or more ago when the primary objective of many audits was the
discovery of errors, defalcations, and other forms of fraud.
In the current era, the auditors’ role has changed from that of a “detective” to
that of accounting experts whose breadth of experience in the audit of many
companies enables them to offer clients constructive advice which leads to
compliance with accounting principles, improved accounting methods, better
financial administration, and more profitable operation.
The auditors can be independent and objective without being cold and
impersonal. They should never convey the impression that they regard the
client’s employees as potential embezzlers. Neither should they take over
office equipment or accounting records in a manner that suggests lack of
consideration for the convenience and status of the client’s staff.
The development of social relationships with the client outside the office, as
advocated by Ferrer, is helpful to the CPA partner as it is to the architect, the
physician, the attorney, and members of other professions. The successful
CPA will usually be an active community leader, well known in civic
organizations, social clubs, educational circles, and many other related areas.
The CPA not only attracts new clients but contributes to the advancement of
the total environment in which the CPA’s professional talents are employed.
The most difficult issue posed by Perez and Ferrer is whether the development
of very close friendships between the CPA and staff on the one side and the
client and staff on the other may cause the CPA to lose independence to some
degree. This possibility cannot be easily dismissed. In assessing relationships
with the client, the CPA must not only consider the fact of being independent,
but also the recognition of independence by the public. The CPA must ask the
question: Would an outsider having full knowledge of the relationships
between the CPA and a client have doubts about the CPA’s independence?
This hard-to-define narrow path between cordial CPA-client relations on the
one hand and the threat of loss of public confidence in the CPA’s
independence on the other demands that the CPA exercise care and judgment
in social relationships with clients. Partners, who by the very nature of their
responsibilities must meet with business executives on their own ground, tend
to develop social contacts with clients. Presumably, partners in a public
accounting firm have demonstrated the maturity, judgment, and breadth of
view that will enable them to maintain a proper balance between friendship
with clients and professional independence.
When the element of sex enters the picture, the formulation of precise rules of
conduct becomes more difficult, if not impossible. Assume, for example, that
a female executive and part owner of a client company and a male partner of
the company’s public accounting firm are known to be constant companions
during off business hours. The public would probably find it difficult to
believe that the CPA would be truly independent in auditing the business in
which his friend played such an important role.