1-Explain audit services, attestation services, and assurance services,

and give examples of each.

An assurance service is an independent professional service to improve the

quality of information for decision makers. An attestation service is a form of
assurance service in which the CPA firm issues a report about the reliability of an
assertion that is the responsibility of another party. Audit services are a form of
attestation service in which the auditor expresses a written conclusion about the
degree of correspondence between information and established criteria.
The most common form of audit service is an audit of historical financial
statements, in which the auditor expresses a conclusion as to whether the financial
statements are presented in accordance with an applicable financial reporting
framework such as U.S. GAAP or IFRS. An example of an attestation service is a
report on the effectiveness of an entity’s internal control over financial reporting.
There are many possible forms of assurance services, including services related to
business performance measurement, health care performance, and information
system reliability.

2-The list below indicates various audit, attestation, and other engagements
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 auditor’s report on whether the financial statements are fairly
presented in accordance with International Financial Reporting Standards.
3. An engagement to help a company structure a merger transaction to
minimize the taxes of the combined entities.
4. A report stating whether the company has complied with restrictive
covenants related to officer compensation and payment of dividends
contained in a bank loan agreement.
5. A report on the effectiveness of internal controls at a company that
provides payroll processing for other companies.
6. An examination report stating whether a company’s statement of
greenhouse gas emissions is presented in conformity with standards
issued by the World Business Council for Sustainable Development and
the World Resources Institute.
7. Evaluating the voting process and certifying the outcome for Rolling
Stone Magazine’s “Greatest Singer of All Time” poll.
8. A report indicating whether a governmental entity has complied with
certain government regulations.
9. A review report that provides limited assurance about whether financial
statements are fairly stated in accordance with U.S. GAAP.
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.
Required:
a. Explain the relationships among audit services, attestation services, and
other assurance 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.
a. Audit services are a form of attestation service, and attestation
services are a form of assurance service. In a diagram, audit services
are located within the attestation service area, and attestation
services are located within the assurance service area.

b. 1. (2) An attestation service other than an audit service

2. (1) An audit of historical financial statements
3. (3) An assurance or nonassurance service that is not an
attestation service
4. (2) An attestation service other than an audit service
5. (2) An attestation service other than an audit service
6. (2) An attestation service other than an audit service
7. (2) An attestation service other than an audit service
8. (2) An attestation service other than an audit service
9. (2) An attestation service other than an audit service
(Review services are a form of attestation, but are
performed according to Statements on Standards for
Accounting and Review Services.)
10. (2) An attestation service other than an audit service
 11. (3) An assurance or nonassurance service that is not an
attestation service

3-In the normal course of performing their responsibilities, auditors often

conduct audits or reviews of the following:
1. Federal income tax returns of an officer of the corporation to determine whether he

or she has included all taxable income in his or her return.

2. Federal income tax returns of a corporation to determine whether the tax laws have

been followed.

3. The computer operations of a large corporation to evaluate whether the internal controls

are likely to prevent misstatements in accounting and operating data.

4. Financial statements for use by stockholders when there is an internal audit staff.

5. A bond indenture agreement to make sure a company is following all requirements

of the contract.

6. Internal controls at a casino to ensure the casino is in compliance with federal and

state regulations.

7. Computer operations of a corporation to evaluate whether the computer center is

being operated as efficiently as possible.

8. Annual statements for the use of management.

9. Operations of the IRS to determine whether the internal revenue agents are using

their time efficiently in conducting audits.

10. Statements for bankers and other creditors when the client is too small to have an

audit staff.

11. 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.

12. 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.

