Chapter 1 (Auditing and Assurance Services) Flashcards
AICPA created….
FASB
Who is the general umbrella to standards board?
GAAP
ASB
auditing standards board
Sarbanes Oxley created….
PCAOB (public company auditing oversight board)
If there is so much, where do CPAs start?
identifying the business risk is where the audit starts
Forces creating demand-users demand for reliable information, users demand for…
reliable
relevant
timely information
4 environmental conditions that increase user demand
complexity
remoteness
time sensitivity
consequences
the risk (probability) that the information (mainly financial) disseminated by a company will be materially false or misleading
information risk
When users want someone to lend credibility to the information, when we provide this credibility it is called….
assurance
When assurance is for specific assertions made by management.
attestation
When the assertions are embodied in a companies financial statements.
auditing
a systematic process of objectively obtaining and evaluating evidence regarding assertions (financial statements) about economic acctions and events to ascertain the degree of correspondence between the assertions and established critic (GAAP) and communicating the results (auditor’s report) to interested users (creditors, investors).
auditing
In the auditing definition, objectively is used because…
we as CPA’s are independent
We judge our client’s accountant records against…
GAAP
Process, purposeful, planned, based on logical structure.
systematic
What is the purpose of obtaining and evaluating?
to obtain the degree of correspondence between the assertions and the established criteria
What is the overview of the financial statement auditing?
we start with the objective outsider which is the independent auditor, then we obtain and evaluate evidence which is the knowledge of client’s business, then branches out to the assertions about economic actions and events which are the financial statements which are all under GAAP (FASB, APB, ARB, GASB, AICPA, AcSEC, EITF, SEC), then those two join together to produce the audit reports and other communication
auditing deals with…
financial statements
attestation services deals with…
primary financial information
assurance services deals with…
an information
Very specific definition
As a CPA you are fully certified to the SCC financial statements
Giving reliability for data
Actually have standards
Requires a written report
Things that are required by GAAP (B/S, I/S, C/F, Footnotes)
auditing
We have standards
Requires a written report
Given reliability for data
This is were we do some sort of assurance that is not audit
attestation services
intended for a very large audience Very specific Like consulting work We do not have standards No written report is required Not providing reliability
Assurance services
There critical components of assurance series…
Information or a process on which the assurance service is provided
A user or group of users who derive value from the assurance services provided
An assurance service provider
Independent professional services that improve the quality of information, or its context, for decision makers.
Can be provided to management or external users/
assurance services
The breakdown of Professional
professional judgment
- experience
- education
- license
One in which a practitioner is engaged to issue or does issue a report on subject matter or an assertion about the subject matter that is the responsibility of another party
attestation engagement (subset of assurance and always involves a report that goes to a third party
Agreed upon procedures
Pro forma financial information
Financial forecasts and projections
financial attestation engagement
Compliance with contractual requirements
Effectiveness of internal control systems
Inventory quantities and locations
non-financial attestation engagements
What is the basic assurance process?
First we are going to gather evidence about assertions, then evaluate the evidence agains an objective criteria. After that we are going to communicate the results to interested parties
What do auditors do?
they provide reasonable assurance
An auditor provides reasonable assurance that the financial statements are free of material error and fraud
The expectation GAAP
The Balance sheet goes with the…
existence assertion
The income statement goes with the…
occurrence
Footnotes have to be just right (How do we know that? that’s just professional judgment)
Presentation and disclosure
Applies to the balance sheet
existences (assets)
Applies to the income statement
Occurrence (transactions)
Remember this by owning/owing
rights and obligations
Is everything recorded that should have been and based on cutoff. Income manipulation.
Everything is in its proper period
Is the account complete
Completeness/Cutoff
Is inventory valued properly (i.e.: lower of cost or market based on FIFO etc., obsolete, damaged goods not included
Did the accountant valuate the statements according to GAAP?
Methodology of depreciation: SL, Sum of all year, double declining, MACR
valuation or allocation
What procedures can you use to verify the answer?
PERCV (the 5 management assertions)
An auditor’s tendency not to believe management’s assertions without sufficient corroboration.
professional skepticism
Have to listen to people and take their word but, I am going to verify.
skepticism
When do you stop auditing?
that is based on your professional judgment
What are the three public accounting profession services?
assurance
tax consulting
consulting
Types of audits and auditors.
financial (external auditors/CPAs)
operational (internal auditors/CIA)
Compliance (governmental auditors)
Forensic (Fraud auditors/CFEs)
Ensure that financial statements are accurate.
financial (external auditors/CPAs)
Improve operational economy
Improve operational efficiency
operational (internal auditors/CIAs)
Ensure compliance with company and/or governmental rules and regulations
compliance (governmental auditors)
Most audits are combinations of financial, operational, and compliance audits.
forensic (fraud audits/CFE’s)
