Chapter 6 Flashcards
immediate family
spouse and dependents
Objectivity vs independence
Objectivity applies to All services rendered but independence applies to attestation services only
Covered Member
Audit team and boss/office “chain of command”
close relatives
parents, siblings and adult kids
Independence NOT impaired when:
1) Fully collaterized car loans with a bank client
2) credit card balances no more than $10K
3) A bank account that is fully insured by the gov’t
4) A passbook loan
5) being a member of or an honorary trustee
6) membership in the same trade association as a client does not impair (country club)
Impairment of independence
1) one year overdue in the payment of professional fees
2) Actual or threatened litigation may impair independence
3) member makes management decisions for an attest client
4) commissions or referral fees
General Standards - member must:
1) exhibit professional competence (technical qualifications)
2) exercise due care (possess the same degree of skill commonly possessed)
3) Adequately plan and supervise
4) Obtain sufficient relevant data to afford reasonable basis
Must disclose confidential client information (even without client consent) when:
1) subpoena or summons
2) quality review (peer review)
3) in response to any inquiry either made by the ethics division or trial board
4) your defense team (when client is suing you)
Contingent fees generally not allowed, but permitted when:
1) fixed by courts
2) compilation of FS expected to be used by third parties only if the member includes a stmt that member is not independent
CPA not obtain clients in a matter that is false or misleading/deceptive. That is:
1) create false or unjustified expectations of favorable results
2) imply the ability to influence a court or regulatory agent
3) Intentionally underestimate fees
4) would mislead or deceive a reasonable person
Registration with PCAOB - only registered pub accounting firm can audit SEC issuer. Application mentions:
1) names of issuers audited in the preceding and current year
2) a statement of the firms quality control policies
3) a list of all firm accountants who will participate in the audit
4) legal or disciplinary proceedings pending against the firm
5) disclosures filed by audited issuers concerning accounting disagreements
Auditor Independence: Prohibited services when auditing ‘issuer’:
1) bookkeeping
2) Financial Info systems and design implementation
3) Appraisal and valuation services
4) Actuarial services
5) mgmt functions
6) Internal audit outsourcing services
7) Services as a broker, dealer, investment adviser
8) Legal services
9) expert services unrelated to audit
10) tax services OK if pre-approved by audit committee
Registered Public Accounting Firms must:
1) maintain audit documentation for 7 years
2) provide a second partner review of each audit report
3) describe in audit reports the scope of the testing of the issuers IC structure
PCAOB is subject to the SEC and has duty to:
1) register public accounting firms that prepare audit reports for issuers
2) establish rules relating to the preparation of audit reports for issuers
3) conduct inspection, investigations, and disciplianary proceedings concerning registered public accounting firms
PCAOB - annual inspections
must conduct for registered public accounting firms that regularly provide reports for more than 100 issuers; if less than 100 issuers then inspect at least once every 3 years
The Rules
Rule 101 - Independence Rule 102 - Integrity and Objectivity Rule 201 - General Standards Rule 202- Compliance with standards Rule 203- Acccounting Principles Rule 301 - Confidential client info Rule 302 - Contingent Fees Rule 501 - Discreditable Acts
Enhanced Financial Disclosures
- Disclosures in periodic reports
- off-balance sheet transactions
- disclosure of transactions - officers/directors or 10% + S/H
- mgmt assessment of IC
- Code of Ethics for Senior Financial Officers
- Disclosure of Audit Committee Financial Expert
Non-audit services - preapproval not required when:
non-audit services do not exceed 5% of total revenues from the audit client
Required Auditor Reporting to the Audit Committee
1) Critical accounting principles and practices used
2) alternative accounting treatments
3) material written communications between the audit firm and mgmt
Employee benefit plan - Independence impaired
1) any direct financial interest or a material indirect financial interest in the plan or the plan sponsor
2) connection to the plan or the plan sponsor as a promoter, underwriter, investment advisor, voting trustee
3) an accountant or a member of the accounting firm maintains financial records for the employee benefit plan
Employee benefit plan - Independence NOT impaired
1) former officer is employed by firm and completely disassociated from the plan
2) the accountant firm was engaged by the plan sponsor during the engagement
3) an actuary associated with the account firm rendered services to the plan
Purpose of audit documentation
1) basis for the auditors report and the conclusion about the achievement of the objectives
2) evidence that the audit was conducted in accordance with GAAS and applicable legal requirements
Audit documentation requirements
1) assist the engagement team in planning, conducting, and supervising the audit,
2) show that the accounting records = FS
3) Be prepared in detail so that an experienced auditor with no connection can understand
4) provide a record of accumulated evidence
5) be a record of matters of continuing significance
6) assist an auditor who reviews a predecessor auditors documentation
Audit documentation retention
SAS Rules (nonissuers) = 5 years (from report release date) PCAOB Rules = 7 years
Complete WPs - Audit documentation
SAS Rules = within 60 Days following the report release date
PCAOB Rules = 45 days following the report release date
Audit Documentation form
may be in paper, electronic, or other media. Oral explanations alone are insufficient.
