Problem 1: 150 words and reference
The PCAOB oversees all public corporations. It requires the companies to have stringent internal control procedures including an opinion on internal control by the auditors. Auditors as part of an occupational group of individuals have a collective identity. They commit to give their knowledge and expertise through adherence to the AICPA's Code of Professional Conduct. What auditing professionals receive in return for this commitment to serve the public good through their work is society's trust which results in prestige, the right to some level of self-governance, and economic reward for their service through monopoly rights to perform audits. Why the assignment should not be accepted when management lacks integrity?
Problem 2: Please respond the below statement in around 225 words and reference.
Auditing Standard No. 5 purpose is to set the requirements and give guidance to auditors when they are engaged to do an audit of management assessment of how well the internal controls over the financial reporting is protected from misstatements and errors. It also combines this audit with the audit of the financial statements to relieve some of the work that is required of the auditor when performing these engagements.
In order for a company to have effective internal controls in regards to their reporting of financial information that they use for their financial statements that are seen outside of the company, they must ensure that there is no weakness in the chain of control within the company. The auditor should plan on how he is going to test the internal controls of a company, keeping in mind that every company is different which can require internal controls to be used. Such as some smaller companies who have less processes or employees who have access to financial information and are responsible for reporting this information. Bigger companies may have more streamline information that involves less interaction with non-key personal, so there are less internal controls needed.
With the revision of the requirements of the auditors that allow them to take the opinions and the information that other individuals have found showing that that the internal controls of a company are effective and do not allow for fraudulent activities that would cause misstatements to be made that could have an impact on the financial statements of the company. Requirements that an auditor needs to use in determining if the information is accurate is that the person giving the information is competent in knowledge of the information they are reporting, and that the person is objective. Objective as they are not influenced by others to give information that could cause mistakes from happening.
One thing that could be included to ensure that the auditor is choosing the right resources or personal for information about previously discovered information about the internal controls is to test these other parties. To ensure that a person can be objective and not letting things go under the radar because of some conflict of interest, the auditor could test this by having false transactions to be recorded by different levels of the internal control and see if they are discovered. Also, if they are discovered would the person discovering them allow them to continue to be reporting because of their relationship with one or more of the individuals recording these transactions. The knowledge of these sources can be easily tested, but their objectivity can be harder to spot. If an auditor is going to take someone else's work to help him perform an audit, they need to know they will hold the same standards for everyone within the business.
Problem 3: Please respond the below statement in around 225 words and reference.
Auditing Standard 5 (AS 5) is a document released by the Public Company Accounting Oversight Board (PCAOB) that deals with an auditor testing the internal controls of a company. It deals with setting standards and provides a guideline of what to do when testing the internal controls of an organization. Internal controls are ways that a company limits the likelihood of fraud in the organization (PCAOB, 2007).
Testing of internal controls is a part of delivering an opinion on a company's financial statements. In fact, it often determines how much testing might need to be done to indicate the validity of the financial statements. In AS 5, it states that poor quality control areas should be tested more rigorously and that areas of adequate controls might mean less work for the auditor (PCAOB, 2007).
In planning an audit of internal controls, AS 5 states that there are internal and external factors that an auditor must think about. Some examples are knowledge of the industry of the company, knowledge of the management and their controls, control deficiencies previously mentioned to the company or board, public information about the company, the complexity of the business and so forth (PCAOB, 2007).
The first step of making a judgment about internal controls is a risk assessment by the auditor. This will allow an auditor to budget their time wisely and test the areas that could materially affect the financial statements (PCAOB, 2007).
AS 5 also suggests some good areas for an auditor to look over such as controls over significant transactions that are not the normal course of business and how they are handled, late or unusual journal entries, control over period-end entries, related party transactions, mitigations or pressures for management to falsify records, and management estimates (PCAOB, 2007).
AS 5 also states that an auditor must not always take every deficiency in a control as a single incident, but to think of it holistically as well to see if combined weaknesses in control constitute a material weakness (PCAOB, 2007).
It gives guidance upon relying on the work of others. To look to see if others have the competence, objectivity, and integrity needed to rely on their work. It emphasizes that even if an employee is very talented at their job, that they may lack the objectivity to rely on their work (PCAOB, 2007).
In doing an audit of internal controls, it is suggested to do a top-down approach of the audit, starting at the entity level and working one's way down. It also suggests that walkthroughs are a great way to gather evidence. Walkthroughs are tracing a transaction from point of origin to entry on the financial statements, asking questions along the way. The use of walkthroughs is extremely important for significant accounts of the business and getting an idea of how the business works (PCAOB, 2007).
In sum, an auditor must use both external and internal data to provide a reasonable opinion on the internal controls of a company.
Overall, I found it hard to fault the logic of AS 5. The only criticisms I have are based upon the way auditing is taught. The thing that I dislike most about teaching of auditing and proclamations is that it is all very philosophical. I spend most of the reading thinking that the ideas are really sound ideas, but they are not tied to doingness. For one that has never served in an auditing function, it is much the same as explaining everything about how a car engine works to someone that has never seen a car engine before. It is hard to develop judgment on something one has never seen and harder still to retain knowledge of a subject when it is all just theory in one's head.
AS 5, like every other writing about auditing that I have read, discusses the philosophical nature of things without providing solid examples to pin the data to. As a counter-example, I may have never entered in a journal entry for a capital lease but I can go to my intermediate accounting textbook and find an example and read up on the subject. It shows me a doingness that I can remember when I need to reference it. There is no such thing for auditing.
In specific to AS 5, there are many references that an auditor must be more lenient to smaller companies but does not give any specific examples. In one suggestion, it states that an accounting department of a smaller company might not be able to segregate accounting duties in a way that optimizes internal control but gives no example. Where is the drawing line? At what point in a smaller company would one decide that an accounting department is materially compromised with regards to internal controls?
I understand that the presentation of the data's purpose is to develop objectivity and independence in an auditor, but I personally think that removing all examples works against trying to teach someone which is supposed to be the point of this guidance.
To use the analogy I used before, I can go outside and lift up my hood to see a car engine and then enlighten myself through the text, but I cannot go into an accountant's office and demand to see their auditors. The vagueness of the text gets in the way of learning how audits function and confuses someone who actually wants to learn about a subject thus stands an equal chance of doing more harm than good in the end.
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