AUD Flashcards
Assembly and Retention Guidelines
Assembled within 45 days (nonissuer) or 60 days (Issuer)
Retention = 5 years (nonissuer) and 7 years (issuer)
Audit documentation
- Permanent and current files
- supports auditor’s opinion/report
- Aids in training and the conduct/supervision
- Record of accumulated evidence
- Accounting records reconcile w/ FS
- Experienced auditor w/o connection can understand work performed
Engagement Letter
- Objective of the audit
- Management responsibilities
- Auditor’s responsibilities
- Inherent limitations
- Identification of framework
- Expected form and content of reports
- Reassessed before each engagement
Client Confidentiality
May breach if:
- Quality review program
- Subpoena process
- Investigation conducted by AICPA, state CPA society, or under state statute
Management Responsibilities
- Preparation and fair presentation of FS
- Design, implementation, and maintenance of IC
- Provide auditor with: access to all info relevant and requested; unrestricted access to persons necessary to obtain audit evidence
Those charged with Governance
Bear responsibility to oversee the obligations and strategic direction of an entity
- include BoD and audit committee
- Usually NOT mgt
Audit Committee
- Establish control environment
- Selecting and appointing auditor
- review of quality of auditor’s work
- Review of scope of audit
- Responding to auditor recommendations
- Helping resolve disagreements
- Bridge between auditor and BoD
Required Communications to Governance
-Auditor’s responsibility (expressing an opinion)
-Planned scope and timing of the audit
-Significant Audit Findings (includes uncorrected, nontrivial MS
>when governance not involved in managing entity, auditor should communicate: material, corrected MS; mgt representations; mgts consultation w/ other accountants; significant issues that arose and were discussed w/ mgt
-For issuers, additionally communicate: all critical accounting policies; material alternative GAAP accounting treatments, and other material communication
Communications related to IC w/ FS Audit only
*Not required to search for deficiencies that are less severe than a material weakness, or to express an opinion on IC
>But: Sign. def. and MW must be communicated, in writing to mgt and governance w/in 60 days of report release date
>Uncorrected, previously communicated SD and MW
>To mgt all other deficiencies
>May not report absence of SD, but may report absence of MW
Independence Rule
- Required for audits and attest services
- Not required for compilations, consulting services, or tax work
- Impaired if: direct financial interest or material indirect financial interest; unpaid audit fees in excess of one year; CPA has mgt position with client, spouse part of accounting or financial reporting; CPA makes hiring decisions for client; litigation cannot impair if immaterial unrelated to audit
Integrity and Objectivity Rule
-Free of conflicts of interest, unless disclosed and approved by client
General Standards Rule
- Professional competence
- Due professional care (exercise the same skill a reasonably prudent accountant would; critically review work of others)
- Sufficient relevant data
Compliance with Standards Rule and Accounting Principles Rule
- Must comply with applicable standards
- CPA cannot state F/S comply with GAAP if departures exist that would have material effect
- Unusual departures may exist, but must be described and explained (Justifications include: new legislation and evolution of a new form of business transaction)
Contingent Fees Rule
- Not permitted for audits, reviews, and most tax work
- Permitted for compilations lacking independence
- Permitted when CPA represents a client in an examination of a tax return by the IRS
Acts Discreditable Rule
- Retaining client records after client has demanded their return
- Discrimination
- Failure to follow standards
- Negligence in false or misleading journal entries
- Failure to timely file tax returns or remit payroll taxes
- Soliciting or disclosing CPA exam questions and answers
- Making false, misleading, or deceptive claims about the members abilities to provide professional services
- Disclosure of confidential information
Adverse Interest Threat
Members interests are opposed to the interests of the client or employing organization
Advocacy Threat
-Promoting the interests of the client or employing org to the point that objectivity or independence is compromised
Familiarity Threat
Long or close relationship w/ client or employing org, member becomes too sympathetic
Management Participation Threat
Member takes role of client mgt or otherwise assume mgt responsibilities
Self-interest Threat
Member could benefit financially or otherwise from an interest in, or relationship with, a client or employing org, or persons associated w/ the client
