CHAPTER 4

PUBLIC ACCOUNTING PROFESSION

I. Review Questions

1. a. Major auditing developments in the 20th century (5 required) include the

following:
 A shift in emphasis to the determination of fairness of financial
statements.
 Increased responsibility of the auditor to third parties, such as
governmental agencies, stock exchanges, and the investing public.
 A change in auditing method from detailed examination of individual
transactions to use of sampling techniques, including statistical
sampling.
 Recognition of the need to consider the effectiveness of internal
control as a guide to the direction and amount of testing and sampling
to be performed.
 Development of new auditing procedures applicable to electronic data
processing systems, and use of the computer as an auditing tool.
 Recognition of the need for auditors to find means of protecting
themselves from the current wave of litigation.
 An increase in demand for prompt disclosure of both favorable and
unfavorable information concerning any publicly owned company.
 Increased concern with compliance by organizations with laws and
regulations.

b. Compliance audits and operational audits. Compliance audits – An audit

to determine whether verifiable data, such as income tax returns or other
financial reports, are in compliance with established criteria, such as laws
and regulations. Operational audits – An examination of a department or
other unit of a business or governmental organization to measure the
efficiency and effectiveness of its operations.

2. a. Management has primary responsibility for the fairness of the financial

statements.

b. The auditors are responsible for performing an independent audit of the

financial statements and issuing a report on them in accordance with
generally accepted auditing standards.

c. The statement is false. The notes to the financial statements should

contain only representations of management. The auditors should express
4-2 Solutions Manual - Principles of Auditing and Other Assurance Services
their reservations in their report.

3. a. Audits add credibility to the financial statements of the company. The

individual can invest in the company knowing that there is a low
probability that the financial statements depart materially from generally
accepted accounting principles. Audited financial statements facilitate
this transaction by reducing risk related to the investment. Specifically,
audits reduce information risk--the risk that information used to make the
investment decision is misstated--related to the financial statements.
Audited financial statements do not directly affect business risk, which is
the risk that the company will not be able to meet its financial obligations.

b. The potential consequences of not having an audit are:

 If the investor is particularly risk averse, he or she may not invest in
the company at all.
 If the investor decides to invest in the company, he or she will not be
willing to pay as high a price because the investor will want to be
compensated for the additional risk that is involved in relying upon
unaudited financial statements.

4. Generally, to be a CPA one must meet certain education requirements, and

pass the CPA exam.

The CPA examination is prepared and graded twice each year. It is generally
recognized as an academic examination. It includes multiple-choice questions
in the following subjects namely, Theory of Accounts, Practical Accounting I,
Practical Accounting II, Auditing Theory, Auditing Problems, Management
Services, Business Law and Taxation.

5. Refer to pages 88 to 94 of the textbook.

6. Refer to page 103 (Section 14 of the Philippine Accountancy Act of 2004) of

the textbook.

7. Refer to pages 106 to 107 (Section 28 of the Philippine Accountancy Act of

2004) of the textbook.

8. Refer to pages 108 to 109 (Sections 34 & 35 of the Philippine Accountancy

Act of 2004) of the textbook.

9. Refer to page 112, 2nd paragraph of the textbook.

10. Refer to pages 113 to 114 of the textbook.

11. Refer to pages 114 to 116 of the textbook.

12. Refer to pages 132 to 133 of the textbook.

 Public Accounting Profession 4-3

13. Refer to page 134 of the textbook.

14. Refer to pages 140 to 143 of the textbook.

II. Multiple Choice Questions

1. d 6. d
2. c 7. b
3. b 8. c
4. a 9. b
5. d 10. a

III. Comprehensive Case

MORALES, CABRERA, & CO., CPAs

1. a. Hiring / Professional requirements
b. To ensure that personnel who will be performing audits have adequate
technical training and proficiency.
c. New accountants hired must have an accounting degree from an accredited
school.

2. a. Advancement / Professional requirements

b. To ensure personnel are qualified to do the tasks they are assigned.
c. An in-charge accountant must have served as a staff auditor on an audit in
the client’s industry.

3. a. Skills and Competence

b. To ensure that personnel continue to be updated on changes in accounting
or auditing standards.
c. Personnel will participate in forty hours of continuing education per year.

4. a. Consultation
b. To ensure that personnel have access to persons with more experience in
dealing with problems they have encountered.
c. For each industry for which the office has a client, a specialist will be
identified.

5. a. Independence
b. To ensure that personnel meet PICPA guidelines for independence.
c. Firm personnel must list their investments. Personnel must report any
stock acquisitions.

6. a. Supervision
b. To ensure that work performed meets the firm’s standard of quality.
c. Staff personnel are to follow firm guidelines for working paper
development.
4-4 Solutions Manual - Principles of Auditing and Other Assurance Services

7. a. Inspection / Review
b. To verify that quality control procedures are being followed.
c. Inspect the audit programs for all engagements.

8. a. Acceptance and retention of clients

b. To minimize the risk associated with clients.
c. New clients must be investigated by a private investigative agency.

9. a. Assigning personnel to engagements

b. To ensure that personnel posses the degree of technical training and
proficiency required for an engagement.
c. To be eligible to be senior on an engagement, a person must have had
experience in the industry.