Chapter 2 - Professional Standards Flashcards
ASB is for ____ entities
private
three types of professional standards principles
responsibilities, performance, reporting
PCAOBs and ASB principles are…
similar
GAAS stands for…
generally accepted auditing standards
what does GAAS do?
identify necessary qualifications and characteristics of auditors and guide the conduct of audit
simple gaas definition
who can audit? how to audit?
purpose of GAAS
to achieve the following objective of an audit
1. obtain reasonable assurance that there is no material misstatement
2. report on the f/s and communicate in accordance of audit findings
sources of GAAS
ASB, PCAOB, IAASB, etc.
what does GAAP tell us?
how to record transactions, present f/s, and disclose other financial information
what is the foundation of an audit?
fundamental principles
three components of GAAS
fundamental principles, PCAOB auditing standards and ASB statements on auditing standards, interpretive publications
interpretive publications guide..
application of GAAS
PCAOB auditing standards and ASB statements on auditing standards are…
requirements supporting principles
simple definition of responsibilities principle
who can audit
4 parts of responsibilities principle
- competence and capabilities
- independence
- due care
- professional skepticism and judgement
competence and capabilities also means…
experience and expertise
two types of independence that an auditor must be
in fact and in appearance
independence in fact means…
you are independent
independence in appears means…
you appear independent
you cannot measure which type of independence?
in fact
what relationship should be independent?
financial and managerial
due care is…
level of performance by reasonable auditor in similar circumstances
skepticism is…
appropriate questioning and critical assessment of evidence
judgement is…
using knowledge, training, and experience in making informed decisions during an audit
we want an auditor to be both…
confident and capable
how can confidence hurt an audit?
being over confident
the goal of performance principle is…
to provide reasonable assurance that f/s do not contain material misstatements
4 parts of performance principle
- planning and supervision
- materiality
- risk assessment
- audit evidence
reasonable assurance means there is room for…
error
planning of audit means asking ____? ____?
when? who?
materiality means it influences…
decisions of f/s users
materiality is considered…
thought the audit
risk assessment involves understanding…
the entity and environment
with risk assessment, you have to determine…
necessary effectiveness of substantive tests
audit evidence is obtained by…
testing
sufficient evidence =
quantity
appropriate evidence =
quality
reasonable is NOT…
absolute
audit risk model equation
audit risk = inherent risk * control risk * detection risk
which two risks have risk of material misstatement?
inherent risk and control risk
we do not have control over which risks?
inherent and control
audit risk means giving…
the wrong opinion
inherent risk is the risk of..
material misstatement without controls
control risk is risk that…
controls in place will not prevent or detect MM
detection risk refers to…
audit work
audit work means…
looking at evidence
appropriate evidence must be both..
relevant and reliable
relevance: does evidence….?
address assertions of interest
reliability refers to the…
hierarchy of evidence sources
evidence sources from most reliable to least
direct personal knowledge, external documentary evidence, internal documentary evidence
sufficient evidence is influences by…
effectiveness of the entity’s internal control (sample size)
effective internal control results in…
lower level of control risk and evaluate less evidence
good internal controls =
less audit work
examples of auditors’ direct personal knowledge evidence
observe PP&E and inventory
external documentary evidence
A/R confirmations, bank confirmations
external internal evidence examples
invoice from vendor for purchases
internal documentary evidence example
client sales invoices
reporting principle is meant to…
express an opinion (or state that an opinion can be expressed) on an entity’s f/s
reporting principle asses f/s against…
financial reporting principles (GAAP)
system of quality control provides a firm with..
reasonable assurance that the firm and its personnel..
1. comply with professional standards and regulatory/legal requirements
2. issue reports that are appropriate for the circumstances
6 elements of system 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
PCAOB monitors public accounting firms through…
inspections
how often do firms auditing > 100 public entities get inspected by PCAOB?
annually
how often do firms auditing < 100 public entities get inspected by PCAOB?
every three years
PCAOB inspection reports list..
deficiencies in audits conducted by registered firms
auditors that audit private companies instead get…
peer reviewed
