Unformatted text preview: vidence 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, vendors'
invoices and other supporting documentation.
This 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 generally accepted
accounting principles (GAAP), 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. 6-4 1-8 OPERATIONAL
AUDITS AUDITS OF
STATEMENTS PURPOSE To evaluate
effective To determine
whether the client is
procedures set by
higher authority To determine
(usually GAAP) USERS OF
REPORT Management of
organization Authority setting
internal or external Different groups
purposes — many
outside entities NATURE Highly
often subjective Not standardized,
but specific and
usually objective Highly
CPAs Frequently Occasionally Almost
AUDITORS Frequently Frequently Occasionally IRS
AUDITORS Never Universally Never INTERNAL
AUDITORS Frequently Frequently Frequently 1-9
Five examples of specific operational audits that could be conducted by an
internal auditor in a manufacturing company are:
1. Examine employee time cards and personnel records to determine if
sufficient information is available to maximize the effective use of
2. Review the processing of sales invoices to determine if it could be
done more efficiently.
3. Review the acquisitions of goods, including costs, to determine if
they are being purchased at the lowest possible cost considering
the quality needed. 6-5 1-9 (continued)
4. Review and evaluate the efficiency of the manufacturing process.
5. Review the processing of cash receipts to determine if they are
deposited 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 clients 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 and 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 would 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 of
published financial statements prepared in accordance with generally
accepted accounting principles.
2. GAO auditors perform compliance or operational audits in order to
assure the Congress of the expenditure of public funds in accordance
with its directives and the law.
3. IRS agents perform compliance audits to enforce the federal tax laws
as defined by Congress, interpreted by the courts, and regulated by
4. Internal auditors perform compliance or operational audits in order to
assure management or the board of directors that controls and
policies are properly and consistently developed, applied and
1-12 The four parts of the Uniform CPA Examination are: Auditing and Attestation,
Financial Accounting and Reporting, Regulation, and Business Environment and
1-13 It is important for CPAs to be knowledgeable about e-commerce technologies
because more of their clients are rapidly expanding their use of e-commerce.
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 ass...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.
- Fall '13