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).
 The most likely type of auditor and the type of audit for each of the examples
are:

EXAMPLE a. TYPE OF AUDITOR b. TYPE OF AUDIT

1. IRS Compliance
2. IRS Compliance
3. Internal auditor or CPA Financial statements or operational
4. CPA Financial statements
5. Internal auditor or CPA Compliance
6. Internal auditor or CPA Compliance
7. Internal auditor or CPA Operational
8. CPA or internal auditor Financial statements
9. GAO Operational
10. CPA Financial statements
11. GAO Financial statements
12. GAO Compliance

4-There are many types of information that require assurance. Individually

or in groups, identify the following types of assurance services.
Required
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.
a. Assurance related to financial statements are the most likely forms of assurance
that are likely to be provided only by public accounting firms. Examples include audits
of historical financial statements, reviews of historical financial statements, audits of
internal control over financial reporting, and compliance auditing such as that required
by the Single Audit Act and OMB Circular A-133 (although these audits may also be
provided by government auditors).

b.There are many types of information that are assured by providers other than public
accounting firms. Some of these assurances are provided by government entities,
such as food inspections, elevator inspections, and pumps at gasoline stations. Other
assurances are provided by nonprofit and for-profit assurance providers, such as ISO
9000 certifications.

c.Examples of assurance that may be provided by public accounting firms or other

assurance providers. For example, assurance on corporate responsibility and
sustainability may be provided by public accounting firms or other assurance
providers. Other examples included assurance on Web site controls, and information
such as Web site traffic or newspaper circulation.

5-Explain briefly the differences among the types of auditing?

AUDITS OF
FINANCIAL
OPERATIONAL COMPLIANCE
STATEMENTS
AUDITS AUDITS

PURPOSE
To evaluate To determine whether To determine
whether operating the client is following whether the overall
procedures are specific procedures set financial statements
efficient and by higher authority are presented in
effective accordance with
specified criteria
(usually GAAP)

USERS OF Management of Authority setting down Different groups

AUDIT organization procedures, internal or for different
REPORT external purposes — many
outside entities

NATURE Highly Not standardized, but Highly

nonstandard; often specific and usually standardized
subjective objective

PERFORMED
BY:

CPAs
Frequently Occasionally Almost universally

GAO

AUDITORS Frequently Frequently Occasionally

IRS

AUDITORS Never Universally Never

 INTERNAL

AUDITORS Frequently Frequently Frequently

6-Discuss the differences and similarities between the roles of accountants

and auditors. What additional expertise must an auditor possess beyond
that of an accountant?
Answer: The role of accountants is to record, classify, and summarize economic events in a
logical manner for the purpose of providing financial information for decision making. To
provide relevant information, accountants must have a thorough understanding of the
principles and rules that provide the basis for preparing the accounting information. In
addition, accountants must develop a system to ensure that the entity's economic events are
properly recorded on a timely basis and at a reasonable cost.

The role of auditors is to determine whether the recorded information prepared by

accountants properly reflects the economic events that occurred during the accounting period.
Because U.S. or international accounting standards provide the criteria for evaluating whether
financial information is properly recorded, auditors must thoroughly understand those
accounting standards. In addition to understanding accounting, the auditor must possess
expertise in the accumulation and interpretation of audit evidence. It is this expertise that
distinguishes auditors from accountants. Determining the proper audit procedures, deciding
the number and types of items to test, and evaluating the results are unique to the auditor.

7-Replace the wrong word or sentence with the bold line with the correct one:
1) A correct relationship among the auditor, the client, and the external users is
management of a public company hires the independent auditor
Answer
the external users can rely upon the auditor's report to reduce information risk.

2) The most common way for users to obtain reliable information is to verify the
information with management.
Answer
have an independent audit.

3) In the audit of historical financial statements, management asserts that the financial
statements are fairly stated in accordance with regulatory accounting principles
Answer
applicable international accounting standards and applicable U.S. accounting standards

4) Any service that requires a CPA firm to issue a report about the reliability of an
 assertion that is made by another party is an assurance service
Answer
attestation service.
5)Three common types of attestation services are audits of historical financial
information, verifications of historical financial information, and attestations regarding
internal controls.
Answer
audits of historical financial statements, reviews of historical financial statements, and audits
of internal control over financial reporting.

