Question

Discuss the following types of Auditors:

Auditors Working for CPA Firms

Governmental Auditors (e.g. GAO, IRS, health inspectors)

Internal Auditors

Identify the roles CPA firms play in society.

Briefly explain Sarbanes-Oxley (SOX) and the role the Securities and Exchange Commission (SEC) plays in regulating audits.

Answer 1

1) Auditors Working For CPA Firms

Auditors working for CPA firms are licensed CPAs and are responsible forauditing the published historical financial statements. They are often called 'external auditors' or independent auditors. Independent auditor is engaged to render an opinion on whether a company’s financial statements are presented fairly, in all material respects, in accordance with financial reporting framework. The audit provides users such as lenders and investors with an enhanced degree of confidence in the financial statements. An audit conducted in accordance with GAASand relevant ethical requirements enables the auditor to form that opinion.

To form the opinion, the auditor gathers appropriate and sufficient evidence and observes, tests, compares and confirms until gaining reasonable assurance. The auditor then forms an opinion of whether the financial statements are free of material misstatement, whether due to fraud or error.

Some of the more important auditing procedures include:

Inquiring of management and others to gain an understanding of the organization itself, its operations, financial reporting, and known fraud or error

Evaluating and understanding the internal control system

Performing analytical procedures on expected or unexpected variances in account balances or classes of transactions

Testing documentation supporting account balances or classes of transactions

Observing the physical inventory count

Confirming accounts receivable and other accounts with a third party

At the completion of the audit, the auditor may also offer objective advice for improving financial reporting and internal controls to maximize a company’s performance and efficiency.

2) Governmental Auditors (e.g. GAO, IRS. Health Inspectors )

Govermental auditors done auditing in accordance with these standards places on the audit organization the responsibility for ensuring that (1) the audit is conducted by personnel who collectively have the necessary skills, (2) independence is maintained, (3) applicable standards are followed in planning and conducting audits and reporting the results, (4) the organization has an appropriate internal quality control system in place, and (5) the organization undergoes an external quality control review.

3) Internal Auditors

An internal auditor is an employee of a company charged with providing independent and objective evaluations of the company's financial and operational business activities, including its corporate governance. Internal auditors also provide evaluations of operational efficiencies and will usually report to the highest levels of management on how to improve the overall structure and practices of the company.

Among the many functions that an internal auditor performs are evaluating the accuracy of controls at business unit levels and recommending improvement; evaluating links among those business units; verifying physical assets and making sure they are protected; ensuring compliance with established business procedures of the firm; and investigating internal fraud or behavior in violation of company policy.

Also, properly-managed publicly-traded companies have internal auditing teams to carry out compliance with outside regulatory agencies such as the SEC and with auditing guidelines as laid out by the Generally Accepted Accounting Principles (GAAP).

Auditing teams report to audit committees at the board level.

4) Roles of CPA Firms Play In Society

The nature of the work carried out by CPAs – including auditing, accounting, and tax services – requires a high level of ethics: current and potential shareholders, investors, lenders, regulatory agencies, and other users of an entity’s financial statements rely heavily on those financial statements in order to make informed decisions about the entity.

Due to the important role they play in society, CPAs have a significant responsibility for the services they provide. This means working to cultivate the accounting profession, cooperating with peers in the industry, and maintaining public confidence in their ability to provide professional services.

Because the accounting profession provides the opportunity for financial gain stemming from client relationships, maintaining objectivity and independence is crucial. CPAs must be independent in both fact and appearance when providing auditing and other attestation services. This is achieved by applying the principles of integrity, responsibilities, and serving the public interest. But beyond this, accounting firms ensure the objectivity and independence of CPAs within their firms by requiring employees to review client lists for potential conflicts of interest and sign independence agreements, establishing quality control policies and procedures to deal with potential conflicts of interest and independence issues, and through a continual assessment of client relationships and public responsibility.

5) Sarbanes-Oxley (SOX)

The U.S. Congress passed the Sarbanes-Oxley Act of 2002 on July 30, 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The SOX Act of 2002, also known as the Corporate Responsibility Act of 2002, mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud.

6) Role Of Securities and Exchange Commission (SEC) Play in Regulating Audit.

The U.S. Securities and Exchange Commission (SEC) is an independent federal government agency responsible for protecting investors, maintaining fair and orderly functioning of securities markets and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States.

In addition to its responsibility for accounting standards, the Commission is responsible for the approval or disapproval of auditing rules put forward by the Public Company Accounting Oversight Board, a private-sector regulator established by the Sarbanes-Oxley Act to oversee the auditing profession. The Commission also has thorough-going oversight responsibility for all of the activities of the PCAOB, including approval of its annual budget. To assist the Commission in the execution of these responsibilities, the Office of the Chief Accountant is the principal liaison with the PCAOB. The Office also consults with registrants and auditors on a regular basis regarding the application of accounting and auditing standards and financial disclosure requirements.