1 Quality Auditing: Why it Matters

Question 1

Acceptable level

Answer 1

In connection with independence, a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member’s independence is not impaired. When used in connection with any rule except for the Independence Rule, an acceptable level is a level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member’s compliance with the rules is not compromised.

Question 2

Adverse opinion

Answer 2

Expressed when the auditor believes that the financial statements taken as a whole are not presented fairly in conformity with GAAP or when the auditor believes that the client’s internal control over financial reporting is not effective

Question 3

American Institute of Certified Public Accountants (AICPA)

Answer 3

A professional organization for CPAs that develops professional standards for the conduct of nonpublic company audits and other services performed by its members. The organization also serves to self-regulate the profession performing nonpublic audits.

Question 4

Audit Quality

Answer 4

Performing an audit in accordance with generally accepted auditing standards (GAAS) to provide reasonable assurance that the audited financial statements and related disclosures are presented in accordance with GAAP and providing assurance that those financial statements are not materially misstated whether due to errors or fraud.

Question 5

Center for Audit Quality (CAQ)

Answer 5

An organization affiliated with the AICPA that is dedicated to enhancing investor confidence and trust in the financial markets.

Question 6

Client acceptance decision

Answer 6

The process by which a new client is evaluated by the audit firm and individual engagement partner prior to being accepted into the audit firm’s portfolio of clients.

Question 7

Client continuance decision

Answer 7

The process by which existing clients for which the audit firm provided services in the preceding period are evaluated by the audit firm and the individual engagement partner at the completion of the audit to determine whether the audit firm should continue to provide services again in the next period.

Question 8

Confidential information

Answer 8

Information obtained during the conduct of an audit related to the client’s business or business plans; the auditor is prohibited from communicating confidential information except in very specific instances defined by the Code or with the client’s specific authorization.

Question 9

Cooling Off Period

Answer 9

Number of years after which the individual auditor may resume providing service to the audit client.

Question 10

Covered member

Answer 10

a. An individual on the engagement team
b. An individual in a position to influence the engagement
c. A partner, partner equivalent, or manager who provides more than 10 hours of nonattest services to the audit client within any fiscal year
d. A partner or partner equivalent in the office in which the lead engagement partner or partner equivalent primarily practices in connection with the engagement
e. The firm, including the firm’s employee benefit plans
f. An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in items a–e or two or more such individuals or entities if they act together

Question 11

CPA

Answer 11

A certified public accountant who is licensed by a state board of accountancy

Question 12

Direct Financial interest

Answer 12

A financial interest owned directly by, or under the control of, an individual or entity or beneficially owned through an investment vehicle, estate, or trust when the beneficiary controls the intermediary or has the authority to supervise or participate in the intermediary’s investment decisions.

Question 13

Due Professional care

Answer 13

A standard of care expected to be demonstrated by a competent professional in his or her field of expertise, set by GAAS but supplemented in specific implementation instances by the standard of care expected by a reasonably prudent auditor.

Question 14

Engagement letter

Answer 14

A communication between the audit firm and the audit committee that states the scope of the work to be done on the audit so that there can be no doubt in the mind of the client, external auditor, or the court system as to the expectations agreed to by the external auditor and the client.

Question 15

Ethical dilemma

Answer 15

A situation in which moral duties or obligations conflict; an ethically correct action may conflict with an individual’s immediate self-interest.

Question 16

Financial Reporting Council

Answer 16

The United Kingdom’s independent regulator responsible for promoting investment in securities through good corporate governance and financial reporting.

Question 17

Financial Statement Audit

Answer 17

A systematic process of objectively obtaining evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

Question 18

Generally Accepted Auditing Standards

Answer 18

GAAS refers to professional external auditing standards that are followed by auditors when conducting a financial statement audit. Throughout the book, when we refer to professional external auditing standards, we will use the term GAAS (generally accepted auditing standards). GAAS are set by several bodies, including the AICPA, the IAASB, and the PCAOB.

Question 19

Indirect Financial interest

Answer 19

A financial interest in which the beneficiary neither controls the intermediary nor has the authority to supervise or participate in the intermediary’s investment decisions.

Question 20

Integrated Audit

Answer 20

Type of audit provided when an external auditor is engaged to perform an audit of the effectiveness of internal control over financial reporting (the audit of internal control over financial reporting) that is integrated with an audit of the financial statements.

Question 21

International Auditing and Assurance Standards Board (IAASB)

Answer 21

A part of the International Federation of Accountants that is responsible for issuing auditing and assurance standards. Its goal is to harmonize auditing standards on a global basis.

Question 22

International Ethics Standards Board for Accountants (IESBA)

Answer 22

An independent, standard-setting body that serves the public interest by setting robust, internationally appropriate ethics standards, including auditor independence requirements, for professional accountants worldwide.

Question 23

International Federation of Accountants (IFAC)

Answer 23

The global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies.

Question 24

Network firm

Answer 24

A firm or other entity that belongs to a network. This includes any entity (including another firm) that the network firm, by itself or through one or more of its owners, controls, is controlled by, or is under common control with.

Question 25

objectivity

Answer 25

An impartial, unbiased attitude.

Question 26

Principles of professional conduct

Answer 26

Broad principles that articulate auditors’ responsibilities and their requirements to act in the public interest, to act with integrity and objectivity, to be independent, to exercise due care, and to perform an appropriate scope of services.

Question 27

Professional judgment

Answer 27

The application of relevant professional knowledge and experience to the facts and circumstances in order to reach a conclusion or make a decision.

Question 28

Professional Skepticism

Answer 28

An attitude that includes a questioning mind and critical assessment of audit evidence.

Question 29

Public Company Accounting Oversight Board (PCAOB)

Answer 29

A quasipublic board, appointed by the SEC, to provide oversight of the firms that audit public companies registered with the SEC. It has the authority to set auditing standards for the audits of public companies.

Question 30

Rights Theory

Answer 30

An ethical theory that identifies a hierarchy of rights that should be considered in solving ethical dilemmas.

Question 31

Safeguards

Answer 31

Actions or other measures that may eliminate a threat or reduce a threat to an acceptable level.

Question 32

Securities and Exchange Commission (SEC)

Answer 32

The governmental body with the oversight responsibility to ensure the proper and efficient operation of capital markets in the United States.

Question 33

Threats

Answer 33

Relationships or circumstances that could compromise compliance with the rules.

Question 34

Unqualified Report

Answer 34

The standard audit report that describes the auditor’s work and communicates the auditor’s opinion that the financial statements are fairly presented in accordance with GAAP.

Question 35

Utilitarian Theory

Answer 35

An ethical theory that systematically considers all the potential stakeholders who may be affected by an ethical decision and seeks to measure the effects of the decision on each party; it seeks to facilitate decisions resulting in the greatest amount of good for the greatest number of people.