Chapter 2 Flashcards
The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether…
caused by error or by fraud
Who has ultimate responsibility for the financial statements?
Management
What are the 2 parts of PCAOB Inspection Reports?
Part I: deficiencies within individually-inspected engagements
Part II: deficiencies within quality control system
AICPA
Private organization
Auditing standards for public companies until 2002
PCAOB
Quasi-private organization
Has legal authority to set standards for all public company audits
Regulation of Audit Firms - AICPA
Peer Review Program
- For firms who audit nonpublic companies
– Review of a firm’s practice conducted by another public accounting firm
Regulation of Audit Firms - PCAOB
- For firms who audit issuers (public companies)
- Monitors public accounting firms through inspections
Inspections
Firms auditing more than 100 public entities are inspected annually.
Firms auditing less than 100 public entities are inspected every 3 years
Inspection reports list deficiencies in audits conducted by registered firms
AICPA has _____ expertise, but _____ independence
increased
decreased
PCAOB has _____ expertise, but _____ independence
decreased
increased
System of Quality Control provices firm with reasonable assurance that the firm and its personnel…
– Comply with professional standards and regulatory/legal requirements
– Issue reports that are appropriate in the circumstances
(has nothing to do with the clients, its about the audit firm)
System of Quality Control
- PCAOB selects a sample of audits to inspect
- PCAOB looks at system of quality control
- PCAOB reports audits with deficiencies
If the auditors don’t remit deficiencies, PCAOB releases a “Part 2” which is a public report and a BIG DEAL!
Elements of System of Quality Control
- Leadership responsibilities for quality within the firm (“tone at the top”)
- Relevant ethical requirements
- Acceptance and continuance of client relationships and specific engagements
- Human resources
- Engagement performance
- Monitoring
What is the equivalent of GAAP for audit?
GAAS (Generally Accepted Auditing Standards)
What is the purpose of GAAS?
to achieve the following objectives of an audit examination…
– Obtain reasonable assurance about whether financial statements are free of material misstatement, whether due to error or fraud
– Issue a report on the financial statements
Components of GAAS
- Fundamental Principles
(general conduct) - PCAOB Auditing Standards and ASB Statements on Auditing Standards
(supporting principles) - Interpretive Publications
(application guide)
Flow of an Audit
- Obtain/retain client
- Engagement planning
- Risk assessment
- Audit evidence
- Reporting
Responsibilities principle
- Competence and capabilities
- Independence
- Due Care
- Professional skepticism and professional judgment
Competence and capabilities
Education, experience, expertise
Due Care
Level of performance (effort) by reasonable auditor in similar circumstances (prudent auditor)
Professional skepticism
appropriate questioning and critical assessment of evidence
Professional judgement
application of training, knowledge, and experiences
Which of the following best demonstrates the concept of professional skepticism?
a) Relying more extensively on external evidence rather than internal evidence
b) Focusing on items that have a more significant quantitative effect on the entity’s financial statements
c) Critically assessing verbal evidence received from the entity’s management
d) Evaluating potential financial interests held by auditors in the client
C.
Critical mindset, how do you approach the evidence that was gathered?
Performance Principle
Goal is to provide reasonable assurance that financial statements do not contain material misstatements
* Planning and supervision
* Materiality
* Risk assessment
* Obtain sufficient appropriate audit evidence
Sufficient
Quantity
Appropriate
Quality (relevant and reliable)
Planning and Supervision
You can’t just put interns on an audit and call it good
Materiality
Amount that woudl influence and investor’s decision
Risk assessment
Auditors focus their procedures where there is higher risk
Sufficiency: the greater risk of misstatemetn likely requires a _______ quantity of audit evidence
Higher
Sufficiency: Higher quality audit evidence often results in a ______ quantity of audit evidence
lower
Appropriateness: Reliability
- Independent source outside the entity
- Effectiveness of internal control
- Auditor’s direct personal knowledge
- Documentary evidence
- Original documents
Which of the following procedures would provide the most reliable audit evidence?
a) Inquiries of the client’s internal audit staff
b) Inspection of prenumbered client purchase orders filed in the vouchers payable department
c) Inspection of vendor sales invoices received from client personnel
d) Inspection of bank statements obtained directly from the client’s financial institution
D.
Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following?
a) Independence
b) Adequate competence and capabilities
c) Adequate planning and supervision
d)Gathering sufficient appropriate evidence
C.
Reporting Principle
- Express an opinion
- Assess financdial statements against financial reporting framework (GAAP, IFRS)
Report of Independent Registered Public Accounting Firm
- Opinion on the financial statements
- Basis for opinion
- Critical audit matter
The auditor is working on behalf of the….
shareholders
Critical Audit Matters
Tell shareholders what the hardest areas to audit were
(Where was the most subjectivity used?)
Unmodified (unqualified) opinion
“clean” financial statements are in conformity with GAAP
Qualified opinion
Except for limited items, financial statements are in conformity with GAAP
Adverse opinion
Financial statements are not in conformity with GAAP
Disclaimer
Auditors do not express an opinion