Self-review Threat
Member will not appropriately evaluate the results of a previous judgement made, or service performed or supervised
Undue Influence Threat
Member will subordinate their judgement to an individual associated with a client or employing ord or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over th member
SOX
- Record retention= 7 years
- Concurring or second partner must also review audit report
- Many other services prohibited, except for tax services preapproved by audit committee
- Auditor must be preapproved by audit committee and must report: critical accounting policies and practices used; alternative accounting treatments preferred by auditor; material written communications between mgt and auditor
- Partner must rotate off every 5 years and take 5 years off
- Audit firm cannot have employed issuer’s mgt for a one-year period proceeding audit
PCAOB
-Same as SOX plus,
>No contingent fees or commissions
>No tax services related to aggressive tax transactions
>No tax services to mgt
>Firm must describe in writing to audit committee all relationships that play a factor with independence, annually
SEC
-Same as SOX plus:
>No loans to or from audit client
>Client may not invest in accounting firm or engage accounting firm for investment services
>No contingent fees or commissions
>Requires ALL partners to rotate, leads have 5 year cool off, while others have 2 years
>Partners can only be compensated for selling audit, review or attest services
US DOL
-Independence required
>Impaired if: direct or material indirect interest; connection to plan; maintains financial records of plan
>Not impaired if: Employee disassociates from the plan until no longer relevant to time period audited, actuary associated with the accountant or the accountant’s firm rendered services to plan
GAGAS Conceptual Framework for Independence
-Threats and safeguards approach
>Adds: Bias threat and structural threat
- Must determine whether providing a non-audit service would impair independence
-Consider if mgt has ability to effectively oversee the non-audit service to be performed
Independence Considerations When Stock Received from Inheritance
They disposed of the financial interest as soon as practicable but no later than 30 days after they had knowledge of and obtained the right to dispose of the financial interest.
AND
(2) During the period that they did not have the right to dispose of the financial interest, they did not participate on the attest engagement team, and the direct financial interest is not material to them
Quality Control Standards (HELP ME)
- Human Resources
- Engagement/Client Acceptance and Continuance: minimization of association w/ client lacking integrity; expects to complete with reasonable competence, and complies with legal and ethical requirements
- Leadership Responsibilities: Culture that emphasizes quality
- Engagement Performance: Firm consistently adheres to high level of performance, engagements properly supervised, confidentiality, safe custoday, integrity, accessibility, retrievability, and retention maintained.
- Monitoring: Reasonable assurance that QC is relevant, adequate, operating effectively, and complied with in practice
- Ethical Requirements: Maintain independence in fact and appearance
- Deficiencies or Noncompliance with a firm’s QC standards DO NOT necessarily imply that a specific engagement was not performed in accordance with appropriate standards
Audit Plan
-Outlines NET of the procedures to be performed including risk assessment procedures, further audit procedures, and other audit procedures over management assertions
Business and Industry Knowledge
- Not required prior to accepting engagement, but understanding must be obtained once accepted
- Industry knowledge: guides, trade publications, govt publications
- Business knowledge: Tours, financial history, understanding accounting system, asking questions
Inherent Limitations of IC
- Human error
- Collusion, deliberate circumvention, fraud
- Mgt Override
Five Components of IC (CRIME)
- Control Environment (Tone at the top)
- Risk Assessment (Mgts identification)
- Info and Communication (identity, capture, and exchange info)
- Monitoring (Assess the quality, like IA)
- Existing Control Activities (Established to ensure that mgt objectives are carried out) > PAID TIPS
(Existing) Control Activities (PAID TIPS)
Prenumbering of docs
Authorization of transactions
Independent checks to maintain asset accountability
Documentation
Timely and appropriate performance reviews
Information processing controls
Physical controls for safeguarding assets
Segregation of duties (ARC)
ARC
Authority
Recording
Custody
Audit Requirements in Understanding IC
Obtain understanding if design of controls
Determine whether IC have been implemented
