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CHAPTER 1FINANCIAL ACCOUNTING ANDITS ECONOMIC CONTEXTISSUES FOR DISCUSSIONID1–1Security analysts and stockholders: These users would use financial statements to try to estimate the future earnings and cash flow potential of the company, which would be used to project a value for the company’s stock.Bank loan officers: These users would use the financial statements to determine the ability of a company to repay loans to the bank.A company’s customers and suppliers: These users would use financial statements todetermine whether to extend credit to the company (suppliers) or whether to rely upon the company to be a supplier (customers). Both suppliers and customers would also use the financial statements to monitor the company’s profit margins.Public utilities: This group would use the financial statements to determine the company’s growth rate and how that might impact upon the company’s utility needs. Also, they would evaluate the company’s ability to pay its bills.Labor unions: These groups would use the financial statements to monitor the profitability of the company to help determine the amount of pay raises and benefits that it will negotiate for from the company.A company’s managers: The company’s managers will use the financial statements to assessthe overall financial health of the company. This could impact the managers in a number of ways: raises, promotion opportunities, performance of other departments, etc.ID1–2The board of directors serves various functions for a company. One is to represent and protect the interests of the stockholders who are not on the board. Another is to provide oversight and input to management. The managers are involved in running the business on a day-to-day basis whereas the board is more focused on the bigger, long-term picture. A weak board may not ask probing questions of management but instead may take everything at face value and believe anything that management says to them. A healthy management team would want a strong board that delivers valuable input. A management team that wants a weak board of directors may be trying to hide something (management fraud).Auditors are concerned with management fraud because, if there is a problem, in many cases the auditors will be sued by the stockholders on the basis that the auditors should have detected the fraud.ID1–3The function of the audit committee is to provide a channel whereby the auditors report their findings and concerns, if any, to the board of directors. Typically there are outside members of the board that are on the audit committee so that if the auditors have concerns about management’s financial statements or activities, then the auditors have a way to speak directly to the board of directors.The auditors are in a sensitive position because the financial statements and activities that they are auditing are prepared by the same people who hire and pay the auditors. Therefore, they may be reluctant to jeopardize their relationship with the company by being too negative.ID1–4Since Pepsi’s profits increased by a greater percentage than sales increased, it must mean that expenses as a percentage of sales dropped. Pepsi was able to improve its profitability per dollar of sales.The growth in equity was larger than the growth in assets, indicating that Pepsi reduced its liabilities. The financing activities verify that Pepsi used a significant amount of cash, partially to reduce debt. In addition to the reduction in liabilities, the strong cash flow from operations was used to purchase additional assets for the company.ID1–5Creditors would impose these types of restrictions on Continental Airlines so that the creditors would be protected for their loans. These types of restrictions are fairly common and act as a trip wire to warn the creditors that business may not be going well. The cash restriction would force Continental to have enough cash to pay the interest on the debt, the minimum stockholders’ equity makes sure that there are assets to act as collateral for the loans, and the restriction of dividends insures that management doesn’t distribute cash or assets out to the stockholders and not leave assets in the company to satisfy the creditors.These restrictions act as trip wires in that as soon as a restriction is violated the creditors can call the debt and force the company to pay back the loans. What is more typical is for the loans to be restructured. This usually means higher interest rates and fees to do the restructuring. These all put the creditors in a better position to protect their loans.ID1–6Companies would usually engage in this type of behavior to try to improve their stock price. By showing higher revenues or lower expenses investors are more likely to reward the company with a higher stock price. Companies that have negative cash flow are under a lot of pressure to maintain a high stock price since selling stock is the only way to fund the business. This type of incentive can lead to questionable behavior.The ethical implications are significant because if investors lose faith in the financial statements that are reported this would severely impact the stock market. A strong driver to a robust economy is access to capital (stock markets). If this source is reduced because investors don’t believe the numbers that are reported, a very bad impact on the overall economy would result.ID1–7This is the normal statement that an auditor would make about a company whose books it had audited and found no significant problems. This would be part of what is called a “non-qualified opinion”. If there was a particular item that the auditors did not agree with they would issue a “qualified opinion” – they would agree with everything except the qualified item that would be identified.