Explain what is meant by determining the degree of correspondence

between information and established criteria. What are the information and established
criteria for the audit of Jones Company’s tax return by an internal revenue agent? What
are they for the audit of Jones Company’s financial statements by a CPA firm?
To do an audit, there must be information in a verifiable formand some
standards (criteria) by which the auditor can evaluate the information. Examples
of established criteria include generally accepted accounting principles and the
Internal Revenue Code. Determining the degree of correspondence between
information and established criteria is determining whether a given set of
information is in accordance with the established criteria. The information for
Jones Company's tax return is the federal tax returns filed bythe company. The
established criteria are found in the Internal Revenue Code and all
interpretations. For the audit of Jones Company's financial statements the
information is the financial statements being audited and the established criteria
are generally accepted accounting principles.
In the conduct of audits of financial statements, it would be a serious
breach of responsibility if the auditor did not thoroughly understand accounting.
However, many competent accountants do not have an understanding of the auditing
process. What causes this difference?
This apparent paradox arises from the distinction between the function of
auditing and the function of accounting. The accounting function is the recording,
classifying and summarizing of economic events to provide relevant information
to decision makers. The rules of accounting are the criteria used by the auditor
for evaluating the presentation of economic events for financial statements and
he or she must therefore have an understanding of accounting standards, as well
as auditing standards. The accountant need not, and frequently does not,
understand what auditors do, unless he or she is involved in doing audits, or has
been trained as an auditor.
After accepting an engagement, a CPA discovers that the client’s
industry is more technical than he realized and that he is not competent in certain areas of
the operation. What are the CPA’s options?
A CPA firm has several options when it decides it is not competent to
perform an audit:
1. Withdraw from the engagement.
2. Obtain the expertise through continuing education and self-studies.
3. Hire someone who has the expertise.
4. Work on a consulting basis with another CPA firm.
List the seven parts of a standard unqualified audit report and explain
the meaning of each part. How do the parts compare with those found in a qualified report?
The unqualified audit report consists of:
1. Report titleAuditing standards require that the report be titled and
that the title includes the word independent.
2. Audit report addressThe report is usually addressed to the company,
its stockholders, or the board of directors.
3. Introductory paragraphThe first paragraph of the report does three
things: first, it makes the simple statement that the CPA firm has
done an audit. Second, it lists the financial statements that were
audited, including the balance sheet dates and the accounting
periods for the income statement and statement of cash flows.
Third, it states that the statements are the responsibility of
management and that the auditor's responsibility is to express an
opinion on the statements based on an audit.
4. Scope paragraph. The scope paragraph is a factual statement about
what the auditor did in the audit.The remainder briefly describes
important aspectsof an audit.
5. Opinion paragraph. The final paragraph in the standard report
states the auditor's conclusions based on the results of the audit.
6. Name of CPA firm. The name identifies the CPA firm or practitioner
who performed the audit.
7. Audit report date. The appropriate date for the report is the end of
fieldwork, when the auditor has gathered sufficient appropriate
evidence to support the opinion.
The same seven parts are found in a qualified report as in an unqualified report. There are also
often one or more additional paragraphs explaining reasons
for the qualifications.

Distinguish between management’s and the auditor’s responsi -bility for the financial statements
being audited.
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
audit in the auditor's report.
Distinguish between internal documentation and external docu -mentation as audit evidence and
give three examples of each.
internal documentation is prepared and used within the client's organization
without ever going to an outside party, such as a customer or vendor.
Examples:
check request form
receiving report
payroll time card
adjusting journal entry
External documentationeither originated with an outside party or was an
internal document that went to an outside party and is now either in the hands of
the client or is readily accessible.
Examples:
vendor's invoice
cancelled check
cancelled note
validated deposit slip

Explain why analytical procedures are important evidence even though they are
relatively unreliable by themselves
CORRECT
Analytical procedures are evidence of the likelihood of misstatements
in the financial statements, but they are rarely sufficient by
themselves to conclude that the statements are misstated. Other
supportive evidence is needed to determine whether apparent
misstatements are actually material.
Define what is meant by a permanent file, and list several types of
information typically included. Why does the auditor not include the contents of the
permanent file with the current year’s audit file?
The permanent file contains data of an historical and continuing nature
pertinent to the current audit. Examples of items included in the file are:
1. Articles of incorporation
2. Bylaws, bond indentures, and contracts
3. Analysis of accounts that have continuing importance to the auditor
4. Information related to the understanding of internal control:
a. flowcharts
b. internal control questionnaires
5. Results of previous years' analytical procedures, such as various
ratios and percentages compiled by the auditor
In what ways can the profession positively respond to and reduce
liability in auditing?
Some of the ways in which the profession can positively respond and reduce
liability in auditing are:
1. Continued research in auditing.
2. Standards and rules must be revised to meet the changing needs
of auditing.
3. The AICPA can establish requirements that the better practitioners
always follow in an effort to increase the overall quality of auditing.
4. Establish new peer review requirements.
5. CPA firms should oppose all unfoundedlawsuits rather than settling
out of court.
6. Users of financial statements need to be better educated regarding
the attest function.
7. Improper conduct and performance by members must be sanctioned.
8. Lobby for changes in state and federal laws concerning accountants’
liability.