1.2 Flashcards
Assurance and advisory services are best described as
Independent professional services that improve the quality of information, or its context, for decision makers.
The AICPA defines assurance services as independent professional services that improve the quality of information, or its context, for decision makers. Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.
The objective of assurance services is to
Improve the firm’s outcomes.
The main objective of assurance services, as stated by the AICPA, is to provide information that assists in better decision making. Assurance services encompass audit and other attestation services but also include nonstandard services. Assurance services do not encompass consulting services.
In connection with the element of monitoring, a CPA firm’s system of quality control ordinarily should provide for the maintenance of
Documentation to demonstrate compliance with its policies and procedures.
Monitoring relates to providing reasonable assurance that policies and procedures related to the system of quality control are relevant, adequate, operating effectively, and complied with. The objectives of monitoring these policies and procedures are to evaluate (1) compliance with professional standards and legal requirements, (2) the design and effectiveness of the quality control system, and (3) whether appropriate reports are issued. Documentation of monitoring includes procedures, evaluations, deficiencies, and the bases for taking or not taking further action. Documentation of all elements of quality control should be retained for a period of time sufficient to enable those performing monitoring procedures and a peer review to evaluate the extent of the firm’s compliance with its quality control standards, or for a longer period if required by law or regulation (QC 10).
With regard to assignment of personnel to an engagement team, a CPA firm’s policies and procedures should include
Consideration of the team’s understanding of similar engagements through training and participation.
The quality control element of human resources requires assignment of appropriate personnel with the competence and capabilities to (1) perform engagements in accordance with professional standards and legal and regulatory requirements and (2) enable the firm to issue appropriate reports. The determination of team assignments and levels of supervision includes considering the team’s understanding of similar engagements through appropriate training and practical experience.
A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm’s standards of quality. To achieve this goal, the firm most likely would establish procedures for
Reviewing documentation of the work performed and reports issued.
The engagement performance element of quality control includes policies and procedures that cover planning, performing, supervising, reviewing, documenting, and communicating the results of each engagement. Objectives of supervision include establishing procedures for (1) planning engagements, (2) maintaining the firm’s standards of quality, and (3) reviewing documentation of the work performed and reports issued.
Which of the following is an element of a CPA firm’s quality control system that should be considered in establishing its quality control policies and procedures?
Managing human resources.
The quality control element of human resources requires establishment of policies and procedures to provide reasonable assurance that only qualified persons with the required technical training and proficiency perform the work.
All of the following are audit quality control requirements contained in the Sarbanes-Oxley Act of 2002 except
The audit report must be submitted to the Public Company Accounting Oversight Board prior to issuance.
Audit reports must be determined appropriate for issuance by the CPA firm but need not be approved by the PCAOB.
Which of the following are elements of a CPA firm’s quality control that should be considered in establishing its quality control policies and procedures?
Human Resources:
Monitoring:
Engagement Performance:
Yes
Yes
Yes
The quality control element of human resources relates to providing reasonable assurance that the firm has sufficient personnel with the necessary capabilities, competence, and commitment to ethics. The quality control element of monitoring relates to providing reasonable assurance that the firm has a quality control system that is relevant, adequate, effective, and complied with. The quality control element of engagement performance relates to providing reasonable assurance that (1) engagements are consistently performed in accordance with applicable requirements and (2) issued reports are appropriate (QC 10).
Who establishes generally accepted auditing standards?
Auditing Standards Board and the Public Company Accounting Oversight Board.
AICPA Code of Professional Conduct requires adherence to standards issued by bodies designated by the AICPA Council. The Auditing Standards Board (ASB) is the body designated to issue auditing standards. They are in the form of Statements on Auditing Standards (SASs). The Public Company Accounting Oversight Board (PCAOB) was created by the Sarbanes-Oxley Act of 2002. It establishes by rule auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers. The PCAOB is required to cooperate with the AICPA and other groups in setting auditing standards and may adopt their proposals. Nevertheless, the PCAOB is authorized to amend, modify, repeal, or reject any such standards. A number of auditing standards have been issued to date, the most significant requiring opinions on internal control for public companies.
Which of the following services, if any, may an accountant who is not independent provide?
Preparations and compilations but not reviews.
A compilation provides no assurance. Thus, the accountant need not be independent. The report describes the compilation service and disclaims an opinion or conclusion or any other form of assurance on the financial statements. The accountant discloses a lack of independence in the report. An accountant who prepares financial statements need not be, or determine whether (s)he is, independent. Also, no report is required.
A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services (SSARSs) when
Assisting in adjusting the books of an account:
Consulting on Accounting matters:
No
No
SSARSs apply to the professional responsibilities of accountants who prepare, compile, or review the unaudited financial statements or financial information of a nonpublic entity. Unlike a compilation, a preparation does not require the accountant to (1) determine whether (s)he is independent or (2) issue a report. The service allows an accountant to use software to generate financial statements. However, merely assisting in their preparation is a bookkeeping service (AR-C 70). The objective of a compilation is to assist management in presenting financial information in the form of financial statements. But the accountant does not undertake to obtain or provide any assurance on them (AR-C 80). The objective of a review is to obtain limited assurance that no material modifications should be made for the statement to conform with the applicable financial reporting framework (AR-C 90). Neither assisting in adjusting the books of account nor consulting on accounting matters is a preparation, compilation, or review. Moreover, consulting services are governed by the Statement on Standards for Consulting Services, not SSARSs.
A CPA firm’s quality control procedures pertaining to the acceptance of a prospective audit client would most likely include
Consideration of the business reputation of the client’s principal owners, key management, related parties, and those charged with governance.
CPA firms should have policies and procedures to determine whether to accept or continue a client or to perform a specific engagement. The firm’s policies and procedures should provide reasonable assurance that it (1) has considered the integrity of the client and the risks involved, (2) is competent, (3) has the necessary capabilities and resources, and (4) is able to comply with the applicable requirements (QC 10).
Assurance services differ from consulting services in that assurance services
Focus on providing advice:
Involve monitoring of one party by another:
No
Yes
Assurance services encompass attestation services but not consulting services. Assurance services differ from consulting services in two ways: (1) they focus on improving information rather than providing advice, and (2) they usually involve situations in which one party wants to monitor another rather than the two-party arrangements common in consulting engagements.
Within its system of quality control, the objectives of the firm’s policies and procedures related to the element of human resources include providing
Professional development activities that allow employees to fulfill assigned responsibilities.
Policies and procedures should be established to provide reasonable assurance that the firm has sufficient personnel with the capabilities, competence, and commitment to ethical principles necessary to perform engagements in accordance with professional standards and legal and regulatory requirements as well as to issue appropriate reports.
Which of the following services provides the least assurance regarding the fairness of financial statements?
Compilation.
During a compilation, neither analytical procedures nor tests of balances and transactions are performed. Thus, no assurance can be expressed regarding the fairness of the financial statements.