“In our opinion”, it is their opinion and not a fact, “fairly, in all material respects”, means that the auditors can not say that every single number is exactly accurate to the penny but that the numbers are generally about right. This reflects the concept of materiality. The auditors believe that all material items have been presented accurately. “in conformity with generally accepted accounting principles”, this means that the financial statements have been compiled in a way that meets all of the accounting principles that are called GAAP.ID1–8Corporate governance describes the relationship among the stakeholders of a company, mainly : the shareholders, the Board of Directors, management and the company’s auditors.Corporate governance mechanisms encourage management and the Board of Directors to act in the best interest of the shareholders and to provide the shareholders with accurate and timely financial information. The Sarbanes-Oxley Act was passed to upgrade the financial transparency of corporate operations, requiring increased financial disclosures and management responsibilities for the intergrity of the financial statements. Improved information provided to shareholders and other providers of capital will strenghten the confidence in the financial system, ultimately benefitting both providers and users of capital.ID1–9Management is charged with the responsibility to benefit the shareholders’ investment in the company. Choosing investments that will boost the short-term results of the company in lieu of long-term gains does not meet this requirement. While satisfying the needs of Wall Street analysts for short-term results, a management decision to forego larger long-term returns violates the relationship between the owners of the company and the management of the company. Many observers feel that short-term profit pressures from analysts have caused management to ignore its responsibility to work for the long-term benefit of the shareholder.ID1–10While the NYSE is reacting to potential rules changes based on marketing considerations, the SEC is reacting based on a desire to improve the quality of financial information that companies disclose. The SEC has a very strong argument in that the US equity markets are the largest and most liquid markets in the world. All other countries would love to have a financial market like the ones that exist in the US.One of the possible reasons that other countries don’t want to adopt the same accounting rules as exist in the US is that their companies may not compare well with US companies that have been operating under the stricter rules. To lower the accounting standards may have the impact of influencing the US capital markets to look more like capital markets in other countries, which would not be good for the US economy.ID1–11Many experts agree that one of the driving forces recently in economic growth has been the globalization of the economy, with countries across the world doing more and more business with each other. This globalization is threatened when the companies cannot agree on a uniform set of guidelines covering a business practice as important as financial reporting. The flow of capital is dependent on transparent and accurate financial information. If countries cannot agree on accounting standards, the ability of those companies to do business in each other’s markets, and the ability of capital to move from one country to another, will be limited.ID1–12Management accounting is the accounting system that generates information that is used exclusively by the managers of the company. Financial accounting refers to the financial statements that are prepared and distributed outside of the company. So in many cases management accounting information is the operational information used by the managers of the company. This can be very proprietary to the company and so is not made public.Management accounting numbers are not subject to audit and therefore are prepared in whatever form is helpful to the manager.Financial accounting information is audited and therefore has to follow GAAP. Its primary purpose is to be used by people outside of the company.ID1-13a. Home Depot is a large retailing company, focusing on hardware sales to consumers andcontractors. It is a retailer because it does not manufacture the goods that it sells. It buys products from vendors and offers those products for sale in its stores.b. The firm of KPMG audits the financial statements of Home Depot. The audit report consists of4 paragraphs. The first paragraph states what years and financial statements were auditedand therefore being commented upon by this audit report. The second paragraph explains what an audit is intended to do and how the company has gone about doing this audit. The third paragraph states the auditors’ opinion regarding the financial statements that have been audited. The final paragraph indicates a change in accounting methods by the company.c. Net income in 2003 was $4,304,000,000, for 2002 net income was $3,664,000,000 and for2001 net income was $3,044,000,000.d. 2003 2002Current liabilities $9,554 27.7% $8,035 26.8%Long-term liabilities 2,476 7.2% 2,174 7.2%Total assets $34,437 $30,011From 2002 to 2003 Home Depot increased its current liabilities by $1.5 billion and increased its long-term liabilities by $300 million. As a percentage of total assets, however, long-term liabilities remained constant. The ratio of current liabilities to total assets increased by nearly a percentage point. This shows that the increase in total assets (over $4 billion) was generated by the increase in current liabilities and net income.e. Cash from operating activities was $6,545,000,000 in 2003, in 2002 it was $4,802,000,000 andin 2001 was $5,963,000,000.f. Home Depot is considered to be one of the best-managed companies in the US. The companyis extremely profitable (see c above), growing and well-capitalized. This financial condition is reflected in the company’s cash balance of over $2.8 billion and shareholders’ equity of over $22 billion.。
反腐败与反商业贿赂管理制度一、概述 Overview本制度为预防公司经营管理过程中的腐败行为，切实做好反商业贿赂和腐败工作，加强企业内控机制，强化制度监督和制度反腐，加强对重点部门、岗位人员的监督和管理力度，确保治理商业贿赂长效机制，防止各种不正当行为的发生。
This procedure aims to prevent corrupt behavior in the company's business management process, effectively carry out anti commercial bribery and corruption work, strengthen the internal control mechanism of the enterprise, strengthen institutional supervision and anti-corruption, strengthen the supervision and management of key departments and positions, ensure a long-term mechanism for controlling commercial bribery, and prevent the occurrence of various improper behaviors.适用于XX股份有限公司（以下简称“公司”）及其分/子公司、中心、各事业部（以下统称“各单位”）一切经营管理活动或对外接触的活动。
