What is the purpose of engagement planning?
The purpose of engagement planning is to ensure that both the auditor possesses the knowhow and capabilities needed to address the client’s needs, and that the client is of integrity and has not imposed any restrictions that may cause the auditor to issue an unqualified opinion.

What critical information should the auditor consider during engagement planning?
During the engagement planning process the auditor should assess several areas of the company’s operations and prior activities. Most notably the auditor should evaluate the integrity of the company’s management, communicate with the predecessor auditor, make inquiries of other third parties, review previous experiences with existing clients, identify special circumstances and unusual risks, identify intended users of audited financial statements, assess the company’s client’s legal and financial stability, identify scope limitations, evaluate the company’s financial reporting systems, and of course the auditor should at some point ask the potential client exactly what services are desired.

How will this information affect the scope of the audit?
Every bit of the above mentioned information can affect the scope of the audit. For example, if a company is not forthright and honest about their financial reporting practices, the auditor may end up conducting an audit that does not properly assess the current position of the company. An independent auditor would hate for his/her company to be exposed to bad PR if the company they’ve audited is featured on the news as a scandalous company.

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?
Often public accounting is viewed as a guarantor of results, or even as a provider of assurance that one’s investment is of high quality for several reason. First, public accounting is often perceived as an independent analysis of an entity’s financial position. Other reasons may include the standards are procedures that accounting professionals are required to uphold. GAAP, GAAS, AICPA, SOX, etc., all set guidelines and regulations that are designed to instill confidence in the public’s perception of professional accounting and auditing work.

To what extent is it reasonable to view the auditor as a guarantor?
The extent to which it is reasonable to view the auditor as a guarantor is quite high. After all, auditors are the only people we can trust to provide an accurate portrayal of company, as auditors are the only ones who have the ability to provide such information. Another reason might be that often audits are performed by third party companies who begin the audit process without bias or assertions to how the entity should be operated.

To what extent do you believe that user expectations of the public accounting profession appear to be unwarranted?
I don’t think that it is necessarily fair to assume that all users’ expectations of the public accounting profession appear unwarranted. There are multiple users – management, shareholders, bond holders, creditors, etc., will likely have their own purposes and interpretations of specific data. To suggest that all users view financial reports in the same manner, or for the same purpose, is not realistic.

What is the Sarbanes-Oxley Act?
The Sarbanes-Oxley Act of 2002, also referred to as SOX, was enacted in reaction with the public’s outcry to more closely regulate corporate and auditor accountability. After the numerous corporate scandals that wound up costing shareholders their entire life savings, it was clear that new legislation was needed in order to protect investors of public companies. SOX for auditors is designed to promote quality control.

How does SOX affect the audits for the accounting firm and for the organization?
SOX affects the audits performed by an accounting firm and for the organization by specifying what activities an auditor should be responsible for, and which activities would be unlawful for the auditor to perform. The following services cannot be performed by auditors, in accordance with SOX: bookkeeping related to the accounting records or financial statements of the audit client, financial information systems design and/or implementation, appraisal or valuation services, internal audit services, management functions, broker/dealer/investment advisor/investment banking, or legal services.

How does GAAP affect financial reporting?
GAAP affects financial reporting in numerous ways. GAAP sets the guidelines, principles, laws, and framework for accounting professionals to follow when conducting accounting work and when reporting financial information. The Securities and Exchange Commission (SEC) requires that publically traded companies prepare their financial reports following GAAP.

How does GAAP need to change to accommodate today’s dynamic business environment?
One area that GAAP needs to change in order to accommodate today’s dynamic business environment is to have room for international accounting and financial reporting practices. Currently GAAP is referred to as US GAAP to signify that GAAP is designed to meet the needs of accounting professionals and financial statement users in the United States. However, more and more businesses are finding that they can operate more efficiently with offshore operations, meaning that a set of international accounting criteria needs to be followed. The International Financial Reporting Standards (IFRS) is a globally accepted set of guidelines and considerations that many U.S. subsidiaries use when reporting their financial position.

In an International Accounting Standards Board (IASB) article titled “IASB Responds to G20 Recommendations and US GAAP Guidance”, the global need for a single set of high quality accounting standards is emphasized. The article mentions that the Financial Accounting Standards Board (FASB), along with the Accounting Standards Board of Japan (ASBJ) and many other national standard setters are working towards this goal.

As the world continues to globalize, fueled by increased communications and education, the need for a globally accepted accounting standards will become much more prevalent.

Codification of GAAP:
According to the American Institute of Certified Public Accountants (AICPA), changes were recently made that affected the previous Financial Accounting Standards Board (FSBA) Statement No. 162. The new statement, FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, provides literature on how accounting professionals should interpret the hierarchy of GAAP. Codification of GAAP was established in order to aid accounting professionals in making ethical decisions when conducting auditing and accounting work and when presenting financial data.

The hierarchy of GAAP:
The hierarchy of accounting for GAAP is divided into four levels:

• Level A: FASB Statements, FASB Interpretations, SEC Rules and Interpretive Releases, Accounting Principles Board Opinions (Unless amended), Accounting Research Bulletins (Unless amended)
• Level B: FASB Technical Bulletins, AICPA Industry Audit Guides that have been reviewed by the FASB
• Level C: Accounting Standards Executive Committee (AcSEC) Practice Bulletins that have been reviewed by the FASB, Consensuses reached by the Emerging Issues Task Force (EITF)
• Level D: AICPA Accounting Interpretations (no longer issued), FASB Implementation Guides, Other widely recognized or prevalent accounting practices

The significance of goodwill in the consolidation process:
When consolidating the financial statements of two or more firms into a single set of financial statements it is necessary, not to mention extremely important, to consolidate all assets, liabilities, expenses, and revenues. If any major factor of any of the firms is left out, i.e. goodwill, the consolidated statements will not accurately reflect the firm’s wealth.

If goodwill is not included in the parent company’s consolidated statements, then they will not be recognizing the goodwill of its subsidiaries, causing different (wrong) amounts to be stated for the value of the subsidiary.

One thing to note is that while the parent company should recognize its subsidiaries’ goodwill, the goodwill itself is only of value to the subsidiary who has it; in other words without the subsidiary, there is no goodwill.