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Question 4.4. (TCO D) You are a CPA, you worked 2 years for a CPA firm doing audits and nowyou have just completed your first year in your own CPA firm. Your Physician audit client, whom you just issued an Unqualified Opinion, has just determined that his accountant has been stealing about $300,000 per year from their Physician Medical Practice which you failed to detect during your audit. You had warned the Managing Partner that they did not have adequate Internal controls – are you liable? Explain your defense and possible legal liability. Solution:Management’s Responsibility over internal controls Management is responsible for establishing and maintaining the control environment. Auditors play a role in a system of internal controls by performing evaluations and making recommendations for improved controls.Auditor is not liable to establish and maintain the working of the internal control and any discrepancy in the internal control will be the liability of management only, provided auditor has performed his role with due care and has taken all reasonable steps in order to find discrepancy. External auditors evaluate internal controls as part of their audit planning process, but they are not responsible for the design and effectiveness of your controls
Thus, as an external auditor I am not liable for the poor internal control and for failure in detecting that accountant has been stealing about $300,000 per year from their Physician MedicalPractice because I had taken all reasonable steps in order to check the working of the internal controls.Question 5.5. (TCO F) Sarbanes Oxley requires that per Section 404 that Internal Controls within a publicly held company are to be reviewed, evaluated and tested at year end to insure thatadequate controls are in place. Explain and describe two of the three major methods to obtain and document their understanding of a company’s controls. LeftQuestion 1.1. (TCO E) What is COSO? Describe the 5 elements of COSO’s Internal Control-Integrated Framework. Provide an example of each of those components and explain why they are important in providing “Reliable Financial Reporting” for a company. Please provide a complete answer for full points. Solution:“TheCommittee of Sponsoring Organizations of the Treadway Commission(COSO) is a joint initiative of five private sector organizations, established in theUnited States, dedicated to providing thought leadership to executive management and governance entities on critical aspects of organizational governance,business ethics, internal control,enterprise risk management,fraud, andfinancial reporting.”Five Elements of COSO’s Internal Control-Integrated Framework are:
-Control Environment:relates to the control consciousness of the people within the organization. The control environment is the basis for all other components of internal control. The reason why it is important in providing “Reliable Financial Reporting” for a company is because it related to the control consciousness of the people.