这些活动包括但不限于与政府部门接触、产品销售、原辅材料采购与验收、工程施工、设备采购和维护、质量监督等经济活动。
公司及下属各单位全体员工（包括全职员工和兼职员工），所有与集团有业务来往的客户、供应商、服务商、承包商，均在本程序管制范围内。
Applicable to all business management activities or external contact activities of XX CO.,LTD. (hereinafter referred to as the "Company") and itsbranches/subsidiaries, centers, bases, and business units (hereinafter collectively referred to as the "Units"). These activities include but are not limited to economic activities such as contact with government departments, product sales, procurement and acceptance of raw and auxiliary materials, engineering construction, equipment procurement and maintenance, and quality supervision. All employees (including full-time and part-time employees) of the company and its subordinate units, as well as all customers, suppliers, service providers, and contractors who have business dealings with the group, are within the control scope of this procedure.二、定义 Definition本程序所规定的腐败、商业贿赂行为是指公司内、外人员采用欺骗等违法、违规手段，谋取个人不正当利益，损害公司正当经济利益的行为；或谋取不当的公司经济利益，同时可能为个人带来不正当利益的行为。
会计英语复习范围一、翻译（英译汉，汉译英各10个，每个1分）Accounting 会计，会计学 accountant 会计师，会计人员 governmental and institutional accounting 政府和事业单位会计 public utilities 公共事业 assurance services 鉴证服务stakeholder 利益相关者deferrals 递延项目replacement cost 重置成本matching principle 配比原则 income statement 损益表、利润表 accounting equation 会计等式或会计平衡式 retained earnings 留存收益 net income 净收益 source document 原始凭证 general ledger 总分类账 subsidiary ledger 明细分类账 trial balance 余额试算表 work sheet 工作底稿或工作底表 cash receipts 现金收入 cash payment 现金支出 prepaid expenses 预付费用unearned revenues 预收收入accrued expenses 应计费用accrued revenues 应计收入dividend 股利 economic performance 经济成果，经营成果 gross profit 销售毛利 raw material 原材料 treasury stock 库存股、库藏股 stock options 股票认购权 plant and equipment 厂场设备，固定资产 principal 本金 operating cash flows 经营活动资金流量disclosure notes 报表附注accounting policies 会计政策 savings accounts 储蓄账户owners’ equity 所有者权益 original investment 初始投资 stock split 股票分割 cost accounting 成本会计 cost centre 成本中心 job costing 订单成本计算法 contract costing 合同成本计算法activity based costing 作业成本法management accounting 管理会计standard costing 标准成本法 cost behavior 成本习性、成本形态 International Accounting Standards committee（IASC）国际会计准则委员会 transnational financial reporting 跨国企业财务会计 auditing 审计 analytical procedures 分析性程序 standard audit report 标准审计报告 unqualified opinion 无保留意见 adverse opinion 否定意见 disclaimer of opinion 拒绝表示意见 qualified opinion 保留意见 internal control 内部控制 Risk Management 风险管理 Corporate government 公司治理 Capital Budget 资本预算 GAAP（Generally Accepted Accounting Principles）一般公认会计原则二、多选（10个，每个2分）1. Accounting assumptions. 会计假设⑴Separate entity assumption.会计主体假设⑵Going concern assumption.持续经营假设⑶Accounting-period assumption.会计分期假设⑷Monetary unit assumption.货币计量假设2. Accounting recognition and measurement principles 会计确认和计量原则⑴Cost principle. 历史成本原则⑵Matching principle. 配比原则⑶Conservatism. 谨慎性原则⑷Materiality.重要性原则⑸Differentiate capital and revenue.划分资本性支出和收益性支出⑹Substance over form. 实质重于形式3. External users of accounting information are not directly involved in running the organization. Almost all of us are users of accounting information. They include shareholders, lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press. 会计信息外部使用者不直接参与组织与组织的经营管理，我们所有的人几乎都使用会计信息。
第一位考生：大题内容如下：（1）JIT定义、作用（2）ERP定义、作业（3）FCPA和内控有关的法条（4）standard cost system定义、作用（5）bond of director的责任（6）IFRS 和GAAP对于研发支出的区别第二位考生：（1）四个责任中心的计算和定义（2）考了BRP定义优点和改善（3）supply management chain 定义（4）简单的差异分析计算（5）内部审计三个目的第三位考生：简答题1案例：一家制造业企业。
管理者发觉无法达到最大的产能，而且销售部门一直在抱怨缺货。
（1）成功预算的5大特征（2）定义预算松弛，并写出解决方案（3）区别理想和可实现产能（4）无法实现理想产能什么的（5）降低缺货的好处简答题2（内控、财务会计）一家汽车公司，生产新款、旧款两款汽车。
有三种存货计价法：LIFO、FIFO、特别认定法。
该公司内控部门有6人，都与CEO有关。
首席审计官是由CEO任命的，首席审计官向CFO 报告业务，而且CFO还需要确定内部审计的范围。
（1）内部审计独立性存在哪些问题？如何解决？（2）定义LIFO、FIFO、特别认定法；这三种方法分别有什么优缺点（各一条）；该公司运用那种存货方式（3）该公司旧款汽车价格低，可能会造成亏损，应该做出什么调整方案，才能更好的披露企业的利润（4）IFRS与GAAP之间在存货管理上的主要差别一道内容是有关Capex budget的，相关问题记得的如下，不完整1）master budget的定义和描述2）举出三个master budget的主要组成部分3）master budget可以带给公司的benefit4）根据题目提供的内容和数据做出一个capex budget，需要计算过程5）budget的作用一道内容是有关R&D new facility的，相关问题记得的如下1）题目中列出的五个数据应该如何入账2）列举两个US GAAP和IFRS有关R&D费用方面的不同点3）BOD对于公司运营interest shareholder需要承担的责任4）two provisions of FCPA第一位考生：大题内容如下：（1）JIT定义、作用（2）ERP定义、作用（3）FCPA和内控有关的法条（4）standard cost system定义、作用（5）board of director的责任（6）IFRS 和GAAP对于研发支出的区别1. JIT:The definition ofJIT: lean production, is a demand-pull production system, manufacture eachcomponent in a production line as soon as possible, only when it is needed bythe next step of production lineThe role ofJIT:l It helps in reducing the setup time andprocess cycle timel It enables to minimize the handling cost:move materials from one machine to another, operation in sequence.l It can eliminate the defects, which solveproblem quickly and eliminate the defects quickly. 2. ERP:The definition ofERP：ERP is a software platform that is used toplan and keep records of resources, including finance, labor capacities, materials, property.The advantages ofERP:l ERP system give lower-level managers, workers,customers and suppliers access to detailed and timely operating informationl ERP system is essential to support JITinitiatives because of the effect it has on lead timel ERP uses a single database to collect and feed data into all software applications, allowing integrated, real-time informatio n sharing and providing visibility to the company’s businessprocesses as a whole3. FCPAIt is unlawful tomake payment to foreign officials to assist in obtaining or retaining business4. Standcost systemDefinition: A standcost system uses the stand costs and quantities for three types of manufacturingcost: direct material, direct labor and factory overheadThe role of standcost system:Stand costs are theexpected costs the company should attain. Stand cost system provides a basisfor evaluating performance, control and process improvement.5. The responsibilitiesof board of directorsThe board ofdirectors provides governance, guidance, oversight and commits the timenecessary to fulfill the board objectives. The board members should beobjective, and have the knowledge of the industry, be willing to ask questionson management’s decisions.6. IFRS & GAAP in Research& developmentl IFRS: development can be capitalizedl GAAP: Research &development all shouldbe expensed.