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Chapter 01 - The Role of the Public Accountant in the American Economy



CHAPTER 1



                                 The Role of the
                             Public Accountant in the
                               American Economy


Review Questions

1-1     The “crisis of credibility” largely arose from the number of companies that restated their previously
        issued financial statements as a result of accounting irregularities and fraud. Especially responsible
        were the very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and
        constituted the largest companies in American history to do so. The extent of the accounting
        irregularities and fraud being investigated and disclosed brought into question the effectiveness of
        financial statement audits. In addition, the criminal conviction of Arthur Andersen, LLP, one of the
        then Big 5 accounting firms, on charges of destroying documents related to the Enron case brought into
        question the ethical standards of the profession.

1-2     Assurance services are professional services that enhance the quality of information, or its context, for
        decision-making. The two types are: (a) those that increase the reliability of information and (b) those
        that involve putting information in a form or context that facilitates decision-making.

1-3     A financial statement audit is, by far, the most common type of attest engagement. The overall
        assertion, made by management, most frequently is that the financial statements follow generally
        accepted accounting principles.

1-4     A large corporation with securities listed on a stock exchange is required by the rules of the stock
        exchange and by the rules of the Securities and Exchange Commission to provide an audit report with
        the annual financial statements furnished to its stockholders. It also is required to engage the auditors
        to provide an opinion on its internal control. Apart from legal requirements, however, a large listed
        corporation recognizes that it must maintain investor confidence in the reliability of its financial
        statements and internal control over financial reporting if it is to continue to be able to secure capital
        from the public. The report by a firm of certified public accountants adds credibility to the financial
        statements prepared by the corporation. When a small family-owned enterprise elects to have an audit,
        the purpose usually is to use the auditors' report to support an application for a bank loan.




                                                        1

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Chapter 1 qs

  • 1. Chapter 01 - The Role of the Public Accountant in the American Economy CHAPTER 1 The Role of the Public Accountant in the American Economy Review Questions 1-1 The “crisis of credibility” largely arose from the number of companies that restated their previously issued financial statements as a result of accounting irregularities and fraud. Especially responsible were the very visible Enron and WorldCom fraud cases. Both companies filed for bankruptcy and constituted the largest companies in American history to do so. The extent of the accounting irregularities and fraud being investigated and disclosed brought into question the effectiveness of financial statement audits. In addition, the criminal conviction of Arthur Andersen, LLP, one of the then Big 5 accounting firms, on charges of destroying documents related to the Enron case brought into question the ethical standards of the profession. 1-2 Assurance services are professional services that enhance the quality of information, or its context, for decision-making. The two types are: (a) those that increase the reliability of information and (b) those that involve putting information in a form or context that facilitates decision-making. 1-3 A financial statement audit is, by far, the most common type of attest engagement. The overall assertion, made by management, most frequently is that the financial statements follow generally accepted accounting principles. 1-4 A large corporation with securities listed on a stock exchange is required by the rules of the stock exchange and by the rules of the Securities and Exchange Commission to provide an audit report with the annual financial statements furnished to its stockholders. It also is required to engage the auditors to provide an opinion on its internal control. Apart from legal requirements, however, a large listed corporation recognizes that it must maintain investor confidence in the reliability of its financial statements and internal control over financial reporting if it is to continue to be able to secure capital from the public. The report by a firm of certified public accountants adds credibility to the financial statements prepared by the corporation. When a small family-owned enterprise elects to have an audit, the purpose usually is to use the auditors' report to support an application for a bank loan. 1