Ethics Case: It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements

Ethics Case 1-8 The auditors’ responsibility

It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements. Another group, auditors, serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements. Auditors examine (audit) financial statements to express a professional, independent opinion. The opinion reflects the auditors' assessment of the statements' fairness, which is determined by the extent to which they are prepared in compliance with GAAP.

Some feel that it is impossible for an auditor to give an independent opinion on a company's financial statement because the auditors' fees for performing the audit are paid for by the company. In addition to the audit fee, quite often the auditor performs other services for the company such as preparing the company's income tax returns.

How might an auditor's ethics be challenged while performing an audit?

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The PCAOB has the authority to set audit standards for all audits of public companies

2-60. (Audit Standards for NonPublic Companies, LO 5, 9, 10) The PCAOB has the authority to set audit standards for all audits of public companies. The AICPA continues to set audit standards for nonpublic companies through its auditing standards board.

Required:
a. What are the pros and cons of having the same audit standards for both public and nonpublic entities?
b. In what ways might you expect auditing standards for audits of nonpublic companies to differ from the standards for public companies? Identify three (there are not necessarily three right or wrong answers-this is an opinion and discussion question only). Identify the rationale for your answers.
c. A CPA is performing an audit of a local municipality. Where should the auditor look to determine audit standards that must be followed?
d. What role should an audit committee play in determining which standards an audit firm will use in auditing their company? Explain.


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The following is an auditor's report prepared in accordance with International Standards on Auditing (ISAs)

Auditing P 3-33 The following is an auditor's report prepared in accordance with International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB):

Independent Auditor's Report

To the Shareholders of Les Meridian, Inc.

We have audited the accompanying financial statements of Les Meridian, Inc,. which comprise the balance sheet as of December 31, 2009, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary significant accounting policies and other explanatory notes.

AND SO ON


Required:
a. For each of the seven distinct parts of the standard unqualified report prepared in accordance with generally accepted auditing standards in the United States, describe whether key elements of each of those seven parts are present in hte audit report based on International Standards on Auditing for Les Meridian's financial statements.
b. Describe elements in the audit report based on International Standards on Auditing that are more extensive than an audit report based on US auditing standards.


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Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards

Auditing P 3-31

Various types of "accounting changes" can affect the second reporting standard of the generally accepted auditing standards. This standard reads, "The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period." Assume that the following list describes changes that have a material effect on a client's financial statement for the current year:
1. Correction of a mathematical error in inventory pricing made in a prior period.
2. A change from prime costing to full absorption costing for inventory valuation.
3. A change from presentation of statements of individual companies to presentation of consolidated statements.
4. A change from deferring and amortizing preproduction costs to recording such costs as an expense when incurred because future benefits of the costs have become doubtful. The new accounting method was adopted in recognition of the change in estimated future benefits.
5. A change from the completed-contract method to the percentage-of completion method of accounting for long-term construction contracts.
6. A change in the estimated useful life of previously recorded fixed assets based on newly acquired information.
7. A change to including the employer share of Social Security (FICA) taxes as "retirement benefits" on the income statement from including it with "other taxes."
8. A change from FIFO method of inventory pricing to the LIFO method of inventory pricing.

Identify the type of change described in each item above, and state whether any modification is required in the auditor's report as it relates to the second standard of reporting. Organized your answer sheet as shown. For example, a change from the LIFO method of inventory pricing to the FIFO method in inventory pricing would appear as shown.
Assume that each item is material.

Item No. Type of Change Should Auditors report be modified?
Example An accounting change from one GAAP "Yes" to another GAAP


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What are the benefits of standard costs and how do businesses set those standards?

What are the benefits of standard costs and how do businesses set those standards?


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