Audit Standards

Question 1

General Standards under GAAS

Answer 1

Training & Proficiency

Independence

Profesional Due Care

(TIP)

Question 2

Fieldwork Standards (GAAS)

Answer 2

Planning

Internal Control

Collaborative evidence

(PIC)

Question 3

Reporting Standards (GAAS)

Answer 3

Accounting Principles in confiormity with GAAP [Explicit]

No new Accounting Principles applied (consistency) [Implicit]

Omitted Informative Disclosures - None [Implicit]

Expression of Opinion [Explicit]

(ANOE)

Question 4

What at the generally accepted auditing standards (GAAS) used for?

Answer 4

GAAS are used as overall measures of the quality fo the auditor’s performance.

Question 5

How should independence be maintained by the CPA engaged in providing attestation services?

Answer 5

In mind and appearance

No direct and indirect material financial interest

Act with integrity and objectivity

Question 6

Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?

• Internal control
• Corroborating evidence
• Quality control
• Materiality and relative risk

Answer 6

Materiality and relative risk RMM(IR x CR)

This is also known as Risk of Material Misstatement (RMM), which represents the magnitude of misstatements or ommissions resulting from Inherent Risk and Control Risk.

HINTS:

element = A part or aspect of something, esp. one that is essential or characteristic.

Fieldwork & reporting standards: PICANOE

Internal control and Corroborating evidence = Fielwork standards (PIC), not elements

Quality control = related more directly to the General standards (TIP) than fieldwork & reporting (PICANOE)

Question 7

What services is most directly designed to improve the quality of information or its context for decision makers?

Answer 7

Assurance services

Question 8

What services require the auditor to be independent?

Answer 8

Auditor must be independent for Attestation services:

Examinations (Audits - Reasonable Assurance)

Reviews (Limited [Negative] Assurance)

Agreed-Upon Procedures (Summary of Findings)

Special Reports (can be Examinations or Reviews)

(ERA’S)

Question 9

Professional Skepticism

Answer 9

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

The auditor assumes that the client and its management is neither honest or dishonest.

Question 10

Training and Proficiency (GAAS)

Answer 10

The audit must be performed by a person or persons having adequate technical training and proficiency as an auditor.

Question 11

Independence (GAAS)

Answer 11

In all matters relating to the assignment, an independence in mental attitude must be maintained by the auditor or auditors.

Question 12

Due Professional Care (GAAS)

Answer 12

Due professional care must be exercised in the performance of the audit and the preparation of the report.

Question 13

How should a CPA demonstrate due professional care in his/her work?

Answer 13

• Giving criticism by reviewing the judgment used at every level
• Skill and due care of a prudent CPA, meaning
  
  • Prepare complete workpapers
  • Due diligence
  • Professional skepticism
  • Comptence

Question 14

What level of assurance is intended to be obtained by the auditor when engaged in an audit of financial statements?

Answer 14

Reasonable assurance

Question 15

What is reasonable assurance in a financial statement audit?

Answer 15

Reasonable assurance is the high, but not absolute, level of assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.

Question 16

Planning and Supervision (GAAS)

Answer 16

The auditor must adequately plan the work and must properly supervise any assistants.

Question 17

Internal Controls (GAAS)

Answer 17

The auditor must obtain a sufficient understanding of the entity and the environment, including its internal control, to assess the risk of material misstatement (RMM) of the financial statements whether due to error or fraud and to design the nature, extent, and timing of further audit procedures.

Question 18

Corroborative Audit Evidence (GAAS)

Answer 18

The auditor must obtain sufficient appropriate (corrobative) audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

If relying on an IC, then reduce Substanative Testing in order to reduce detection risk.

Question 19

Accounting Principles in Conformity with US GAAP (GAAS)

Answer 19

The report must state whether the financial statements are presented in conformity with U.S. Generally Accepted Accounting Principles (GAAP).

NOTE: Departures from GAAP must be justified in order to have an unqualified opinion. These departures can be justified IF there is clear evidence that presenting the information under GAAP would result in misleading the users of the financial statements. Examples are new transactions that have yet to be addressed by GAAP or theapplicable reporting framework.

Question 20

No New Accounting Principles Applied - Consistency (GAAS)

Answer 20

*The report must identify thos circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. *

Question 21

Omitted Informative Disclosures - None (GAAS)

Answer 21

Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.

NOTE: This is implied in the report.

Question 22

Expression of an Opinion (GAAS)

Answer 22

The report must contain either an expression of opinion regarding the financial statements, taken as a whole¹, or an assertion to the effect that an opinion cannot be expressed.² When an overall opinion cannot be expressed, the reasons thererfore should be stated.³ In all cases where an auditor’s name is associated with fianncial statements, the report should contain a clear-cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.