第二位考生：（1）四个责任中心的计算和定义（2）考了BRP定义优点和改善（3）supply management chain 定义（4）简单的差异分析计算（5）内部审计三个目的1. Costcenter: focus on costs onlyRevenue center: focus on revenuesonlyProfit center: responsible for bothon the revenue and costs.Investment center: responsible inrevenue, cost and invested capital, which considers the opportunity cost.2. BPRThe definition of business processreengineering: it is a method of creating competitive advantage in which a firmreorganize its operating and management functions, often with the result thatthe positions are modified, combined or eliminatedBPR advantages: eliminate many traditional controls, improve efficiency and productivity, and minimize costs,monitoring internal controlThe way to improve BPR: technological advance, core process redesign,process innovation3. Supply chain management: it is themanagement of flow of goods and services from original sources to final customers.5. Three objectives of internal auditEffectiveness and efficiency ofoperations, reliability of financial reporting and compliance with laws andregulations.第三位考生：案例：一家制造业企业。
年度纳税申报审计报告英文版In the realm of corporate governance and financial transparency, the annual tax return audit report holds a pivotal position. It serves as a comprehensive documentation of a company's financial activities and tax obligations over a fiscal year, providing a snapshot of its financial health and compliance with tax regulations. The report, when prepared in English, not only caters to the global business community but also ensures seamless communication and understanding among stakeholders, auditors, and tax authorities.The structure of an annual tax return audit report typically begins with an executive summary, which outlines the key financial metrics, tax payments made, and any significant observations or recommendations. This summary acts as a roadmap, guiding the reader through the detailed analysis that follows.Subsequently, the report delves into the financial statements, including the balance sheet, profit and loss account, and cash flow statement. These statements present a detailed breakdown of the company's assets, liabilities, income, expenses, and cash flows for the year. It is essential to note any significant deviations from previous years or industry standards, which might indicate financial irregularities or operational challenges.The tax section of the report is particularly crucial, as it details the taxes paid by the company, including income tax, capital gains tax, and any other applicable levies. It also highlights any tax planning strategies employed by the company and their impact on the overall tax liability. It is imperative to ensure that all tax obligations are meticulously calculated and paid on time to avoid any legal implications.The audit section of the report is where the independence and objectivity of the auditing firm come into play. This section details the audit procedures followed, any material findings, and whether the financial statements present a true and fair view of the company's financialposition. Any discrepancies or irregularities identified during the audit are highlighted and recommended for corrective action.In addition to the financial and tax sections, the report also includes a section dedicated to the company's governance practices. This section covers topics such as board structure, board meetings, committee activities, and any related policies or procedures. It is crucial for companies to demonstrate transparency and accountability in their governance practices, as it enhances trust among shareholders and other stakeholders.Finally, the report concludes with a section summarizing the key findings, observations, and recommendations. This section acts as a closing argument, emphasizing the importance of the report's contents and urging stakeholders to take the necessary actions to improve the company's financial health and governance practices.Overall, an annual tax return audit report in English serves as a comprehensive document that not only satisfies legal requirements but also enhances the company'sreputation and credibility. By ensuring accuracy, transparency, and timeliness, companies can build trustwith their stakeholders, attract investors, and foster sustainable growth.**年度纳税申报审计报告的英文版**在公司治理和财务透明度领域，年度纳税申报审计报告具有重要地位。
wrongful acts as price fixing; price fixing occurs when firms illegally control suppliesnorms about what is right and good. Unethical behavior is behavior that individualbehavior is to demonstrate upper-management support. Companies can formalize thisa related concept, but it refers to the overall way in which a business attempts toaffect individual behavior in the workplace. Social responsibility refers to the way in which a business tries to balance its commitments to groups and individuals in itsfive areas: its customers, its employees, its investors, its suppliers, and localpotential misinterpretation of words and phrases such as light, reduced calorie, diet, and low fat; (2) misleading advertising; and (3) advertising of morally objectionableprogram; the audit will determine whether a company fell short on its socialinformation; (2) determining the most appropriate moral values; and (3) making an ethical judgment based on the rightness or wrongness of the proposed activity orwho are affected by it. The norm of rights considers whether an act respects the rights of the individuals involved. The norm of justice considers whether the act is consistent with what is fair. The norm of caring considers whether the act is consistentthem fairly and honestly by charging fair prices, honoring warranties, meetingAnswer: The four basic consumer rights first identified by John F. Kennedy are (1) consumers have a right to safe products; (2) consumers have a right to be informed about all relevant aspects of a product; (3) consumers have a right to be heard; and (4)or sale of stocks. Confidential information is information that is not available to the general public but that is available to a few people because of their position within a company. Investors