List the work experience requirements in your state. Is experience in industry as an accountant or an internal auditor sufficient to be eligible to become a CPA?

DISCUSSION QUESTIONS AND PROBLEMS

1-16 (OBJECTIVE 1-5) The list below indicates various audit, attestation, and other engage-
ments involving auditors.
1. A report on the effectiveness of internal control over financial reporting as required by Section 404 of the Sarbanes–Oxley Act.

2. An examination report on whether a company’s statement of greenhouse gas emis-
sions is presented in conformity with standards issued by the World Business Council
for Sustainable Development and the World Resources Institute.

3. An auditor’s report on whether the financial statements are fairly presented in accor-
dance with International Financial Reporting Standards.

4. An engagement to help a company structure a merger transaction to minimize the
taxes of the combined entities.

5. A report stating whether the company has complied with restrictive covenants re-
lated to officer compensation and payment of dividends contained in a bank loan
agreement.
6. A report on the effectiveness of internal controls at a company that provides payroll
processing for other companies.

7. A review report that provides limited assurance about whether financial statements are fairly stated in accordance with U.S. GAAP.

8. An evaluation of the voting process and certification of the outcome for Rolling Stone Magazine’s “Greatest Singer of All Time” poll.
9. A report indicating whether a governmental entity has complied with certain government regulations.

10. A report about management’s assertion on the effectiveness of controls over the
availability, reliability, integrity, and maintainability of its accounting information
system.
11. An evaluation of the effectiveness of key measures used to assess an entity’s success in achieving specific targets linked to an entity’s strategic plan and vision.

a. Explain the relationships among audit services, attestation services, and other assur-
ance and nonassurance services provided by CPAs.

b. For each of the services listed above, indicate the type of service from the list that
follows.
(1) An audit of historical financial statements
(2) An attestation service other than an audit service
(3) An assurance or nonassurance service that is not an attestation service
1-17 (OBJECTIVE 1-3) Monterrey Corporation has an existing loan in the amount of
$7 million with an annual interest rate of 6.5%. The company provides an internal
company-prepared financial statement to the bank under the loan agreement. Two com-
peting banks have offered to replace Monterrey Corporation’s existing loan agreement
Required

21Chapter 1 / THE DEMAND FOR AUDIT AND OTHER ASSURANCE SERVICES
with a new one. Southwest National Bank has offered to loan Monterrey $7 million at
a rate of 5.5% but requires Monterrey to provide financial statements that have been re-
viewed by a CPA firm. First City Bank has offered to loan Monterrey $7 million at a rate
of 4.5% but requires Monterrey to provide financial statements that have been audited by
a CPA firm. Monterrey Corporation’s controller approached a CPA firm and was given an
estimated cost of $45,000 to perform a review and $80,000 to perform an audit.
a. Explain why the interest rate for the loan that requires a review report is lower
than that for the loan that does not require a review. Explain why the interest rate
for the loan that requires an audit report is lower than the interest rate for the other
two loans.
b. Calculate Monterrey Corporation’s annual costs under each loan agreement, includ-
ing interest and costs for the CPA firm’s services. Indicate whether Monterrey should
keep its existing loan, accept the offer from Southwest National Bank, or accept the
offer from First City Bank.
c. Assume that Southwest National Bank has offered the loan at a rate of 5.5% with a
review, and the cost of the audit has increased to $125,000 due to new auditing stan-
dards requirements. Indicate whether Monterrey should keep its existing loan, accept
the offer from Southwest National Bank, or accept the offer from First City Bank.
d. Discuss why Monterrey may desire to have an audit, ignoring the potential reduction
in interest costs.
e. Explain how a strategic understanding of the client’s business may increase the value
of the audit service.
1-18 (OBJECTIVES 1-3, 1-4, 1-5) Consumers Union is a nonprofit organization that provides
information and counsel on consumer goods and services. A major part of its function
is the testing of different brands of consumer products that are purchased on the open
market and then the reporting of the results of the tests in Consumer Reports, a monthly
publication. Examples of the types of products it tests are mid-sized automobiles,
residential dehumidifiers, flat-screen TVs, and blue jeans.
a. In what ways are the services provided by Consumers Union similar to assurance ser-
vices provided by CPA firms?
b. Compare the concept of information risk introduced in this chapter with the infor-
mation risk problem faced by a buyer of an automobile.
c. Compare the four causes of information risk faced by users of financial statements as
discussed in this chapter with those faced by a buyer of an automobile.
d. Compare the three ways users of financial statements can reduce information risk
with those available to a buyer of an automobile.
1-19 (OBJECTIVE 1-1) James Burrow is the loan officer for the National Bank of Dallas.
National has a loan of $325,000 outstanding to Regional Delivery Service, a company
specializing in delivering products of all types on behalf of smaller companies. National’s
collateral on the loan consists of 25 small delivery trucks with an average original cost of
$24,000.
Burrow is concerned about the collectibility of the outstanding loan and whether the
trucks still exist. He therefore engages Samantha Altman, CPA, to count the trucks, using
registration information held by Burrow. She was engaged because she spends most of
her time auditing used automobile and truck dealerships and has extensive specialized
knowledge about used trucks. Burrow requests that Altman issue a report stating the
following:
1. Which of the 25 trucks is parked in Regional’s parking lot on the night of June 30, 2019.
2. Whether all of the trucks are owned by Regional Delivery Service.
3. The condition of each truck, using the guidelines of poor, good, and excellent.
4. The fair market value of each truck, using the current “blue book” for trucks, which
states the approximate wholesale prices of all used truck models, and also using the
poor, good, and excellent condition guidelines.
Required
Required
In-class
Discussion
In-class
Discussion

22Part 1 / THE AUDITING PROFESSION
a. For each of the following parts of the definition of auditing, state which part of the
preceding narrative fits the definition:
(1) Information
(2) Established criteria
(3) Accumulating and evaluating evidence
(4) Competent, independent person
(5) Reporting results
b. Identify the greatest difficulties Altman is likely to have doing this audit.

