1.In their review of the public accounting profession, James Harris and Associates warn that an audit report too often is viewed as a "certificate of health" for a company.

The report states:

The most serious consequences stemming from such a misunderstanding are that the independent auditor can quickly be portrayed as the force that represents all good in financial accounting and the guarantor of anything positive anyone wants to feel about a given company.

Required:

a.Why is public accounting often viewed as a guarantor of results or even as a provider of assurance that one's investment is of high quality?

a.To what extent is it reasonable to view the auditor as a guarantor? Explain.

b.How does the auditing profession work to create or communicate a reasonable set of expectations that users should hold?

c.To what extent do you believe that user expectations of the public accounting profession appear to you to be unwarranted? Explain

1.Materiality is an important audit concept because audits must be designed to detect "material" misstatements.

Required:

a.Define materiality and describe how it is used in both accounting and auditing.

b.Should the determination of the materiality be discussed with (i) the audit committee and (ii) management before the beginning of the audit engagement? Explain your rationale

c.What factors might an auditor look at in determining materiality for an audit client prior to the start of the audit?

2.The existence of fraudulent financial reporting has been of great concern to both the accounting profession and regulatory agencies such as the SEC. It has been asserted that companies in trouble frequently go bankrupt shortly after receiving unqualified opinions from auditors. The auditing profession has historically argued that such cases are rare, and that the cases appearing in the press give the impression that the profession is doing a poorer job than it actually is.

Required:

a.Distinguish between an "audit failure" and a "business failure." Explain why the press may have difficulty in distinguishing between the two.

b.Identify a recent fraud that has been reported in the press. For the fraud identified:

Identify the motivations for the fraud and how the fraud took place.

Identify the internal control failures that would have allowed the fraud to take place.