with inside information are able to sell a stock at a high price just before a piece of negative information becomes public and the price plummets, thuspreventing a big loss. Similarly, an investor with inside information may buy stock at a low price, just before a piece of favorable information becomes public and the pricebecome too active, they will gain too much control over the ways in which those projects are addressed by society as a whole. Other critics claim that businessproactive stance to social responsibility. Companies adopting an obstructionist stance to social responsibility do as little as possible to solve social and environmental problems and may deny or cover up violations. Companies adopting a defensive stance meet the minimum legal requirements, but typically nothing beyond those actions required by law. Companies adopting an accommodative stance meet all legal requirements and will exceed the legal minimums when solicited by individuals or groups in its social environment. Finally, companies adopting a proactive stance actively seek opportunities to contribute to the well being of groups and individuals insocial responsibility: (1) top management must support the effort and develop a policy statement outlining that commitment; (2) a committee of top managers must develop a plan detailing the level of management support; (3) one executive must be put in charge of the firm's agenda; and (4) the organization must conduct occasional socialfive main groups: customers, employees, investors, suppliers, and the local communities where they do business. To be responsible toward their customers, businesses strive to be fair in their pricing, honor warranties, meet delivery commitments, and stand behind the quality of their products. Businesses that are socially responsible toward their employees treat them fairly, make them a part of the team, and respect their dignity and basic human needs. To be responsible toward investors, businesses follow proper accounting procedures, provide appropriate information to shareholders about financial performance, and manage the organization to protect shareholders rights and investments. Businesses are responsible toward suppliers when they provide realistic delivery schedules and reduced profit margins; many businesses keep their suppliers informed about future plans and work to partner with them. To be responsible toward communities, businesses often give back throughand control pollution. Although noise pollution is now attracting increased concern, air, water, and land pollution remain the greatest problems in need of solutions from businesses. Companies often install pollution-controlling devices that prevent eventual buildup of acid rain. Businesses are also taking advantage of new forms of solid-waste disposal; further, they are working to limit toxic wastes left over from their production processes. Recycling has gained tremendous attention from businesses in recent years; some controversy exists regarding proper recycling sincedriven by the state and federal laws that surround consumer rights. Consumers have the right to safe products, a right to be informed about relevant aspects of a product, a right to be heard, a right to choose what they buy, a right to be educated about purchases, and a right to courteous service. Businesses acting responsibly prevent unfair pricing, which comes in the form of price fixing and/or price gouging. In addition, businesses work to promote ethics in advertising. Increased attention is given to proper wording in ads, to whom ads are directed, contents of packages,the accommodative stance, the defensive stance, and the proactive stance. With an obstructionist stance, an organization usually does as little as possible to solve social or environmental problems. When the organization crosses the ethical or legal line that separates acceptable from unacceptable practices, its typical response is to deny or cover up its actions. With an accommodative stance, a firm meets its legal and ethical requirements but will also go further in certain areas. Such firms voluntarily agree to participate in social programs, for example, but solicitors must convince them that given programs are worthy of their support. Firms assuming a defensive stance will do everything that is required of them legally but nothing more. This approach is most consistent with arguments against corporate social responsibility. In taking a proactive stance, a firm practices the highest degree of social responsibility. Firms of this nature take to heart the arguments in favor of social responsibility; they seewithout top management support; top management must issue a statement announcing the commitment. A committee of top managers must then develop a plan detailing the level of management support; some companies set aside percentages of profits for social programs. At this point, managers must set specific priorities. Then, one executive must be put in charge of the firm's agenda; this individual must monitor the program and ensure that its implementation is consistent with the firm's policy statement. The organization must conduct social audits, which are systematic analyses of the firm's success in using funds earmarked for its social responsibility goals.Failing an audit should prompt a rethinking of the program's implementation and its priorities.。
