1A - Ethics, Professional Responsibilities, and General Principles Flashcards
1
Q
What is the Public Company Accounting Oversight Board (PCAOB) and who established it?
A
Established by congress to oversee PUBLIC company audits. Group was formed to protect the interests of investors and further the public interest in the prep of audit reports.
2
Q
The term “Member” is used for which two governing bodies?
A
1.) AICPA Code of Professional Conduct
2.) IESBA Code of Ethics for Professional Accountants.
For AICPA, a firm may only designate itself as “Members of the AICPA” if all CPA Owners are members.
3
Q
Independence Rules for Employee Benefit Plan Auditors.
Who are the three bodies involved and what are each of their guidelines?
A
Department of Labor (DOL) - rules apply to all employee benefit plan auditors.
AICPA - AICPA Rules apply if employee is member of AICPA.
SEC - SEC rules only apply if Form 11-K is filed with SEC.
4
Q
Government Accountability Office (GAO) - What are the 7 Threats to Independence?
A
1.) Self-Interest : Threat that a financial or other interest will inappropriately influence judgement.
2.) Self-Review : Threat an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of PREVIOUS judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit.
3.) Bias : the threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective.
4.) Familiarity : Threat that close relationship will impact objectivity.
5.) Undue Influence Threat : Threat that external influences or pressures will impact an auditor’s ability to make independent and objective judgements.
6.) Mgmt. Participation Threat: Threat that results from an auditor taking on the role of management or otherwise performing management functions on behalf of the entity undergoing the audit.
7.) Structural Threat : Threat that an audit organization’s placement within a government entity, in combination with the structure of the government entity being audited, will impact the audit organization’s ability to perform work and report results objectively.
5
Q
Due Care - Auditor must perform professional services with which two principles?
A
Principle in the AICPA Code of Professional Conduct, member’s responsibility to perform professional services with COMPETENCE and DILIGENCE.
6
Q
SECTION 403 (SOX) - Disclosures of Transactions Involving Mgmt. and Principal Stockholders
A
Requires every person who is directly or indirectly the beneficial owner of more than 10% of any class of equity shall file their statements within 10 days after individual becomes beneficial owner, director, or officer.
7
Q
SECTION 404 (SOX) - Management Assessment of Internal Controls
A
Audit report must attest and report on the INTERNAL CONTROL assessment made by management.
8
Q
SECTION 402 (SOX) - Enhanced Conflict of Interest Provisions
A
Issuer can’t extend or maintain credit in form of personal loan to any director or executive officer of that issuer.
9
Q
SECTION 406 (SOX) - Code of Ethics for Senior Financial Officers
A
Disclose whether or not the issuer had adopted a code of ethics for senior financial officers (and if not, why not). Any change in or waiver of this code requires disclosure as well.
10
Q
SECTION 18 Securities and Exchange Act (SEA) of 1934 - LIABILITY FOR MISLEADING STATEMENTS
A
CPA can incur liability for filing any false or misleading statement in any document required to be filed. The third party must prove INTENT in order to hold the CPA liable. Negligence on the part of the CPA is not enough.
11
Q
Attest Engagements include reports on the following:
A
1.) Internal Control Structure
2.) Compliance w/ Statutory, Regulatory, and Contractual Requirements
3.) Investment Performance Statistics
4.) Information Supplementary to the Financial Statements
12
Q
Consolidated Omnibus Budget Reconciliation Act (COBRA)
A
Requires employers to offer former employees continued benefits after they leave a position for a certain period of time. However, employees are normally responsible for the insurance premiums.
13
Q
SECTION 105 (SOX) - Investigations and Disciplinary Proceedings
A
PCAOB may investigate any act or practice, or omission to act, by a registered public accounting firm, any associated person of such firm, or both.
14
Q
SECTION 11A - Securities Act of 1933
A
CPA who audits the financial statements associated with a registration statement may be sued by anyone who acquires the securities. The CPA must show that the misstatement in the financial statements was immaterial, that the financial statements were not misleading, or that he exercised due diligence in the audit. The burden of proof is shifted to the CPA.
15
Q
SECTION 206 (SOX) - Conflicts of Interest
A
Member of an audit engagement team CANNOT accept employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the SEC during the 1-year period preceding the date of the start of the audit.