6)the lowest level of assurance on a financial statement is audit

Answer
review
7) A primary purpose of an operational audit is to provide aid to the independent auditor, who is
conducting the audit of the financial statements.
Answer
a measure of management performance in meeting organizational goals
8)operational audit focuses on verifying the fair presentation of a company’s results of
operations

Answer
concentrates on seeking aspects of operations in which waste could be reduced by the
introduction of controls.

9) Assurance services can only be performed on financial data is an accurate statement

regarding assurance services
Answer
Assurance services improve the quality of information for decision makers.
10)Audits are an assurance service, but not an attestation service.

Answer
are required for publicly traded companies in the United States.

11) A high, but not absolute, level of assurance is incomplete assurance

Answer
reasonable assurance.

8-Two types of attestation services provided by CPA firms are audits and reviews.
Discuss the similarities and differences between these two types of attestation services.
Which type provides the least assurance?
Answer: In both the review and audit of the historical financial statements, management
asserts that the statements are fairly stated in accordance with accounting standards. The CPA
provides a lower level of assurance for reviews of financial statements compared to the high
level for audits, therefore less evidence is needed. A review is often adequate to meet
financial statement users' needs. It can be provided by a CPA firm at a much lower fee than
an audit because less evidence is needed.

An audit is the most common assurance service provided by CPA firms. Publicly traded
companies in the U.S. are required to have audits under the federal securities acts. Many
nonpublic companies have a review to limit audit fees.

9-What is an audit of internal control over financial reporting?

Answer: For an audit of internal control over financial reporting, management asserts that
internal controls have been developed and implemented following well established criteria.
Section 404 of the Sarbanes-Oxley Act requires public companies to report management's
assessment of the effectiveness of internal control. The Act also requires auditors for larger
public companies to attest to the effectiveness of internal control over financial reporting.
This evaluation, which is integrated with the audit of financial statements, increases user
confidence about future financial reporting, because effective internal controls reduce the
likelihood of future misstatements in the financial statements.

10-What are the four categories of attestation services?

Answer: The four categories of attestation services include
• Audit of historical financial statements
• Audit of internal control over financial reporting
• Review of historical financial statements
• Other attestation services that may be applied to a broad range of subject matter.
 CPA firms perform numerous services that generally fall outside the scope of assurance
services. Give three examples of such services.
Answer: Three specific examples of services performed by CPAs that generally fall outside
the scope of assurance services are
• accounting and bookkeeping services
• tax services
• management and consulting services.

13) CPA firms are never allowed to provide bookkeeping services for clients.
Not allowed

Match the engagement described to the (A) type of audit and (B) auditor that would most
likely perform the engagement. Each engagement will have an answer from List-A and List-
B. An answer can be used once, more than once, or not at all.

List A - Type of Audit: List B - Type of Auditor:

a. Financial Statement d. Internal
b. Compliance e. External
c. Operational f. Government
g. IRS

Engagement:
1. Evaluate a company's payroll processing for economy.
2. Evaluate/determine if bank covenants are being met.
3. Evaluate financial statements that are to be submitted to a bank.
4. Evaluate the promptness of materials inspection in a manufacturer's receiving department.
5. Determine if Medicare reimbursements are in accordance with the Healthcare Financing
Administration (HCFA).
6. Determine if the tax return of a multinational corporation is in accordance with the tax
code.
7. Determine if a public school is properly applying their reimbursement for the payment-in-
kind program.
8. Determine the effectiveness of a Department of Defense project.
Answer:
1. c, d
2. b, d
3. a, e
4. c, d
5. b, f
6. b, g
7. b, e
8. c, f
Discuss the similarities and differences between the roles of independent auditors, GAO
auditors, internal revenue agents, and internal auditors.
Answer: The roles of all four types of auditors are similar in that they involve the
accumulation and evaluation of evidence about information to ascertain and report on the
degree of correspondence between the information and established criteria. The differences in
their roles center around the information audited and the criteria used to evaluate that
information. Independent auditors primarily audit companies' financial statements. GAO
auditors' primary responsibility is to perform the audit function for Congress. IRS auditors
are responsible for the enforcement of federal tax laws. Internal auditors primarily perform
operational and compliance audits for their employing company.