Chapter 2 (Professional Standards) Flashcards
a vocation requiring knowledge of some department or learning or science
profession
Public companies fall under the…
PCAOB (public company accounting oversight board)
When we are talking about the Auditing Standards (ASs), we are talking about ___ companies.
public
Private companies fall under the…
ASB (AICPA Auditing standards board)
The ASB has the ten standards of audit which are called…
SASs (Statements on Auditing Standards)
When we are talking about the Statements on auditing standards (SASs), we are talking about ___ companies.
private
Governmental ethics deals with…
GAO (U.S. government accountability office)
GAS (Government auditing standards) is know as…
The “Yellow Book”
The standards board for international companies is the…
IAASB (IFAC international audit and assurance standards board
The international standards on audit is the…
ISAs (International standards on Auditing)
For 70 years, AICPA has had oversight for audit standards through the…
ASB (auditing standards board)
The PCAOB is under the…
SEC
- measures of the quality of the auditors’s performance
- same from audit to audit
- standards vs. procedures
GAAS (Generally accepted auditing standards)
- Audit quality guides
* identify necessary qualifications and characteristics of auditors and guide the conduct of the audits examination
standards
particular and specialized actions taken to obtain evidence
procedures
Discribe the Background of the 10 GAAS (Generally accepted auditing standards)
Mckesson and Robbin, The Coster brothers did not have an M.D. nor a Ph.D. They had been doing fraud for a long time and when it all came about they had made 20 billion dollars already. they were getting away with it because CPA’s did not ask any specific questions. Out of this case, we got the 10 commandments of auditing which became known as GAAS.
The 10 GAAS are known as…
TID PIE GCDO
a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to interested users.
auditing
The 10 GAAS are broken down into what 3 categories?
- General Standards (TID)
- Fieldwork standards (PIE)
- Reporting Standards (GCDO)
What does TID stand for under the general standards category?
- T is for technical training
- I is for independence
- D is for due professional care
What does Pie stand for under the fieldwork standards category?
- P is for GAAP (engagement planning)
- I is for internal control Evaluation
- E is for Evidence gathering
What does GCDO stand for under the reporting standards category?
- G is for GAAP
- C is for consistency (consistently)
- D is for informative disclosures (Footnotes)
- O is for opinion
- the audit must be performed by a person or persons having adequate technical training and proficiency as an auditor
- in all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors
- due professional car is to be exercised in the performance of the audit and the preparation of the report.
General standards (TID)
- The auditor must adequately plan the work and must properly supervise any assistants.
- the auditor must obtain sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures.
- the auditor must obtain sufficient appropriate audit evidence through audit procedures performed to afford a reasonable basis for an opinion regarding the financial statements under the audit
Fieldwork standards (PIE)
- the report shall state whether the financial statements are presented in accordance with generally accepted accounting principles
- the report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period
- informative disclosure in financial statements are to be regarded as reasonably adequate unless otherwise sated in the report
- The report shall contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. when an overall opinion cannot be expressed, the reasons therefor should be stated. in all cases where an auditor’s name is associated with financial statements, the report should contain a clear cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.
Reporting Standards (GCDO)
What are the two types of interpretations of GAAS for SAS’s?
- unconditional requirements “MUST”
2. Presumptively mandatory requirements “SHOULD”
Must comply without exception-as indicated by the word “must” in the rule.
unconditional requirements
May depart from the rule with proper documentation and justification and use of alternative procedures-as indicated by the term “should” in the rule.
presumptively mandatory requirements
Standards that address technical and independence requirements
general standards
Standards that relate to planning, risk assessment, and evidence gathering.
fieldwork standards
Standards that relate to 4 different aspects of reporting.
reporting standards
The audit must be performed by a person or persons having adequate technical training and proficiency as an auditor
competence
- education
- experience
- certification
In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. Mental attitude (in fact) vs. appearance
independence (the cornerstone of being a CPA)
to be exercised in the performance of the audit and the preparation of the report. (What would another reasonably prudent auditor do in similar circumstances). Follow GAAS
due professional care (you must follow the standards, you did what another CPA would have done)
mental attitude vs appearance falls under what general standard
independence
Two issues generally jeopardize independence:
- Financial relationships
- Managerial relationships (you have to be careful giving consulting advice)
cannot subordinate your judgment to someone else
practical independence (programming, investigative, and reporting independence)
following GAAS is usually what general standard
due professional care
- the public expects you conduct audit with the skill and care of a professional
guide the planning, internal control evaluation, and the evidence gathering phases of the engagement.
fieldwork standards
what are the standards of fieldwork
- planning and supervision
- risk assessment
- sufficient and appropriate evidence
- Preparing an audit program which is required
- Obtaining knowledge of the clients business
- Dealing with differences of opinion
- Timing
planning and supervision phase (1st standard of fieldwork)
- Understanding of the client and its operating environment, including internal control.