16
Q
What is the purpose of the Audit Committee?
A
SUB GROUP of the Board of Directors. Audit committee’s function is to set up means of direct communication between outside directors and the independent auditor. The committee typically:
1.) selects and appoints the independent auditor,
2.) assures that the auditor is independent,
3.) reviews the nature and details of the engagement,
4.) reviews the quality of the auditor’s work,
5.) reviews the scope of the audit,
6.) maintains lines of communication, and
7.) helps solve any disagreements.
17
Q
Occupational Safety and Health Act (OSH Act)
A
Regulates safety and health conditions in most PRIVATE companies. Employers have a duty under the OSH Act to provide their employees with work/workplace free from hazards. Violations of the OSH Act include both civil and criminal penalties.
18
Q
Family and Medical Leave Act (FMLA)
A
Requires employers of 50 or more employees to give up to 12 weeks of unpaid, job-protected leave to eligible employees for the birth or adoption of a child or for the serious illness of the employee, spouse, or parent.
19
Q
Government Accountability Office (GAO) - What are the Four Sections of Independence?
A
1.) A conceptual framework
2.) Guidance for audit organizations that are structurally located within the entities they audit
3.) Requirements when performing non-audit services
4.) Guidance on documentation
20
Q
Health Insurance Portability and Accountability Act
A
Promotes the privacy of individually identifiable health information and sets national standards for the security of electronic protected health information.
21
Q
Fair Labor Standards Act
A
Employers must pay covered employees at least the federal minimum wage and overtime pay of 1.5 times the regular rate of pay. This act also restricts the hours that children under the age of 16 may work and forbids the employment of children in jobs deemed to be dangerous.
22
Q
Gov’t Auditing Standards - What to do when threats to independence are identified?
A
Auditors must apply safeguards to eliminate or reduce threats to an acceptable level.
23
Q
Gov’t Auditing Standards - What could result in impairment of CPA’s Independence?
A
Developing entity program policies are considered a management function. As such, developing such policies would impair a CPA’s independence.
24
Q
Employee Retirement Income Security Act (ERISA)
A
Regulates employers who offer pension or welfare benefit plans. Federal law requires that employee benefit plans with 100 or more participants must have an audit annually as part of their obligation to file Form 5500. Auditors of employee benefit plans must be independent.
25
Contingent Fees
Public Acct. Firm CANNOT provide services for Contingent Fees or Commission during the audit and professional engagement period. Even if the fee arrangement is approved by the client’s audit committee, the auditor’s independence is still impaired.
26
PCAOB Rule 3524 - Audit Committee Pre Approval of Tax Services
Requires registered public accounting firm to describe in writing the scope and fee structure of the services, discuss potential effects on independence, and document the substance of the discussion with the audit committee.
27
SECTION 208 (SOX) - Commission Authority
Prevents public accounting firms in violation of SEC or PCAOB rules from preparing or issuing any audit report with respect to that issuer.
28
Disclosure of Audit Clients
IRS has rules against a CPA or other preparer disclosing a tax return client's name. Since auditing and tax preparation have been separated by SOX, audit clients could be disclosed. Disclosures that suggest a company has financial problems are prohibited.
29
Code of Professional Conduct - AICPA
Consists of the principles, rules, and interpretations and other guidance. The principles provide the framework for the rules, which govern the performance of professional services by members of the AICPA.
30
Professional Skepticism
Attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.
31
Objectivity
Objectivity is the ability to maintain an impartial attitude in both fact and appearance based on one's actions and relationships. (Intellectually honest and free of conflicts of interest).
Objectivity is required by all CPA's, not just those in Public Practice.
32
What is the difference between Independence in Fact and Appearance?
The CPA must be independent not only in fact but also in appearance.
FACT - Means true conflict must not exist.
APPEARANCE - appearance, or impression, of conflict must not exist.
33
AICPA Code of Conduct - Client Records
Client-prepared records are required to be returned to the client per the AICPA’s Code of Professional Conduct. This is true regardless of whether the client is in arrears on fees. In general, any client-owned property is required to be returned to the client. Anything prepared by the Auditor are property of the Audit Firm.
34
Attest Client
Company, Organization, or Individual that engages an external accounting firm to perform audits, reviews, or examinations of financial statements or other financial information.
