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Unformatted text preview: ol report. What are the two required
elements of management’s report on internal control? 6-14 Internet Problem 1-1 (continued)
Answer: According to Section 404 the two required elements of
management’s report on internal control are:
b. 2. a statement that management is responsible for establishing
and maintaining an adequate internal control structure and
procedures for financial reporting.
an assessment, as of the end of the most recent fiscal year
of the issuer, of the effectiveness of the internal control
structure and procedures of the issuer for financial reporting. What obligation does a public company’s auditor have with respect
to internal control over financial reporting according to Section 404?
Answer: With respect to the internal control assessment prepared
by management, the company’s auditing firm that prepares or
issues the audit report for the company shall attest to, and report
on, the assessment made by the management of the issuer.
Section 404 indicates that the attestation should not be a separate
engagement, which means that it is to be integrated with the audit
of the financial statements. (Note: Internet problems address current issues using Internet sources. Because
Internet sites are subject to change, Internet problems and solutions may change. Current
information on Internet problems is available at www.pearsonglobaleditions.com/arens). 1Chapter 6
Audit Responsibilities and Objectives Review Questions 6-1 The objective of the audit of financial statements by the independent
auditor is the expression of an opinion on the fairness with which the financial
statements present financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles.
The auditor meets that objective by accumulating sufficient appropriate
evidence to determine whether the financial statements are fairly stated.
6-2 It is management's responsibility to adopt sound accounting policies,
maintain adequate internal control and make fair representations in the financial
statements. The auditor's responsibility is to conduct an audit of the financial
statements in accordance with auditing standards and report the findings of the
6-15 audit in the auditor's report.
6-3 An error is an unintentional misstatement of the financial statements.
Fraud represents intentional misstatements. The auditor is responsible for obtaining
reasonable assurance that material misstatements in the financial statements are
detected, whether those misstatements are due to errors or fraud .
An audit must be designed to provide reasonable assurance of detecting
material misstatements in the financial statements. Further, the audit must be
planned and performed with an attitude of professional skepticism in all aspects
of the engagement. Because there is an attempt at concealment of fraud, material
misstatements due to fraud are usually more difficult to uncover than errors. The
auditor’s best defense when material misstatements (either errors or fraud) are
not uncovered in the audit is that the audit was conducted in accordance with
6-4 Misappropriation of assets represents the theft of assets by employees.
Fraudulent financial reporting is the intentional misstatement of financial information
by management or a theft of assets by management, which is covered up by
misstating financial statements.
Misappropriation of assets ordinarily occurs either because of inadequate
internal controls or a violation of existing controls. The best way to prevent theft
of assets is through adequate internal controls that function effectively. Many
times theft of assets is relatively small in dollar amounts and will have no effect
on the fair presentation of financial statements. There are also the cases of large
theft of assets that result in bankruptcy to the company. Fraudulent financial
reporting is inherently difficult to uncover because it is possible for one or more
members of management to override internal controls. In many cases the
amounts are extremely large and may affect the fair presentation of financial
statements. 6-16 6-5
True, the auditor must rely on management for certain information in the
conduct of his or her audit. However, the auditor must not accept management's
representations blindly. The auditor must, whenever possible, obtain appropriate
evidence to support the representations of management. As an example, if
management represents that certain inventory is not obsolete, the auditor should
be able to examine purchase orders from customers that prove part of the
inventory is being sold at a price that is higher than the company's cost plus
selling expenses. If management represents an account receivable as being fully
collectible, the auditor should be able to examine subsequent payments by the
customer or correspondence from the customer that indicates a willingness and
ability to pay.
CHARACTERISTIC AUDIT STEPS 1. Management’s characteristics and
influence over the contr...
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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