- Internal control-system that is capable of either preventing or detecting material misstatements, errors or fraud.
- This understanding of internal control aides in our assessment of the RMM (risk of material misstatement)
- RMM is comprised of inherent risk and control risk.
- The assessment of the risks affects the nature, timing and extent of our audit procedures.
risk assessment (2nd standard of fieldwork
all the information auditors use to arrive at conclusion on which the audit opinion is based.
evidence
sufficient relates to…
number of transactions examined
lower control risk-reduce effectiveness of procedures.
effective controls
higher control risk-increase effectiveness of procedures.
ineffective controls
appropriate relates to….
quality (relevance, reliability)
- appropriateness relates to quality
- relevance
- reliable
characteristics of appropriate evidence
- Direct personal knowledge obtained thru physical observation and computation
- External evidence
- External-internal evidence
- Internal Evidence
- Verbal and written
evidence hierarchy
- Standardize the nature of reporting
- Facilitate communication with users by clearly specifying auditors responsibilities regarding the report
- Identify and communicate all material situations in which accounting principles have not been consistently applied
- Require auditors to express an opinion on the f/s examined or indicate all reasons why they could not.
Guidelines provided by the reporting standards
The report shall state whether the financial statements are presented in accordance with GAAP. Explicit
G which stands for GAAP in the reporting standards
The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. Implicit
C which stands for consistency in the reporting standards
Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. Implicit
D which stands for disclosure footnotes in the reporting standards
The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.
O which stands for opinion in the reporting standards
The independent Auditor’s Report (AS 5) letter comes from which standards?
PCAOB
What are the sections of the Auditor’s report (AS 5) letter?
Report title report address introductory paragraph scope paragraph description of an audit opinion paragraph extra internal control paragraph signature report date
The Report address is the address of the ones that …
paid for the audit
What is included in the introductory paragraph of the Independent auditor’s Report (AS 5) letter?
- notice of audit
- F/S examined
- Auditor, management responsibilities
What is does the Scope Paragraph of the independent auditor’s report (AS 5) letter state?
description of what you did with an audit “We believe that our audit provides a reasonable basis of our opinion”
The signature that goes on the independent auditor’s report (AS 5) is the….
firms signature not the CPA that did the audit
The report date on the independent auditor’s report is the…
last day of the fieldwork, anything that is done after that date is not the responsibility of the auditor
What are the types of audit report opinions?
- unqualified
- qualified
- adverse
- disclaimer
the financial statements PRESENT FAIRLY the financial condition and operations of the company in conformity with US. GAAP.
unqualified opinion
EXCEPT FOR one (limited) item, the financial statements present fairly….
qualified opinion
the financial statements DO NOT PRESENT FAIRLY….
adverse (they are not in conformity with GAAP)
the auditors DO NOT EXPRESS AN OPION…
disclaimer (the auditor was not able to give an opinion)
What are the differences between attest standards and audit standards?
- practitioner competence: general standards
- internal control evaluation: fieldwork standards
- reporting F/S (GAAP): have to state whether the audit is in accordance to GAAP
the SQCS 7 has been updated by SQCS 8 due to…
Clarity project
Guide the performance of the firm
quality control standards
- leadership responsibilities for quality within the firm (tone at the top)
- relevant ethical requirement (independence, integrity, objectivity)
- human resources/personnel management
- acceptance and continuance of clients
- engagement performance
- monitoring
elements of the quality control standards
- Was formed to ensure that audit quality is not compromised and that auditor performance continues to meet public expectations.
- the membership of the board consists of five SEC-appointed public members (business executives, investment analysts) and is supported by fees paid by publicly traded companies.
PCAOB (the public company accounting oversight board)