35
SECTION 103 (SOX) - PCAOB Has Authority to do what?
Set, amend, update, and modify auditing, quality control, and ethics standards.
36
In order to participate on the PCAOB Board, members must?
Demonstrate commitment to the interests of investors and the public.
37
SECTION 204 (SOX) - AUDITOR REPORTS TO AUDIT COMMITTEE.
What three things must the Acct. Firm communicate with Audit Committee?
1.) all critical accounting policies and practices,
2.) all alternative accounting treatments,
3.) all material written communications with management.
38
When can a CPA in Public Practice disclose confidential client information regarding Audit Services?
1.) Client's Consent
2.) Peer review by a state CPA society or state board of accountancy.
3.) Subpoena or court summons to release confidential information.
4.) Inquiry that is made by a recognized investigatory body.
39
Non-Attest Engagements
1.) Management consulting engagements in which the accountant provides advice or recommendations
2.) Engagements in which the accountant is engaged to advocate the client's position (e.g., IRS review of tax returns)
3.) Tax engagements to prepare tax returns or provide tax advice
4.) Engagements solely to assist the client
5.) Testifying as an expert witness
40
SECTION 102 (SOX) - Registration with the PCAOB.
What is included in the registration?
1.) a statement of the firm's quality control policies,
2.) a list of the names and license numbers of all accountants associated with the firm,
3.) information regarding criminal, civil, or administrative actions or disciplinary proceedings against the firm (or any person in the firm),
4.) consent from the firm to cooperate and comply with any request made by the PCAOB in furtherance of its authority and responsibilities.
5.) Once registered, the firm must submit annual reports along with registration and annual fees to the PCAOB.
41
SECTION 409 (SOX) - Real Time Disclosures.
What must issuers disclose in real time?
Material changes in the financial condition or operations.
42
What agency approved PCAOB rules before they become effective?
SEC (Securities and Exchange Commission)
43
What are workpapers and who owns them?
Unlike Audit Reports, Workpapers are the property of the Auditor.
Workpapers document the work done and conclusions reached by the auditor, showing procedures applied, tests performed, information obtained, and pertinent conclusions reached.
44
Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards?
Both an audit and an attest engagement require that the auditor be independent in mental attitude.
45
SECTION 407 (SOX) - Disclosures of Audit Committee Financial Expert.
What is considered a financial expert and what must issuer disclose?
Issuer must disclose whether or not the audit committee is comprised of at least one member who is a financial expert.
Financial experts are persons who:
1.) have an understanding of GAAP and financial statements.
2.) are experienced in the preparation or auditing of financial statements and the application of accounting principles.
3.) are experienced with internal accounting controls, and
have an understanding of audit committee functions.
46
Professional Judgement Factors
1.) Accumulate Knowledge through training and experience
2.) Enables objective, critical judgements
3.) Results in ability to make informed decisions
47
Audit Documentation - What is it and what does it support?
Audit documentation is prepared and maintained to support the basis for opinion reached by the auditor and support that the audit was performed in accordance in GAAS.
Audit documentation, if properly supported, may reduce legal liability.
48
What is Reasonable Assurance and what are it's limitations?
Obtained when the auditor has sufficient appropriate audit evidence to reduce audit risk to an acceptably low level; reasonable assurance is not an absolute level of assurance. The likelihood that those objectives will be achieved is affected by limitations inherent to internal control. These limitations include the following:
1.) Human judgment in decision making can be faulty.
2.) Breakdowns in internal control can occur because of human failures such as simple errors or mistakes.
3.) Errors may occur in the use of information produced by IT.
4.) Individuals may not understand the purpose of automated controls or the use of information produced by IT.
49
Audit Evidence
The reliability of audit evidence depends on the nature and source of the audit evidence and the circumstances under which it is obtained. Generally, the reliability of audit evidence increases when it is obtained from external parties because the information is less susceptible to management bias. Consideration of the sources of information to be used as audit evidence includes the possibility that the information source may not be reliable.
50
What situation would call for Contingent Fees?
Fees charged by a CPA may be contingent if a specified finding or result is attained.