Chapter 1The Demand for Audit and Other Assurance ServicesReview Questions1-1The relationship among audit services, attestation services, and assurance services is reflected in Figure 1-3 on page 12 of the text. An assurance service is an independent professional service to improve the quality of information for decision makers. An attestation service is a form of assurance service in which the CPA firm issues a report about the reliability of an assertion that is the responsibility of another party. Audit services are a form of attestation service in which the auditor expresses a written conclusion about the degree of correspondence between information and established criteria.The most common form of audit service is an audit of historical financial statements, in which the auditor expresses a conclusion as to whether the financial statements are presented in accordance with an applicable financial reporting framework such as U.S. GAAP or IFRS. An example of an attestation ser vice is a report on the effectiveness of an entity’s internal control over financial reporting. There are many possible forms of assurance services, including services related to business performance measurement, health care performance, and information system reliability.1-2 An independent audit is a means of satisfying the need for reliable information on the part of decision makers. Factors of a complex society which contribute to this need are:1. Remoteness of informationa. Owners (stockholders) divorced from managementb. Directors not involved in day-to-day operations or decisionsc. Dispersion of the business among numerous geographiclocations and complex corporate structures2. Biases and motives of providera. Information will be biased in favor of the provider when his orher goals are inconsistent with the decision maker's goals.3. Voluminous dataa. Possibly millions of transactions processed daily viasophisticated computerized systemsb. Multiple product linesc. Multiple transaction locations4. Complex exchange transactionsa. New and changing business relationships lead to innovativeaccounting and reporting problemsb. Potential impact of transactions not quantifiable, leading toincreased disclosures1-3 1. Risk-free interest rate This is approximately the rate the bank could earn by investing in U.S. treasury notes for the same length of timeas the business loan.2. Business risk for the customer This risk reflects the possibility thatthe business will not be able to repay its loan because of economicor business conditions such as a recession, poor managementdecisions, or unexpected competition in the industry.3. Information risk This risk reflects the possibility that the informationupon which the business risk decision was made was inaccurate. Alikely cause of the information risk is the possibility of inaccuratefinancial statements.Auditing has no effect on either the risk-free interest rate or business risk. However, auditing can significantly reduce information risk.1-4The four primary causes of information risk are remoteness of information, biases and motives of the provider, voluminous data, and the existence of complex exchange transactions.The three main ways to reduce information risk are:1. User verifies the information.2. User shares the information risk with management.3. Audited financial statements are provided.The advantages and disadvantages of each are as follows:1-5 To do an audit, there must be information in a verifiable form and some standards (criteria) by which the auditor can evaluate the information. Examples of established criteria include generally accepted accounting principles and the Internal Revenue Code. Determining the degree of correspondence between information and established criteria is determining whether a given set of information is in accordance with the established criteria. The information for Jones Company's tax return is the federal tax returns filed by the company. The established criteria are found in the Internal Revenue Code and all interpretations. For the audit of Jones Company's financial statements the information is the financial statements being audited and the established criteria are generally accepted accounting principles.1-6The primary evidence the internal revenue agent will use in the audit of the Jones Company's tax return include all available documentation and other information available in Jones’ office or from other sources. For example, when the internal revenue agent audits taxable income, a major source of information will be bank statements, the cash receipts journal and deposit slips. The internal revenue agent is likely to emphasize unrecorded receipts and revenues. For expenses, major sources of evidence are likely to be cancelled checks and electronic funds transfers, vendors' invoices, and other supporting documentation.1-7This apparent paradox arises from the distinction between the function of auditing and the function of accounting. The accounting function is the recording, classifying and summarizing of economic events to provide relevant information to decision makers. The rules of accounting are the criteria used by the auditor for evaluating the presentation of economic events for financial statements and he or she must therefore have an understanding of accounting standards, as well as auditing standards. The accountant need not, and frequently does not, understand what auditors do, unless he or she is involved in doing audits, or has been trained as an auditor.1-81-9Five examples of specific operational audits that could be conducted by an internal auditor in a manufacturing company are:1. Examine employee time records and personnel records to determineif sufficient information is available to maximize the effective use ofpersonnel.2. Review the processing of sales invoices to determine if it could bedone more efficiently.3. Review the acquisitions of goods, including costs, to determine ifthey are being purchased at the lowest possible cost consideringthe quality needed.1-9 (continued)4. Review and evaluate the efficiency of the manufacturing process.5. Review the processing of cash receipts to determine if they aredeposited as quickly as possible.1-10 When auditing historical financial statements, an auditor must have a thorough understanding of the client and its environment. This knowledge should include the client’s regulatory and operating environment, business strategies and processes, and measurement indicators. This strategic understanding is also useful in other assurance or consulting engagements. For example, an auditor who is performing an assurance service on information technology would need to understand the client’s business strategies an d processes related to information technology, including such things as purchases and sales via the Internet. Similarly, a practitioner performing a consulting engagement to evaluate the efficiency and effectiveness of a client’s manufacturing process woul d likely start with an analysis of various measurement