1-20 (OBJECTIVE 1-7) Five college seniors with majors in accounting are discussing alternative career plans. The first senior plans to become an internal revenue agent because his primary interest is income taxes. He believes the background in tax auditing will provide him with better exposure to income taxes than will any other available career choice. The second senior has decided to go to work for a CPA firm for at least 5 years, possibly as a
permanent career. She believes the variety of experience in auditing and related fields offers a better alternative than any other available choice. The third senior has decided on a career in internal auditing with a large industrial company because of the many different
aspects of the organization with which internal auditors become involved. The fourth senior plans to become an auditor for the GAO because she believes that this career will provide excellent experience in computer risk assessment techniques. The fifth senior would like to ultimately become a certified fraud examiner but is not sure where the best place is to begin his career so that he can achieve this long-term goal.

a. What are the major advantages and disadvantages of each of the four types of auditing careers?
b. What do you think is the best early career choice for the senior interested in ultimately becoming a certified fraud examiner?
c. What other types of auditing careers are available to those who are qualified?
1-21 (OBJECTIVES 1-6, 1-7) In the normal course of performing their responsibilities, auditors
often conduct audits or reviews of the following:
1. The computer operations of a large corporation to evaluate whether the internal controls are likely to prevent misstatements in accounting and operating data.
2. Financial statements for use by stockholders when there is an internal audit staff.
3. A bond indenture agreement to make sure a company is following all requirements of the contract.
4. Internal controls at a casino to ensure the casino is in compliance with federal and state regulations.
5. Computer operations of a corporation to evaluate whether the computer center is being operated as efficiently as possible.
6. Annual statements for the use of management.
7. Operations of the IRS to determine whether the internal revenue agents are using their time efficiently in conducting audits.
8. Statements for bankers and other creditors when the client is too small to have an audit staff.
9. Financial statements of a branch of the federal government to make sure that the
statements present fairly the actual disbursements made during a period of time.
10. Disbursements of a branch of the federal government for a special research project to determine whether the expenditures were consistent with the legislative bill that authorized the project.
11. Federal income tax returns of an officer of a private corporation to determine whether he or she has included all taxable income in his or her return.
12. Federal income tax returns of a corporation to determine whether the tax laws have been followed.
a. For these 12 examples, state the most likely type of auditor (CPA, GAO, IRS, or internal) to perform each.
b. In each example, state the type of audit (financial statement audit, operational audit, or compliance audit).
Required
Required
Required

1-22 (OBJECTIVES 1-3, 1-5) Dave Czarnecki is the managing partner of Czarnecki and Hogan,
a medium-sized local CPA firm located outside of Chicago. Over lunch, he is surprised
when his friend Juarez Foley asks him, “Doesn’t it bother you that your clients don’t look
forward to seeing their auditors each year?” Dave responds, “Well, auditing is only one of
several services we provide. Most of our work for clients does not involve financial state-
ment audits, and our audit clients seem to like interacting with us.”
a. Identify ways in which a financial statement audit adds value for clients.
b. List services other than audits that Czarnecki and Hogan likely provides.
c. Assume Czarnecki and Hogan has hired you as a consultant to identify ways in which
they can expand their practice. Identify at least one additional service that you believe
the firm should provide and explain why you believe this represents a growth oppor-
tunity for CPA firms.
1-23 (OBJECTIVE 1-5) There are many types of information that require assurance. Individ-
ually or in groups, identify the following types of assurance services.
a. Identify three or more assurance services that are likely to be provided only by public
accounting firms.
b. Identify three or more assurance services that are likely to be provided by assurance
providers other than public accounting firms.
c. Identify three or more assurance services that may be provided by public accounting
firms or other assurance providers.

1-24 (OBJECTIVE 1-5) As discussed in the chapter opening vignette and on page 9, compa-
nies are increasingly issuing reports on corporate social responsibility. Visit the Global
Reporting Initiative website (www.globalreporting.org) and answer the following
questions.
a. What is the vision and mission of the Global Reporting Initiative?

b. What is a sustainability report? Explain the use of sustainability reports in integrated
reporting.

c. Explain the two “in accordance” GRI guideline reporting options. What is the GRI
guidance on assurance for “in accordance” reports?

1-25 (OBJECTIVE 1-8) Individuals are licensed as CPAs by individual states. Information on
the requirements for each state can be found through links to websites of each state board
of accountancy that are provided on the NASBA website (www.nasba.org). The Uniform
CPA Examination is administered by the AICPA, and information on CPA examination re-
quirements can be found on the AICPA website (www.aicpa.org).

a. Identify the education requirements to be eligible to sit for the CPA exam in your
state. Include any specific educational content requirements.

b. List the work experience requirements in your state. Is experience in industry as an
accountant or an internal auditor sufficient to be eligible to become a CPA?

c. List any frequently asked questions (FAQ), if there are any, related to experience and
education requirements for your state, along with a summary of the responses.

d. What are the Elijah Watts Sells awards?

e. What was the passing rate for each exam section in the most recent quarter?