51
Presumptively Mandatory Requirement
The GAO (U.S. Government Accountability Office) Yellow Book, containing the generally accepted government auditing standards, requires auditors to document justification of deviations from presumptively mandatory procedures.
52
Government Auditing Standards (GAO)
The Government Auditing Standards are issued by the comptroller general of the United States, Government Accountability Office (GAO). They are often called the “Yellow Book.”
GAO standards incorporate AICPA GAAS but go further, requiring:
1.) review for compliance with applicable laws and regulations,
2.) external reporting of instances or indication of fraud, and
3.) reports on the entity's internal control structure.
These standards also contain guidelines for economy, efficiency, and program results audits.
53
Accounting and Review Services Committee (ARSC)
Designated by the AICPA Council to promulgate standards in connection with unaudited financial statements of nonpublic entities.
54
Financial Statement Review - Nonpublic Company
Smaller in scope than an audit. Review Procedures are limited to:
1.) analytical procedures, such as:
comparing the financial statements with anticipated results in budgets and forecasts, or
studying the relationship of financial statement elements expected to conform to predictable patterns.
2.) inquiry, such as inquiring of management about actions taken at the board of directors' meetings.
The review specifically relieves the accountant from obtaining an understanding of the entity's internal control, including the safeguards over access to and use of assets and records.
55
Matters to Consider for Accepting or Continuing Client Engagement
1.) firm personnel have experience with relevant industries or underlying subject matter or the ability to effectively gain the necessary knowledge;
2.) firm personnel have experience with relevant regulatory or reporting requirements, or the ability to effectively gain the necessary competencies;
3.) the firm has sufficient personnel with the necessary competence and capabilities;
4.) specialists are available, if needed;
individuals meeting the criteria and eligibility requirements to
5.) perform an engagement quality control review are available, where applicable; and
6.) the firm is able to complete the engagement within the reporting deadline.
56
Primary Supervisor
The primary supervisory responsibility of the auditor with final responsibility is to explain to the staff assistants how the results of various auditing procedures performed by the assistants should be evaluated. This is most in keeping with directing the efforts of the assistants regarding their responsibilities and the objectives of the audit procedures.
57
Agreement on Audit Engagement Terms
The letter must address the objectives of the engagement, the responsibilities of management, the responsibilities of the practitioner, the limitations of the engagement, identification of the applicable financial reporting framework, and reference to the expected form and content of any reports to be issued by the auditor. In addition, information about fees and billing may be included but is not required.
58
Limited Assurance
Limited assurance is a statement that “there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework.” It is issued in relation to a review of financial statements (AR-C 90.24) and in certain reports on a review of interim financial information.
59
Compilation
Compilation is a service, the objective of which is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. Although a compilation is not an assurance engagement, it is an engagement where the accountant must determine whether he or she is independent of the entity.
60
Audits of Entities Receiving Federal Financial Assistance
1.) Auditors must follow generally accepted auditing standards and government auditing standards.
2.) The auditor's consideration of internal control is to include obtaining and documenting an understanding of internal control established to ensure compliance with the laws and regulations applicable to the federal financial assistance.
3.) The auditor issues a report on the consideration of internal control.
4.) The auditor is to determine and report on whether funds are administered in accordance with applicable laws and regulations.
61
OMB's "Percentage of Coverage"
If the auditee meets the criteria for a low-risk auditee, the auditor only needs to audit the major programs that, in aggregate, encompass at least 20% of total federal awards expended. Otherwise, the auditor must audit the major programs that, in aggregate, encompass at least 40% of total federal awards expended.
62
Review Engagement
A review engagement is an attestation engagement in which the practitioner obtains limited assurance by obtaining sufficient appropriate review evidence about the measurement or evaluation of subject matter against criteria in order to express a conclusion about whether any material modification should be made to the subject matter in order for it be in accordance with (or based on) the criteria or to the assertion in order for it to be fairly stated. (AT-C 105.10)
63
Assurance Engagement
An assurance engagement is when a CPA undertakes to provide assurance regarding financial statements. (A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. An audit provides reasonable assurance about whether the financial statements are free of material misstatement.)
64
Attest Engagement
An attest engagement is an engagement that requires independence, as set forth in the AICPA Statements on Auditing Standards (SASs), Statements on Standards for Accounting and Review Services (SSARS), and Statements on Standards for Attestation Engagements (SSAEs) (ET 0.400.04). A review engagement is both an assurance and an attest engagement. A compilation is an attest engagement only, not an assurance engagement.