indicators, including ratio analysis and benchmarking against key competitors.1-11 The major differences in the scope of audit responsibilities are:1. CPAs perform audits in accordance with auditing standards ofpublished financial statements prepared in accordance with U.S.GAAP or IFRS.2. GAO auditors perform compliance or operational audits in order toassure the Congress of the expenditure of public funds in accordancewith its directives and the law.3. IRS agents perform compliance audits to enforce the federal taxlaws as defined by Congress, interpreted by the courts, and regulatedby the IRS.4. Internal auditors perform compliance or operational audits in orderto assure management or the board of directors that controls andpolicies are properly and consistently developed, applied andevaluated.1-12 The four parts of the Uniform CPA Examination are: Auditing and Attestation, Financial Accounting and Reporting, Regulation, and Business Environment and Concepts.1-13 It is important for CPAs to be knowledgeable about information technology, including e-commerce, because many of their clients rely extensively on these technologies. Examples of commonly used e-commerce technologies include purchases and sales of goods through the Internet, automatic inventory reordering via direct connection to inventory suppliers, and online banking. CPAs who perform audits or provide other assurance services about information generated with these technologies need a basic knowledge and understanding of information technology and e-commerce in order to identify and respond to risks in the financial and other information generated by these technologies.Multiple Choice Questions From CPA Examinations1-14 a. (3) b. (2) c. (2) d. (3)1-15 a. (2) b. (3) c. (4) d. (3)Discussion Questions And Problems1-16 a. The relationship among audit services, attestation services and assurance services is reflected in Figure 1-3 on page 12 of the text.Audit services are a form of attestation service, and attestationservices are a form of assurance service. In a diagram, auditservices are located within the attestation service area, andattestation services are located within the assurance service area.b. 1. (2) An attestation service other than an audit service2. (1) An audit of historical financial statements3. (2) An attestation service other than an audit service4. (2) An attestation service other than an audit service; or(3) An assurance service that is not an attestation service(WebTrust developed from the AICPA Special Committeeon Assurance Services, but the service meets thecriteria for an attestation service.)5. (2) An attestation service other than an audit service6. (2) An attestation service other than an audit service7. (2) An attestation service that is not an audit service(Review services are a form of attestation, but areperformed according to Statements on Standards forAccounting and Review Services.)8. (2) An attestation service other than an audit service9. (2) An attestation service other than an audit service10. (3) An assurance service that is not an attestation service 1-17 a. The interest rate for the loan that requires a review report is lower than the loan that did not require a review because of lowerinformation risk. A review report provides moderate assurance tofinancial statement users, which lowers information risk. An auditreport provides further assurance and lower information risk. As aresult of reduced information risk, the interest rate is lowest for theloan with the audit report.b. Given these circumstances, Busch should select the loan from FirstCity Bank that requires an annual audit. In this situation, theadditional cost of the audit is less than the reduction in interest dueto lower information risk. The following is the calculation of totalcosts for each loan:c. Busch should select the loan from United National Bank due to thehigher cost of the audit and the reduced interest rate for the loanfrom United National Bank. The following is the calculation of totalcosts for each loan:d. Busch may desire to have an audit because of the many otherbenefits that an audit provides. The audit will provide Busch’smanagement with assurance about annual financial information usedfor decision-making purposes. The audit may detect errors or fraud, andprovide management with information about the effectiveness ofcontrols. In addition, the audit may result in recommendations tomanagement that will improve efficiency or effectiveness.e. The auditor must have a thorough understanding of the client and itsenvironment, including the client’s e-commerce technologies, industry,regulatory and operating environment, suppliers, customers, creditors,and business strategies and processes. This thorough analysis helpsthe auditor identify risks associated with the client’s strategies thatmay affect whether the financial statements are fairly stated. Thisstrategic knowledge of the client’s business often helps the auditoridentify ways to help the client improve business operations, therebyproviding added value to the audit function.1-18 a. The services provided by Consumers Union are very similar to assurance services provided by CPA firms. The services providedby Consumers Union and assurance services provided by CPAfirms are designed to improve the quality of information for decisionmakers. CPAs are valued for their independence, and the reportsprovided by Consumers Union are valued because ConsumersUnion is independent of the products tested.b. The concepts of information risk for the buyer of an automobile andfor the user of financial statements are essentially the same. They are both concerned with the problem of unreliable information being provided. In the case of the auditor, the user is concerned about unreliable information being provided in the financial statements.The buyer of an automobile is likely to be concerned about the manufacturer or dealer providing unreliable information.c. The four causes of information risk are essentially the same for abuyer of an automobile and a user of financial statements:(1) Remoteness of information It is difficult for a user to obtainmuch information about either an automobile manufactureror the automobile itself without incurring considerable cost.The automobile buyer does have the advantage of possiblyknowing other users who are satisfied or dissatisfied with asimilar automobile.