Question

1- a) - describe the vignette highlights and the issues addressed.

b) - What is the purpose of auditor's reports?

c) -Describe the distinction between auditor's and management's responsibility

d) -Describe the parts of the audit report

e) -Describe the Sarbanes-Oxley Act

Answer 1

b) Purpose of Audit Report

The auditor's report is a document containing the auditor's opinion of whether a company's financial statements comply with GAAP. The audit report is important because banks, creditors, and regulators require an audit of a company's financial statements.

Contrary to some beliefs, a certified public accountant's letter of opinion is not a certification and actually is nothing more than an opinion. It is not a guarantee. It is the accountant who is certified, not the financial statements. As a professional, the accountant expresses a detached judgement. He says, in effect, that proper accounting principles appear to have been applied consistently by management and that standard auditing procedures deemed applicable under particular circumstances have revealed nothing which would cause him to question the fairness of the resultant statements. Naturally, some of the items on a financial statement cannot be subjected to exact measurement. Unfortunately, many of these are important in that they may materially affect either or both the condition of the company at a given point in time, or the results of operations over a period of time. By their very nature, certain of these items must represent estimates and approximations. However, we are justified in looking to the certified public accountant for a value based on informed judgement. It is important to recognize that the financial statements and all supplemental data that may accompany the statements are the responsibility of the client. The accountant assumes responsibility only for the opinion that accompanies the report.

The primary purpose of an audit is to provide assurance to the users of the financial statements that these statements are reliable. Auditors do not express an opinion on the client's accounting records. The auditors' investigation of financial statement items includes reference to the client's accounting records, but is not limited to these records. The auditors' examination includes observation of tangible assets, inspection of such documents as purchase orders and contracts, and the gathering of evidence from outsiders including banks, customers, and suppliers, as well as analysis of the client's accounting records.

c)distinction between auditor's and management's responsibility

Management is responsible for preparing the financial statements and the contents of the statements are the assertions of management. The independent auditor is responsible for examining management's financial statements and expressing an opinion on their fairness.

The management of a company has the responsibility for maintaining adequate accounting records and of preparing proper financial statements for the use of stockholders and creditors. Even though the financial statements are sometimes constructed and produced in the auditors' office, primary responsibility for the statements remains with management.

The auditors' product is their report. It is a separate document from the client's financial statements, although the two are closely related and transmitted together to stockholders and to creditors.

d)Parts of the audit report

The Introductory Paragraph

The Scope of Audit

Financial Statement Disclosure.

Detecting Misstatements

The Opinion Paragraph

e)Sarbanes-Oxley Act

The Sarbanes-Oxley Act of 2002 is a law the U.S. Congress passed on July 30 of that year to help protect investors from fraudulent financial reporting by corporations.1 Also known as the SOX Act of 2002 and the Corporate Responsibility Act of 2002, it mandated strict reforms to existing securities regulations and imposed tough new penalties on lawbreakers.

• The Sarbanes-Oxley (SOX) Act of 2002 came in response to highly publicized corporate financial scandals earlier that decade.
• The act created strict new rules for accountants, auditors, and corporate officers and imposed more stringent recordkeeping requirements.
• The act also added new criminal penalties for violating securities laws.

Major Provisions of the Sarbanes-Oxley

Section 302 of the SOX Act of 2002 mandates that senior corporate officers personally certify in writing that the company's financial statements

Section 404 of the SOX Act of 2002 requires that management and auditors establish internal controls and reporting methods to ensure the adequacy of those controls.

Section 802 of the SOX Act of 2002 contains the three rules that affect recordkeeping. The first deals with destruction and falsification of records. The second strictly defines the retention period for storing records. The third rule outlines the specific business records that companies need to store, which includes electronic communications.

Because of the Sarbanes-Oxley Act of 2002, corporate officers who knowingly certify false financial statements can go to prison.