65
Review Engagement
Both an Attest and Assurance Engagement. In a review engagement, the accountant should accumulate review evidence to obtain a limited level of assurance. At the conclusion of the engagement, the accountant should express a conclusion in a written report about whether, based on the procedures performed and the review evidence obtained, the accountant is aware of any material modifications that should be made to (1) the subject matter in order for it to be in accordance with (or based on) the criteria or (2) the responsible party's assertion for it to be fairly stated.
66
Compilation Engagement
Attest Engagement Only. Not an assurance Engagement. Although a compilation is not an assurance engagement, it is an attest engagement (because a report is issued).
67
For a Preparation of Financial Statements Engagement, what level of assurance is provided and is there a report is issued?
In a preparation of financial statements engagement, there is no assurance provided and no report issued.
68
Statements on Auditing Standards (SAS)
The 10 generally accepted auditing standards (GAAS) are interpreted and expanded upon in Statements on Auditing Standards (SAS), issued periodically by the Auditing Standards Board of the AICPA. They provide the detail and guidance needed to meet the 10 GAAS standards.
The 10 standards have changed to AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards. The Auditing Standards Board (ASB) believes that if an auditor fulfills the overall objective of the auditor and meets applicable ethical requirements, the auditor will have fulfilled the requirements currently stated in the 10 standards.
69
Statements on Standards for Accounting and Review Services (SSARS)
FOR NON-ISSUERS.
Statements on Standards for Accounting and Review Services are standards concerning the accounting (compilation) and review services rendered in connection with unaudited financial statements or other unaudited financial information of an entity that is not required to file financial statements with a regulatory agency.
70
What does the Director of the OMB (Office of Management and Budget) have the authority to do?
Develop Government wide guidelines and policy on performing audits to comply with the Single Audit Act.
71
Those Charged with Governance.
Who is typically charged with Governance and what is their responsibility?
Those charged with governance include the person(s) or organization(s) (e.g., a corporate trustee) with responsibility for overseeing the strategic direction of the entity, the financial reporting process, and the obligations related to the accountability of the entity. In some entities, this is the board of directors or the audit committee. In other entities, “those charged with governance” also have management responsibilities.
72
Statements on Quality Control Standards (SQCS)
AICPA members who perform compilation and review engagements are governed by the AICPA's Code of Professional Conduct and the Statements of Quality Control Standards (SQCSs), which establish standards and provide guidance on a firm's system of quality control.
73
Statements on Standards for Attestation Engagements (SSAE)
Issues by senior technical bodies of the AICPA. They apply to practitioners engaged to perform an assertion-based examination, direct examination, or review; or issue an agreed-upon procedure report on underlying subject matter about the subject matter information (or an assertion) that is the responsibility of another party (these are called “attest engagements”).
74
Consulting Services
Consulting services do not fall within the definition of accounting and audit practice. Standards for consulting services are established by the AICPA Management Consulting Services Executive Committee.
75
Pass-Through Entity (Governmental) - What is a pass through Entity?
Entity that receives an award from a grantor or other entity and distributes all or part of it to another entity to administer a government program.
76
What is a Subreceiptant?
Nonfederal entity that receives a subaward from a pass-through entity to carry out part of a federal program; it does not include an individual that is a beneficiary of such a program. A recipient of other federal awards directly from a federal awarding agency also qualifies as a subrecipient.
77
Attestation Standards
Attestation standards apply to four levels of service—assertion-based examination, direct examination, review, and agreed-upon procedures; applicability of the specific AT-C section(s) depends on both the level of service provided and the underlying subject matter or subject matter information (or assertion). The purpose of the attestation engagement is to provide users of information, generally third parties, with an opinion, conclusion, or findings regarding the reliability of subject matter information (or an assertion) about the underlying subject matter or subject matter information, as measured against suitable and available criteria.
78
What is a Re-Audit?
Initial audit engagement to audit financial statements that have been previously audited by a predecessor auditor.
79
Disclaimer of Opinion
A disclaimer of opinion is an expression of no opinion.