(2) Biases and motives of provider There is a conflict betweenthe automobile buyer and the manufacturer. The buyer wantsto buy a high quality product at minimum cost whereas theseller wants to maximize the selling price and quantity sold.(3)Voluminous data There is a large amount of availableinformation about automobiles that users might like to havein order to evaluate an automobile. Either that information isnot available or too costly to obtain.(4) Complex exchange transactions The acquisition of anautomobile is expensive and certainly a complex decisionbecause of all the components that go into making a goodautomobile and choosing between a large number ofalternatives.d. The three ways users of financial statements and buyers ofautomobiles reduce information risk are also similar:(1) User verifies information him or herself That can be obtainedby driving different automobiles, examining the specifications ofthe automobiles, talking to other users and doing research invarious magazines.(2) User shares information risk with management Themanufacturer of a product has a responsibility to meet itswarranties and to provide a reasonable product. The buyerof an automobile can return the automobile for correction ofdefects. In some cases a refund may be obtained.(3) Examine the information prepared by Consumer ReportsThis is similar to an audit in the sense that independentinformation is provided by an independent party. Theinformation provided by Consumer Reports is comparable tothat provided by a CPA firm that audited financial statements.1-19 a. The following parts of the definition of auditing are related to the narrative:(1) Altman is being asked to issue a report about qualitative andquantitative information for trucks. The trucks are thereforethe information with which the auditor is concerned.(2) There are four established criteria which must be evaluatedand reported by Altman: existence of the trucks on the nightof June 30, 2011, ownership of each truck by RegionalDelivery Service, physical condition of each truck and fairmarket value of each truck.(3) Samantha Altman will accumulate and evaluate four types ofevidence:(a) Count the trucks to determine their existence.(b) Use registrations documents held by Burrow forcomparison to the serial number on each truck todetermine ownership.(c) Examine the trucks to determine each truck's physicalcondition.(d) Examine the blue book to determine the fair marketvalue of each truck.(4) Samantha Altman, CPA, appears qualified, as a competent,independent person. She is a CPA, and she spends most ofher time auditing used automobile and truck dealerships andhas extensive specialized knowledge about used trucksthat is consistent with the nature of the engagement.(5) The report results are to include:(a) which of the 25 trucks are parked in Regional'sparking lot the night of June 30.(b) whether all of the trucks are owned by RegionalDelivery Service.(c) the condition of each truck, using establishedguidelines.(d) fair market value of each truck using the current bluebook for trucks.b. The only parts of the audit that will be difficult for Altman are:(1) Evaluating the condition, using the guidelines of poor, good,and excellent. It is highly subjective to do so. If she uses adifferent criterion than the "blue book," the fair market valuewill not be meaningful. Her experience will be essential inusing this guideline.(2) Determining the fair market value, unless it is clearly definedin the blue book for each condition.1-20 a. The major advantages and disadvantages of a career as an IRS agent, CPA, GAO auditor, or an internal auditor are:(b) Other auditing careers that are available are:Auditors within many of the branches of the federal government(e.g., Atomic Energy Commission)Auditors for many state and local government units (e.g., state insurance or bank auditors)1-21 The most likely type of auditor and the type of audit for each of the examples are:1-22 a. Financial statement audits reduce information risk, which lowers borrowing costs. An audit also provides assurances to managementabout information used for decision-making purposes, and may alsoprovide recommendations to improve efficiency or effectiveness ofoperations.b. Hogan and Czarnecki likely provide tax services, accountingservices, and management advisory services. They may also provideadditional assurance and attestation services other than audits offinancial statements.c. Student answers will vary. They may identify new types of informationthat require assurance, such as environmental or corporateresponsibility reporting. Students may also identify opportunitiesfor consulting or management advisory services, such as assistancewith the adoption of international financial reporting standards.Internet Problem Solution: CPA RequirementsInternet Problem 1-1a. Answers will vary by state. Most states require 150 hours ofeducation, with specific requirements for number of accounting hoursand credit hours in other subject areas.b. Most states have frequently addressed questions. Many of theseaddress education requirements, as well as information on how toprepare for the exam, as well as information on applying for licensure.Internet Problem 1-1 (continued)c. The Elijah Watt Sells award program was established in 1923by the American Institute of Certified Public Accountants(AICPA) to recognize outstanding performance on the UniformCPA Examination. The Sells award is presented annually to tencandidates with the highest cumulative scores who completedtesting during the previous calendar year and passed all foursections of the Uniform CPA Examination on their first attempt.d. Passing information is available on the CPA Examination portion ofthe AICPA web site. Recent passing rates have been approximately45% for each section.(Note: Internet problems address current issues using Internet sources. Because Internet sites are subject to change, Internet problems and solutions may change. Current information on Internet problems is available at /arens.)。