NOT required to evaluate effectiveness of controls
Service Organizations
-Type 1 report helps in understanding of design of controls
>Should contain a disclaimer over operating effectiveness of controls
-Type 2 report helps in understanding of design and effectiveness
>May reduce control risk
-Report should be restricted use
Effect of Information Technology on the Audit
-COPAL: Control group, Operators, Programmers, Analyst, Librarian
-Auditing around the computer = manual
-Auditing through the computer = CAAT
>Transaction Tagging (Follow through system)
>Embedded audit modules (Application collects data for the auditor, but auditor must be involved in design)
>Test Deck/Test Data (Uses application program to process test data, results of which are already known; client system; offline; invalid #, excess pay rate, excess hours)
>Integrated Test Facility (Test data commingled with live data; client’s system; auditor’s data; online; CPA controls)
>Parallel Simulation (Auditor reprocesses client’s live data and compares to actual results; auditor’s system; client’s data)
>Generalized Audit Software Packages or GASP (Allow auditor to perform tests of controls and substantive tests directly in client’s system; great when little knowledge of client’s hardware or software is known)
Effect of Information Technology on IC
- Automated controls: high volume of recurring transactions; control acts can be adequately designed and automated
- IT Risks (GIGO)>Overreliance, loss of data, unauthorized changes, failure to make changes/updates
- IT benefits > Accurate and consistent processing, timeliness, analysis, and performance monitoring
Effect of Information Technology on Audit Testing
- Substantive tests alone may not suffice.
- Tests of controls should be performed
- Should obtain an understanding throughout the period (Continous testing)
Categories of Fraud
- Fraudulent Financial Reporting (Lying): Intentional MS or omissions of amounts/disclosures in the FS
- Misappropriate of Assets = Stealing
- Corruption = Cheating
Presumed Fraud Risk
- Improper revenue recognition
- Mgt override of controls
Fraud Risk Factors
-Incentives/Pressures > Reason to commit
-Opportunity> Ineffective controls or override of controls
-Rationalization/Attitude > Justification of behavior
>Ethics
-Just because all three are missing does not mean fraud cannot occur
-Just because all 3 are present does not mean fraud has occurred
Communication of Fraud
- Anything resulting in a material misstatement and/or due to a significant deficiency, report directly to mgt and governance
- If it involves senior mgt, report only to governance
- Otherwise, report to at least one level above where fraud was committed
- To third parties: no duty to disclose unless, SEC in order to comply with legal, successor auditor, response to a subpoena, or a funding agency
Audit Risk Model
-Risk auditor gives unmodified opinion on fraud/error FS
-ARM=RMM(CRxIR)xDR
If RMM (High)=DR(Low), NET(High)
If RMM (Lows)=DR (High), NET (Low)
NET
Nature = control or substantive testing (purpose and type) Extent = Lot or little (Quantity) Timing = Interim or year-end
Risk Assessment and FS Material Misstatement
- Can be discussed together
- Key audit team members MUST be involved
- Done in planning stage
Inherent Risk
May increase when a transaction is more likely to be recorded incorrectly, ie legislation changing accounting for leases
Judgemental Misstatement
Relates to differences arising from the judgements of mgt concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate
Risk Assessment Procedures
MUST:
>Obtain understanding of entity and environment
>Assess RMM (Both IR and CR)
-Inquiry, analytical procedures, audit data analytics, observation and inspection, audit team discussion
>Respond to RMM = test of controls and substantive procedures (DR), NET
>Evaluate audit evidence
Obtaining an Understanding of Entity
-Industry, regulatory, and other external factors
-Nature of entity
-Entities objectives, strategies, and business risks
-Entities financial performance
-Entities IC
>Evaluate design and implementation, not required to evaluate effectiveness
-Under PCAOB, must obtain understanding of company’s selection and application of accounting principles
Management Assertions (COVERU)
-About transactions and events, account balances, presentation, and disclosure Completeness CutOff Valuation, allocation, and accuracy Existence and occurrence Rights and obligations Understnadability and classification
Completeness
All account balances, transactions, and disclosures that should have been recorded have been recorded and included in the FS
Existence/Occurrence
Account balances exist and transactions that have been recorded and disclosed have occurred and pertain to the entity.
Cutoff
Transactions have been recorded in the proper accounting period