A disclaimer of opinion is warranted when restrictions on the scope of the audit are so severe, whether client imposed or due to other reasons, that the auditors are unable to obtain sufficient appropriate audit evidence to enable them to form an opinion.
Example: Instances of limitations on scope include the client's refusal to allow the confirmation of receivables or the lack of a beginning inventory physical count (i.e., when the auditor is hired after the beginning of the fiscal year).
It is only when the auditors are unable to overcome these limitations by other audit procedures that a disclaimer of opinion is warranted.
A disclaimer of opinion because of a scope limitation requires modification of the standard auditor's responsibility paragraph and, in all cases, the substantive reasons for the disclaimer should be explained in a separate emphasis-of-matter or other-matter paragraph.
80
What inquires can be made to the predecessor Auditor BEFORE the accepting the Audit Engagement?
1.) Reason for change of Auditors
2.) Disagreements with mgmt. about accounting policies, auditing procedures, or other significant matters.
3.) Integrity of Management
4.) Communication regarding Fraud and Noncompliance with laws or regulations.
5.) Communications regarding significant deficiencies and material weakness of internal control
81
What is the meaning of "Going Concern"?
Business entity that is expected to continue in operation indefinitely. An enterprise that is no longer considered a going concern is assumed to be approaching, or in the process of, dissolution.
82
When is a Qualified Opinion expressed?
Qualified opinion is expressed when there is one of the following:
1.) Lack of sufficient appropriate evidence that does not warrant a disclaimer of opinion
2.) Restriction of scope that does not warrant a disclaimer of opinion
3.) Departure from GAAP that does not warrant an adverse opinion
83
Acceptance of a Client
CPA firms should establish policies and procedures for determining the acceptance of a client to minimize the risk of being associated with a client whose management lacks integrity.
84
Before accepting a new engagement, the successor auditor should request mgmt. do what?
Request Management to authorize the predecessor auditor to respond fully to the successor auditor's inquires about matters that will assist in determining whether to accept the engagement.
85
Opening Balances - Sufficient Appropriate Evidence
1.) Determine whether prior period's closing balances correctly brought forward to current period.
2.) Determine whether opening balances reflect application of appropriate accounting polices
86
What should the Successor Auditor do if Material Misstatement is found on Predecessor Auditor's report.
1.) Inform predecessor and arrange for discussion amongst relevant parties to resolve matter.
2.) If mgmt. refuses or if successor is not satisfied, consider whether withdrawal or a disclaimer of opinion is appropriate.
87
Inquires to the Predecessor Auditor
An auditor may make a proposal for an engagement before communicating with the predecessor auditor and can tentatively accept the engagement as long as the client is aware that acceptance cannot be finalized until the inquiries of the predecessor have been completed.
88
Compilation
An accountant does not have to be independent when performing a compilation engagement but must be when performing a review or attestation engagement.
If the accountant performing a compilation is not independent, the accountant's report should be modified to state, “I am not independent with respect to XYZ company.”
89
SSARS Engagement Letter Requirements
1.) Terms should be documents in an engagement letter or other suitable written agreement.
2.) Should be signed by the Accountant and Management
90
SSARS Common Engagement Letter Requirements
1.) Objective of Engagement
2.) Identification of the applicable financial reporting framework
3.) Responsibilities of Mgmt.
4.) Responsibilities of Accountant
5.) Limitations of Engagement
6.) Whether the financial statements contain a know departure(s) from the applicable framework
91
Reason for Request to Change - Scope of Engagement
1.) Change in circumstances affecting the need for an audit review
2.) Initial misunderstanding of the nature of engaged service
3.) Restriction on scope
92
Audit Engagement Documentation
1.) Prepare documents on a timely basis
2.) Documents detailed in nature, timing, and extent of audit procedures.
3.) Identify Following Characteristics
- Specific Items Tested
- Who performed Audit Work
- Who reviewed the work
- Date Completed
93
Preparation Engagement Documentation
Prepare documents in sufficient detail to clearly understand the work performed. This includes, Engagement Letter, Copy of Financial Statements.
94
Compilation Engagement Documentation
1.) Engagement Letter
2.) Copy of Financial Statements
3.) Copy of Accountant's Report.
