Chapter 2 Flashcards
Types of Auditors/Services Provided
External, Internal, Government, Forensic, and Other Non-Audit Services
External Auditors
Independent auditors. Audits financial statements.
Sox Audit. Compliance audits.
Internal Auditors
Work for the company. Report administratively, they are responsible (function) to the board. Do Operational testing.
Can do everything external auditors do and more.
Government Auditors
Can work for SEC, PCAOB, FBI, Government, and IRS.
Forensic Auditors
Look at fraud audits, contract audits, money laundry audits, asset audits. and damage calculations.
Other Non-Audit Services (tax, mgmt advisory, compilations and reviews)
Doing consulting work.
Reviews and Compilations.
Tax preparation and planning services.
Management advisory services.
Reviews
A level below an audit. Do not do any audit work or tests.
Do analytical reviews/questions and give a much softer opinion.
Compilations
The third level below an audit. Accumulate the clients information and help put the company’s financial statements together, and that’s it!
LLP
Most popular partnership. Protects the non involved partners personal assets. Assets of firm and active partners can be taken away.
Corporations
Not as popular.
Must be registered in 50 states (regulations), usually corporations are for local firms.
Organizations that Impact the Profession
SEC, FASB, PCAOB, and AICPA/ASB
SEC
“The master”.
Law regulating and rulemaking.
Has responsibility of GAAP.
FASB
A private organization executing for the SEC technically.
Develop accounting principles for public and nonpublic companies and for use by preparers.
PCAOB
Public Company Account Oversight Board.
Create auditing standards that relate to public company audits.
AICPA/ASB
Auditing Standards Board (SEC has significant control but not all).
Creating audit standards for nonpublic company audits.
Sarbanes Oxley (SOX)
Impacted whole economy.
SOX wanted to restore confidence to the people.
Impacted boards, management, audit committees, and auditors.
SOX objective was to drive firms back to the roots of being auditors and not advisors!
Created PCAOB, the regulator for the accounting profession!
SOX Rules
CEO and CFO need to sign financial statements.
Integrated audits.
Rotate partners every five years.
80’s, Enron, Arthur Andersen, and Others
80’s: Good time.
Enron: obstructing justice, 2001 Enron happened and AA was gone.
Arthur Andersen: Gone. Accused of ‘rolling over’, gave away audit fees to conserve huge consulting fees.
Others: Tyco went under! People lost confidence, did not know what was happening!
Professional Skepticism
An attitude that includes a questioning mind and critical assessment of audit evidence.
Society expects this!
Responsibility of the Financial Statements
Management is responsible for F/S.
Fraud Detection
Up to a certain point we are responsible for detecting fraud that is material. No guarantee that we will catch them all!
Expectation Gap
Difference between what the public expects and what we actually do.
Corporate Governance
Consists of all the people, processes, and activities in place to help ensure proper stewardship over an entity’s assets.
“Old GAAS” The 10 Standards (3 categories)
Three General Standards, Standards of Field Work, and Standards of Reporting.
Three General Standards
Adequate technical training.
Independence in mental attitude.
Due professional care.
Standards of Field Work
Audit is planned and supervised.
Understanding of internal control.
Evidence is sufficient and appropriate.
Standards of Reporting
In accordance with GAAP.
Principles are consistently applied.
Informative disclosures.
Expression of audit opinion.
“Old” GAAS plus PCAOB Audit Standards
These are the audit standards used for PCAOB audits or public company audits! (Our focus)
“New GAAS” (Exhibit 2-3) Seven Standards (4 categories)
For non public company audits.
Called, “Principles Underlying an Audit Conducted in Accordance with GAAP”.
Seven Standards of “New GAAS”
Purpose and premise of an audit.
Management’s responsibility for F/S.
Auditors responsibilities.
Express an opinion.
Materiality, and understand internal control.
The auditor is unable to obtain absolute assurance (reasonable).
Reporting.
One Change in “New GAAS” relates to Terminiology
Must/Shall/Is Required: Auditor must do and follow standards.
Should: Consider the standards.
May/Might/Could: Suggested, could find another way to do it.