Audit Documentation should contain significant audit findings:
Include matters:
- about selection and application of accounting principles
- that give rise to significant risks
- any material misstatements
- cause significant difficulty in applying necessary audit procedures
- may result in modification of the auditors opinion or the inclusion of an emphasis-of-matter paragraph in the auditors report
Audit procedures in computerized environment - factors to consider:
1) extent of computer utilization in each accounting app
2) the complexity of the entitys computer operations
3) the organizational structure of the info technology department
4) the availability of an audit trail
5) the use of computer-assisted audit techniques
Auditing around the computer = manual audit procedures
auditor tests the input data, processes the data independently, and compares the independently determined results to the program results
Computer assisted audit techniques = auditing through the computer
emphasis is on the input and process stages
Embedded Audit Modules
Enables continuous monitoring and analysis of transaction processing; advant - continuous monitoring of online, real-time systems; disadvan- audit hooks must be programmed into the operating system
Integrated Test Facility (ITF)
similar to the test data approach except that the test data is commingled with live data. Accomplished by processing the test data to dummy accounts. Client personnel are not informed that the test is being run.
Test Data
Refers to a technique that uses the application program to process a set of test data; advantage is that live computer files are not affected in any way
Parallel Simulation
a technique where the auditor re-processes some or all of the clients live data.
Generalized Audit Software Packages (GASPs)
allow the auditor to perform test of controls and substantive tests directly on the clients systems.
GASPs: advantages
- Allow the auditor to sample and test a much higher percentage of transaction which should result in a more reliable audit.
- require little technical knowledge
- reduce audit time
Advantages of auditing with a computer
- automatic performance on math - reduces errors
- automatic cross-referencing of amounts
- automatic preparation of FS
- reduction in required supervisory review time
Disdvantages of auditing with a computer
audit documentation may not contain readily observable details of calcs
Audit requirements for federal financial assistance
1) Expanded internal control documentation and testing requirements
2) expanded reporting to include formal written reports
3) Expanded reporting to include whether the federal financial assistance has been administered in accordance with applicable laws
4) application of single audit standards to federal financial assistance
Two types of Audits
- Financial
- Performance
Increased mgmt responsibilities identified by GAGAS
1) ID of applicable laws
2) Establishment of IC
3) Preparation of supplementary financial reports
4) Obtaining an audit
GAGAS: test of operating effectiveness of controls required if:
1) theres an expectation of the operating effectiveness
2) substantive procedures do not provide enough evidence to support a conclusion
3) tests of controls are required by the local government standards
GAGAS - required documentation includes:
1) the assessed risk of material noncompliance
2) responses to the risk assessment
3) basis or rationale for materiality levels
4) compliance with supplemental requirements
Increased auditor responsibilities identified by GAGAS
1) obtain reasonable assurance that FS are free from MM resulting from violations of laws that effect FS
2) see whether mgmt has identified laws that effect the determination of amounts in the entity’s FS
3) understanding the possible effects on FS
4) understanding the possible effects on the FS of laws that tend to have direct effect on amounts in FS
5) communication to mgmt that an audit per GAAS may not be sufficient
GAGAS - developing a finding
elements include criteria, conditions, cause, and effect or potential effect; report to both the audited entity and others.
GAGAS - Audit documentation
1) evidence of supervisory review
2) document departures from GAGAS and the impact
GAGAS -reporting internal control
1) Know the design of IC and whether they are implemented
2) communicate all significant deficiencies noted during the audit
3) written report on auditors understanding of IC; assessment of control risks
Single Audit vs. Program-specific audit
All governmental audits are not the same - single audit acts include report on the FS of whole org; program-specific audits do not include reports on the FS
GAGAS - IC written report pass key
1) assertion that evaluating compliance with laws on the FS is part of developing an opinion on FS
2) assertion that specific controls relating to financial reporting are considered
3) an indication either no weaknesses were found or that significant deficiencies were found
Report on compliance with requirements applicable to a major program and IC over program:: Scope Paragraph
1) States the audit of regulatory compliance was conducted in accordance with GAAS, GAGAS, and OMB Circular A-133
2) states that audit does not provide a legal determination of the entitys compliance
3) states character of audit
Report on compliance with requirements applicable to a major program and IC over program:: Intro Paragraph
1) states that entity has been audited for compliance
with requirements…for each of the entities major grants
2) directs the reader to the summary of auditors results
sections of the Schedule of Findings
3) Asserts compliance with laws.. and grants is the responsibility of mgmt and auditor should express opinion
Quality Control Standards: HELP ME
Human Resources Engagement/Client acceptance Leadership responsibilities Performance of the engagement Monitoring Ethical requirements
Report on compliance with requirements applicable to a major program and IC over program:: Opinion Paragraph
1) Identifies any matters of noncompliance
2) summarizes the types of noncompliance
3) Asserts, except for anything noted in preceding paragraph, the entity has complied
Yellow Book -Government Auditing Standards
- scope of the auditors testing of IC
- scope of the auditors tests of compliance with laws & regulations
GAS additional reports required
- reporting on auditor compliance with GAGAS
- reporting on IC and compliance with provisions of laws, regulations, contracts
- communicating deficiences in IC
- reporting views of reponsible officials
- reporting confidential or sensitive info
- distributing reports
Engagement quality control review
Should be completed BEFORE the engagement partner releases the audit report