95
Pro Forma Financials Engagement Documentation
1.) Engagement Letter
2.) Results of procedures performed
3.) Copy of Pro Forma financial information
4.) Copy of Accountants compilation report.
96
Review Engagement Documentation
1.) Engagement Letter
2.) Communication with Mgmt. regarding fraud or non-compliance laws or regulations.
3.) Communications with Mgmt. regarding expectations of the review report.
4.) Written Representation Letter
5.) Copy of reviewed financial statements and accountants review report
97
Review of Interim Financial Information - Issuer
1.) Prepare documents in which the form and content match the circumstances of the particular engagement.
2.) Should include any findings or issues found significant under auditors judgement.
98
How many days does the auditor have to complete the assembly of the final audit file after the report release date?
Auditor should complete the assembly of the final audit file on a timely basis, but within 60 days following the report release date (documentation completion date). Nonissuer
99
Permanent Files
The permanent workpaper file of the auditor should contain items that remain relatively unchanged from year to year. Analysis of capital stock and other owner's equity accounts represent accounts which have very few transactions each year and would be appropriate for the permanent file.
100
PCAOB Auditing Standard 1215
A complete and final set of audit documentation should be assembled for retention as of a date not more than 45 days after the report release date (documentation completion date). Issuers
101
Matters to be communicated from Auditor to Audit Committee/Board of Directors.
1.) Auditors views about qualitative aspects of significant acct. practices. (i.e. Acct. Policies, Estimates, Disclosures)
2.) All know and Potential Fraud and other inconsequential illegal acts.
- If Senior Mgmt. is involved, communicate to those charged with Governance.
- If oral communication, ensure documented workpapers
3.) Significant matters related to internal control.
4.) Uncorrected adjustments\
5.) Material, corrected misstatements that were brought to attention of mgmt. as result of audit procedures.
6.) Any disagreements with management
7.) Any consultation management had with other accountants about accounting and auditing matters.
8.) Representation requested from management.
102
Auditors Response to inadequate communication
1.) Modifying the Auditors opinion on the basis of scope limitation
2.) Obtaining legal advice about consequences
3.) Communicating with 3rd parties or responsible govt. agency.
4.) Withdrawing from engagement.
103
What the Auditor can't communicate in statement on Internal Controls?
Auditor may communicate there were no material weaknesses identified during the audit, they can't have written communication stating that no significant deficiencies were identified during the audit.
104
Written Communication regarding significant Deficiencies and material weakness identified during audit of financial statements should include?
1.) Definition of the term "material weakness" and, when relevant, the definition of the term "significant deficiency."
2.) Description of the significant deficiencies and material weaknesses and an explanation of their potential effects.
3.) Sufficient information to enable those charged with governance and management to understand the context of the communication.
105
Auditor should include in the communication the following elements that explain that the purpose of the audit was for the auditor to express an opinion on the financial statements:
1.) Audit included consideration of internal control over financial reporting in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of internal control.
2.) Auditor is not expressing an opinion on the effectiveness of internal control.
3.) Auditor's consideration of internal control was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies, and therefore, material weaknesses or significant deficiencies may exist that were not identified.
106
Procedures for adequate planning (prior to start of Fieldwork)
1.) Reviewing correspondence files, prior year's working papers, permanent files, financial statements, and auditor's reports;
2.) Discussing matters that may affect the audit with firm personnel responsible for nonaudit services to the entity;
3.) Inquiring about current business developments affecting the entity;
4.) Reading the current year's interim financial statements;
5.) Discussing the type, scope, and timing of the audit with management of the entity, the board of directors, or its audit committee;
6.) Considering the effects of applicable accounting and auditing pronouncements, particularly new ones;
7.) Coordinating the assistance of entity personnel in data preparation;
8.) Determining the extent of involvement, if any, of consultants, specialists, and internal auditors;
9.) Establishing the timing of the audit work; and
10.) Establishing and coordinating staffing requirements.
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What is the Auditor's responsibility related to internal control related matters of a NON-ISSUER?
Auditor is required to determine whether, on the basis of the audit work performed, the auditor has identified one or more deficiencies in internal control.
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Significant Defieicens
A significant deficiency is a matter that comes to an auditor's attention that represents a significant deficiency in the design or operation of internal control and that merits attention by those charged with governance.
