Book Notes Becker

Question 1

3 Levels of AUDIT guidance or the GAAS Hierarchy

Answer 1

1. SAS (Nonissuers) and PCAOB AS (Issuers)- (A)The auditor should use professional judgment in applying the SAS or PCOAB AS to a particular engagement.
   -(B) Be prepared to justify any departures from presumptively mandatory requirements.
2. Interpretive Publications
3. Other Auditing Publications

Question 2

SPECIFIC LANGUAGE is used within the standards to CLARIFY the AUDITOR’S level of RESPONSIBILITY:

MUST or IS REQUIRED TO indicates an unconditional requirement, which must be followed in all cases in which the requirement is relevant.

MAY, MIGHT AND COULD indicate explanatory material that does not impose a professional requirement for performance.

Answer 2

SHOULD indicates a presumprively mandatory requirement, which must be followed in all cases in which the requirement is relevant, except in rare circumstances when departure from the requirement is permitted if there is appropriate justification, performance of sufficient alternative procedures, and thorough documentation.

Question 3

INTERPRETIVE PUBLICATIONS - Recommendations regarding how SASs should be applied in specific situations. They are not considered to be auditing standards.

The auditor should:
1. Consider the guidance provided by these publications in performing an audit
2. Be able to explain any departures and how compliance with standards was otherwise achieved.

Answer 3

Examples include :

1. Auditing interpretations of GAAS,
2. exhibits to GAAS,
3. auditing guidance provide in AICPA audit and accounting guides
4. AICPA auditing statements of Position (SOP)

Question 4

OTHER AUDITING PUBLICATIONS- NO AUTHORITATIVE STATUS

The auditor should:

1. Consider the guidance provided by these publications in performing an audit.
2. Be able to explain any departures, and how compliance with standards was
   otherwise achieved

Answer 4

Examples include:

Auditing articles in the Journal of Accountancy (or other
professional journal),

auditing articles in the AICPA CPA Letter, continuing
professional education materials,

textbooks, and other auditing publications.

Question 5

THE AUDIT PROCESS:

GENERAL PRINCICPLES

1. Overall Objectives
2. Documentation
3. Communication
4. Quality control - firm

ENGAGEMENT ACCEPTANCE
1. Ethics and independence
2. Terms of engagement

ASSESS RISK AND PLAN RESPONSE
1. Audit planning including audit strategy materiality

RISK ASSESSMENT PROCEDURES:
1. Understand the entity and its environment
2. Understand internal control, identify and assess risk, respond to risk

PERFORM PROCEDURES AND OBTAIN EVIDENCE
1. Test of Controls, if applicable
2. Substantive testing

FORM CONCLUSIONS
1. Subsequent events
2. Mgt representation
3. Evaluate audit results
4. Quality control-engagement

REPORTING
1. Report on audited FS
2. Other reporting considerations

Answer 5

Acceptable financial reporting frameworks include general
purpose frameworks designed to meet the needs of a wide range of users (e.g., U.S. GAAP and
International Financial Reporting Standards [IFRSs]), and special purpose frameworks.

The auditor’s report gives credibility to the financial statements.

1.The auditors, as a group
independent of management,

2. have an objective view and can report on a company’s activities
   without bias or conflict of interest.

Without a report from an independent auditor, a company’s
financial statements would be meaningless, because the public would have little faith in financial
statements issued by the inherently biased company.

The financial statements of an enterprise are prepared by the management of the enterprise,
not by the independent auditor.

Further, the financial statements are the product and property
of the enterprise; the independent auditor merely audits and expresses an opinion on them.

Question 6

Management’s responsibilities

1. the preparation and fair presentation of the financial statements in accordance with the
   applicable financial reporting framework;
2. the design, implementation, and maintenance of internal control relevant to the preparation
   and fair presentation of financial statements that are free of material misstatement due to
   error or fraud; and
3. providing the auditor with access to information and persons within the entity needed to
   complete the audit.

Answer 6

The preparation and fair presentation of the financial statements requires:
1. identification of the applicable financial reporting framework;
2. preparation and fair presentation of the financial statements in accordance with the
framework; and
3. inclusion of an adequate description of the framework in the financial statements.

Question 7

Auditor’s responsibilities

The auditor is responsible for expressing an opinion on the financial statements based on the
audit. The auditor is also responsible for:
1. maintaining professional skepticism;
2. complying with relevant ethical requirements;
3. exercising professional judgment throughout the planning and performance of the audit;
4. obtaining sufficient appropriate audit evidence; and
5. complying with generally accepted auditing standards (GAAS).

Answer 7

Auditors should be alert for:
Audit evidence that contradicts other audit evidence obtained.
Information that calls into question the reliability of documents (including the identified
controls over the preparation and maintenance of such information) and responses to
inquiries that may be used as audit evidence.
Conditions that indicate possible fraud.
Circumstances that suggest the need for audit procedures in addition to those required
by GAAS.
Audit evidence that may impact the auditor’s consideration of the initial identification and
assessment of the risks of material misstatement.

The auditor should neither assume that management is dishonest nor assume
unquestioned honesty. A belief that management is honest and has integrity does not
relieve the auditor of the need to maintain professional skepticism or allow the auditor to
be satisfied with less than persuasive evidence.

Question 8

Impediments to Acting With Professional Skepticism
________________________________________________________
Unconscious human bias, which may cause the auditor to evaluate and recall information that favors the interest of the client over the interest of the investor or favors evidence that corroborates, rather than contradicts, the existence of risks.

This may be facilitated by incentives and pressures to maintain and build client relationships, provide an unmodified (unqualified) opinion, keep audit costs low, or cross-sell other services.

Development of an inappropriate level of trust or confidence in management, which may result in the auditor not taking as questioning a stance as needed.

Pressure to avoid potential negative interactions with, or consequences to, individuals whom auditors know (e.g., management) instead of representing the interest of investors.

Scheduling and workload demands, which may result in auditors making shortcuts in judgment, such as seeking audit evidence that is easier to obtain rather than evidence that is more reliable and relevant, or giving more weight to supporting evidence without
considering contrary evidence.

Answer 8

Ethical Requirements

The auditor should comply with ethical requirements related to financial statement audit
engagements, including independence in both fact and appearance. Ethical requirements include
the AICPA Code of Professional Conduct and the rules of the state boards of accountancy and
applicable regulatory agencies that are more restrictive.

The auditor must be independent of an entity when performing an engagement in
accordance with GAAS unless: a) GAAS provides otherwise, or b) the auditor is required by
law or regulation to accept the engagement and report on the financial statements.

The auditor should comply with ethical requirements related to financial statement audit engagements, including independence in both FACT and APPEARANCE.

Ethical requirements include the AICPA Code of Professional Conduct and the rules of the state boards of accountancy and
applicable regulatory agencies that are more restrictive.

The auditor must be independent of an entity when performing an engagement in
accordance with GAAS unless: a) GAAS provides otherwise, or b) the auditor is required by
law or regulation to accept the engagement and report on the financial statements.