Clarity Project Supplement Flashcards
What is the overall goal of an audit of a client’s Financial Statements?
The auditor seeks to obtain reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error, to form and express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.
What auditing standards apply to audits of nonissuers?
Auditors of nonissuer financial statements must comply with the AICPA’s Auditing Standard Board (ASB) professional auditing standards, referred to as the ASB’s clarified auditing standards (AU-C) when the financial statements are issued on or after December 15, 2012. Audits of financial statements issued before December 15, 2012 must comply with the the pre-clarified auditing standards (AU). Auditors of issuer financial statements must comply with the PCAOB auditing standards (AS). While the PCAOB is still issuing new standards since being formed by the Sarbanes-Oxly Act of 2002, Certain ASB auditing standards (AU) are still effective as interim standards for issueers until superseded by PCAOB AS.
What are the two categories of compliance with laws and regulations that an auditor might encounter in an audit engagement?
The auditor might encounter one or both of the following regarding compliance with laws and regulations:
Those what would have a direct-effect on the determination of material amounts and disclosures in the financial statements (e.g., Tax Laws)
Those that would not have a direct-effect on the determination of material amounts and disclosures in the financial statements but may be fundamental to the entity’s operations, fundamental to the entity’s ability to continue as a business, or necessary for the entity to avoid material penalties.
A company has evaded paying its income taxes but has not yet been contacted by the IRS. The same company has also polluted a local river, but this situation has not yet even been investigated. Are these direct-effect or indirect-effect acts of noncompliance with laws and regulations?
Evading income tax is noncompliance of laws and regulations that has a direct-effect because several specific financial statement balances will likely be misstated, including income tax expense, income tax payable, deferred income tax assets or liabilities. Other that the exact penalty and interest amounts, the amounts in the financial statements that are understated can be readily determined by the auditor.
Polluting a river has an indirect-effect because no specific amount is necessarily immediately misstated as a direct result of the noncompliance. However, if the action is ultimately discovered, the company may be monetarily fined and/or punished in some other manner. Thus, this and any other indirect-effect noncompliance with laws and regulations creates a contingent liability for the company.