Generally, significant deficiencies are reported at the conclusion of the audit. However, because timely communication may be important, the auditor may choose to communicate significant matters during the course of the audit. Therefore, an auditor may communicate significant deficiencies during an audit or after the audit's completion.
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Misstatements
The auditor should request management to correct all known misstatements, including the effect of prior-period misstatement. The auditor may request management to further review the impact of likely misstatements. If management decides not to correct some or all of the known and likely misstatements communicated to it by the auditor, the auditor should obtain an understanding of management’s reasons for not making the corrections and should take that into account when considering the qualitative aspects of the entity’s accounting practices.
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Engagement Quality Control Review
An engagement quality control review is required for financial statement and integrated internal control audits of issuers. The engagement quality control reviewer should evaluate significant judgments made by the engagement team and the related conclusions reached.
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Review Report - Independence
To issue a review report, an accountant must be independent. Independence will be impaired if, during the period of the professional engagement or at the time of expressing an opinion, the CPA or firm had or was committed to acquire any direct or material indirect financial interest in the client. The fact that the client was a nonpublic entity is irrelevant. The immaterial nature of the interest is also irrelevant.
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Policies and procedures for engagement supervision might include the following:
1.) Tracking the progress of the engagement
2.) Considering the capabilities and competence of individual members of the engagement team, whether they have sufficient time to carry out their work, whether they understand their instructions, and whether the work is being carried out in accordance with the planned approach to the engagement
3.) Addressing significant findings and issues arising during the engagement, considering their significance, and modifying the planned approach appropriately
Identifying matters for consultation or consideration by more experienced engagement team members during the engagement
QC 10.A34
Hiring and advancement are under the quality control element of human resources, not engagement performance.
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A review may include consideration of whether, for example:
1.) Work has been performed in accordance with professional standards and applicable regulatory and legal requirements,
2.) Significant findings and issues have been raised for further consideration,
3.) Appropriate consultations have taken place and the resulting conclusions have been documented and implemented,
4.) The nature, timing, and extent of work performed is appropriate and without need for revision,
5.) The work performed supports the conclusions reached and is appropriately documented,
6.) The evidence obtained is sufficient and appropriate to support the report, and
7.) The objectives of the engagement procedures have been achieved.
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A Firm's System of Quality Control should encompass the following elements.
1.) Leadership responsibilities for quality within the firm
2.) Relevant ethical requirements
3.) Acceptance and continuance of client relationships and specific engagements
4.) Human resources
5.) Engagement performance
6.) Monitoring
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Ethical Principles that should guide the work of Auditors under Gov't Auditing Standards
1.) Public Interest
2.) Integrity
3.) Objectivity
4.) Proper use of Gov't Info
5.) Resources and Positions
6.) Pro Behavior
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What attributes must a Financial Expert of an Audit Committee for Public company typically posses?
1.) Understanding of GAAP and financial statements;
2.) experience in the preparation or auditing of financial statements of generally comparable issuers and the application of such principles in connection with the accounting for estimates, accruals, and reserves.
3.) Experience with internal accounting controls.
4.) Understanding of audit committee functions.
*DOES NOT NEED TO SERVE ON PRIOR AUDIT COMMITTEE*
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Membership in the AICPA (American Institute of CPA's) is:
Voluntary
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SECTION 303 (SOX) - Improper Influence on Conduct of Audits.
What would violate this rule?
Any action taken to fraudulently coerce, manipulate, or mislead the auditor. It prohibits any director or officer from acting in this manner, as well as anyone acting under their direction. Refusal to answer auditor questions honestly could be considered an attempt to mislead the auditor.
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When can a CPA disclose confidential Client information?
1.) compliance with a validly issued and enforceable subpoena or summons,
2.) review of CPA's professional practice under the AICPA or state CPA society authorization review,
3.) responding from inquiry by a recognized investigative or disciplinary body, and
4.) compliance with the Compliance with Standards Rule and Accounting Principles Rule.
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SECTION 104 (SOX) - Inspections of Registered Public Accounting Firms.
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What is FASB?
The Financial Accounting Standards Board is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles within the United States in the public's interest
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What could lead to a departure from FASB? Think GAAP
1.) New Legislation
2.) New form of Business Transaction
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