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ChapterOneAnswers - Solutions for Chapter 1 Auditing...

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Solutions for Chapter 1 Auditing: Integral to the Economy Review Questions: 1-1. The special function performed by the public accounting profession is the attestation to the fairness of the financial statements of clients. The special function ensures the reliability and integrity of the financial reporting system. Judge Burger described the special function as "certifying the public reports that collectively depict a corporation's financial status," which involves "a public responsibility transcending any employment relationship with the client." The auditing profession exists to serve the users of an organization's financial statements. These include lenders, investors, management, government, and (indirectly) all individuals who are ultimately affected by the integrity of the financial reporting process. 1-2. The two main types of reports that management prepares that are subject to audit are: Annual financial statements Reports on internal control over financial reporting (public companies only) 1-3. Yes, an audit service does require a report to a third-party user. Third parties are the primary users of the audit report. Audit services differ from general assurance services in that assurance services do not require a report to a third party. For example, a firm may request assurance services of their internal controls. At their request, the firm may be the only recipients of a report. Thus, the difference is related to whether or not the service is provided to third parties. Further, an audit service is generally recognized as one that pertains to an organization’s financial statements and internal controls over financial reporting. 1-4. Assurance services are needed because there is a: Potential bias in providing information Remoteness between a user and the organization or trading partner Complexity of the transaction, information, or processing systems such that it is difficult to determine their proper presentation without a review by an independent expert Need to minimize financial surprises Interested parties need to have confidence that the information they are using to make choices is reliable and not subjective. The public accounting profession has strict independence rules and has traditionally been in a position of high trust with the investing public, which gives them an important competitive advantage. The public accounting
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1-2 Solutions for Chapter 1 – Auditing: Integral to the Economy profession also has expertise in a variety of different kinds of business processes to have the ability to deal with many types of transactions. The recent PCAOB requirements call for auditors to comment on the appropriateness of accounting principles. This requirement should reduce the number of financial surprises.
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