NOTE: ¹We do not render piecemeal opinions on financial statements. They must be taken as an whole.

²We either render or disclaim an opinion.

³If we disclaim our opinion, we must state the reasons in the “Disclaimer”.

Question 23

How did the “clarity” standards affect the 10 GAAS standards?

Answer 23

Under the clarity standards, the 10 GAAS were re-positioned into objectives. Each AU-C nows states an objective AND the overall objective of the auditor.

Question 24

What are the overall objectives under the clarity standards?

Answer 24

The overall objectives are to ensure that xxxx

Question 25

Which type of entities does an auditor use the clarity standards in planning and performing an audit engagement?

Answer 25

The clarity standards are applicable to the non-issuers. Recall that the clarity standards replaced SAS.

Question 26

What are the overall objectives of the auditor under each clarity standard (AU-C)?

Answer 26

To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable reporting framework. To report on the financial statements, and communicate as required by SASs, in accordance with the auditor's findings. (Recall DISAPPROVE)

Question 27

What does the "objective" **in** a clarity standard (AU-C) assist the auditor with?

Answer 27

Planning and performing the audit to achieve the overall objectives.¹ Determing whether the audit procedures in addition to those are necessary when the auditor determined that performing the required procedures will not meet the objective during the engagement. Evaluating whether the auditor obtained the sufficient appropriate audit evidence to as a reasonable basis for the opinion. ¹ *Overall objectives* refer to the auditor's responsibility to provide reasonable assurance on whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report on the financial statements, and communicate as required by SASs, in accordance with the auditor's findings. *Objective* **within** a clarity standard refers to the goal to be fulfilled for compliance with GAAS in the individual SAS.

Question 28

Explain "overall objectives" versus "objective" in the clarity standards.

Answer 28

**Overall objectives** refer to the auditor's responsibility to provide reasonable assurance on whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report on the financial statements, and communicate as required by SASs, in accordance with the auditor's findings. **Objective** is specified within the clarity standard, which specifies the goal to be fulfilled in the individual SAS in order for the auditor to comply with GAAS.

Question 29

What is the purpose of the clarity project?

Answer 29

To **enable** the auditor to show that the audit engagement was **conducted in compliance with GAAS** through documentation to indicate that **all of the objectives of the applicable standards have been achieved**. By complying with GAAS, this means the auditor performed ***all*** of the unconditionally and presumptively required audit procedures.

Question 30

Describe the format of the new clarity standard (AU-C)

Answer 30

Introduction - purpose & scope Objective - what needs to be fulfilled in order to comply with GAAS Definitions - terminology Requirements - areas that we must **or** should apply the standard (unconditional & presumptively mandatory) Application & Explanatory Materials - suggest *how* to achieve the objective through the requirements (unconditional & presumptively mandatory) on significant areas to ensure compliance with the standard

Question 31

Describe "unconditionally" and "presumptively mandatory" requirements

Answer 31

Both are under the old SAS and the new clarity standards (AU-C). Apply for both Public and Non-Public audits. Unconditionally required = auditor MUST / SHALL / IS REQUIRED to comply Presumptively mandatory = auditor SHOULD comply

Question 32

Under which circumstances can the auditor depart from requirements set forth in the auditing standards (SAS and AU-C)?

Answer 32

An entire section of GAAS does not apply, such as the section on reliance on the work of internal auditors not being applicable when the client does not have an internal audit department A specific requirement does not apply because the condition it is intended to provide audit evidence in relation to does not exist, such as the requirement to communicate significant deficiencies and material weaknesses in internal control when no such weaknesses exist

Question 33

When can the practitioner depart from a requirement in the SAS or AU-C?

Answer 33

If the requirement is _presumptively mandatory_ **AND** the _auditor documents the justification_ for the departure **and** _describes how the other procedures were sufficient_ to achieve the objectives of the requirement.

Question 34

How does the practitioner demonstrates that s/he exercised professional judgment in the engagement?

Answer 34

By applying professional judgment throughout the audit and documenting the judgment to enable an experienced auditor to understand the significant judgments made in reaching conclusions.

Question 35

What does an auditor's professional skepticism indicates?

Answer 35

Having an attitude of professional skepticism indicates the auditor is aware of the *possibility* that the financial statements are materially misstated **and** will be alert to indications where: * audit evidence contradicts with other audit evidence * quesitons raised about the reliability of documentary evidence and responses to auditor inquiries * conditions that *may* indicate fraud (fraud risk factors) * the need to appy audit procedures in addition to those required by GAAS

Question 36

Identify the type of requirement when a standard includes a requirement for the auditor to consider a procedure.

Answer 36

**Presumptively mandatory** because all the auditor has to do is consider the procedure or item being referenced. Requiring an auditor to consider does _not_ mean a requirement to perform the procedure.