Ethics, General Principles and Conduct Flashcards
Compilation
Compilation is a service, the objective of which is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. Although a compilation is not an assurance engagement, it is an engagement where the accountant must determine whether he or she is independent of the entity.
Documentation
In computing, documentation is the instructions for operators, descriptions of procedures, and other descriptive material about a program or a system. These instructions can be classified as administrative, systems, or operating.
In systems analysis, documentation is the preparation and production of documents for system analysis, programming, and system operation. Good documentation is essential to system maintenance and modification.
In auditing, documentation is the use of documentary evidence to support or substantiate a claim or opinion. Documentary evidence (in an accounting sense) includes checks, invoices, contracts, and minutes of meetings. Documentary evidence may also include third-party documents such as bank statements or escrow account balances held by banks.
Financial Forecast
Financial forecasts are prospective financial statements that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. A financial forecast is based on the responsible party’s assumptions reflecting conditions it expects to exist and the course of action it expects to take. A financial forecast may be expressed in specific monetary amounts as a single-point estimate of forecasted results or as a range, when the responsible party selects key assumptions to form a range within which it reasonably expects, to the best of its knowledge and belief, the item or items subject to the assumptions to actually fall. If a forecast contains a range, the range is not selected in a biased or misleading manner (for example, a range in which one end is significantly less expected than the other).
Financial Projections
Financial projections are prospective financial statements that present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations, and cash flows. A financial projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question such as, “What would happen if…?” A financial projection is based on the responsible party’s assumptions reflecting conditions it expects would exist and the course of action it expects would be taken, given one or more hypothetical assumptions. A projection, like a forecast, may contain a range.
Prospective financial statements
Prospective financial statements are either financial forecasts or financial projections, including the summaries of significant assumptions and accounting policies. Although prospective financial statements may cover a period that has partially expired, statements for periods that have completely expired are not considered to be prospective financial statements. Pro forma financial statements and partial presentations are not considered to be prospective financial statements.
The Public Company Accounting Oversight Board (PCAOB)
The Public Company Accounting Oversight Board (PCAOB) was established by Congress to oversee public company audits. Congress formed the group to protect the interests of investors and further the public interest in the preparation of audit reports. The PCAOB also oversees the audits of broker-dealers.
Scope limitations
Scope limitation is a restriction on an audit that is caused by the client, issues beyond the control of the client, or other events that do not allow the auditor to complete all aspects of his or her audit procedures.
Statements on Standards for Accounting and Review Services
Statements on Standards for Accounting and Review Services are standards concerning the accounting (compilation) and review services rendered in connection with unaudited financial statements or other unaudited financial information of an entity that is not required to file financial statements with a regulatory agency.
Workpapers
Workpapers document the work done and conclusions reached by the auditor, showing procedures applied, tests performed, information obtained, and pertinent conclusions reached (AU-C 230).
The quantity, form, and content of workpapers will vary depending on the circumstance. They should, however, be sufficient to show that the accounting records agree, or reconcile, with the financial statements. Workpapers should show the following:
The audit work was adequately planned and supervised.
A sufficient understanding of the entity and its environment, including its internal control, was obtained.
The audit evidence obtained provides sufficient appropriate audit evidence to provide a reasonable basis for an opinion.
Workpapers are the property of the auditor.
Internal Control
“Internal control is a process, effected by an entity’s board of directors, management and other personnel, which is designed to provide reasonable assurance regarding the achievement of objectives in one or more categories:
“Effectiveness and efficiency of operations
“Reliability of financial information
“Compliance with applicable laws and regulations
“Internal control consists of five interrelated components. These are derived from the way management runs a business, and are integrated into the management process. The components are:
"Control Environment "Risk Assessment "Control Activities "Information and Communication "Monitoring Activities"
Control Risk
Control risk is the risk that a material misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure will not be prevented or detected and corrected on a timely basis by the entity’s internal control.
Engagement letter
An engagement letter is a letter written by the CPA to the client that represents the contractual understanding between the CPA and the client of the work to be performed, signed by both the CPA and the client.
Integrity
Integrity is an unimpaired condition or firm adherence to a code of ethics or moral values.
Integrity is an essential component of independence but is also a quality which all CPAs, even those who are not independent, must possess. It is the subject of the Integrity Principle of the AICPA Code of Professional Conduct: “To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.” (ET 0.300.040.01)
Integrity is a fundamental element of character that is measured in terms of what is right and just, requiring adherence to both the form and the spirit of technical and ethical standards, tolerating no deceit or subordination of principle. Yet it is intimately tied to the principles of independence and objectivity and of due care.
Integrity is also the subject of the AICPA Integrity and Objectivity Rule: “In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.”
Materiality
Information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity’s financial report. Consequently, the FASB cannot specify a uniform quantitative threshold for materiality or predetermine what could be material in a particular situation.
SFAC 8.3, QC11
Materiality judgments are concerned with thresholds.
Example: You would ask the following questions:
Is an item of information, an omission, misstatement, or error large enough, considering its nature and the attendant circumstances, that it is probable that the judgment of a reasonable person relying on the information would have been changed or influenced?
Is the item important enough to matter?
The relative, rather than absolute, size of the item determines whether or not it is material in a given situation. The auditor’s consideration of materiality is affected by the interaction of quantitative and qualitative factors.
The concept of materiality is pervasive. It is related to the relevance and faithful representation of information and is critical to audit judgments regarding audit risk and disclosure.
The Sarbanes-Oxley Act of 2002 (SOX)
The Sarbanes-Oxley Act of 2002 (SOX), also known as the Public Company Accounting Reform and Investor Protection Act, was enacted to develop new or enhanced standards for all U.S. public company boards, management, and public accounting firms.
Significant Deficiency
The auditor must obtain a sufficient understanding of the entity’s internal control structure to determine the nature, extent, and timing of audit tests to be carried out. In gaining this understanding, the auditor must be able to assess deficiencies in the design and operation of the internal control structure. Those deficiencies which are considered significant to the design and operation of the internal control structure should be reported to those charged with governance. Such deficiencies are significant deficiencies, and the auditor is required by AU-C 265 to report these conditions, including those considered material weaknesses and those that are not.
The standard (AU-C Glossary) defines a significant deficiency as a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Specialist
When performing an audit, an auditor often encounters situations in accumulating evidence concerning account balances in which evidence is from fields beyond his expertise. An example might be evidence collected concerning the inventory valuation of fine jewelry. In such cases, the auditor may use the work of a specialist. A specialist is thus defined as a person (or firm) possessing knowledge in a particular field other than accounting or auditing. The auditor may use the findings of the specialist as part of the audit evidence provided the auditor follows the guidelines set forth in AU-C 620.
Test Of Controls
Test of controls provides evidence on a sample basis about the presence or absence of a control condition. It is a sampling plan used to estimate the rate of occurrence of a specific quality (attribute) in the population. The following is an example of a test of controls.
Example: For the question, “Does each credit sale have credit approval?” the answer can only be “yes” or “no.” In a test of controls, the auditor counts the number of deviations and uses this number in the evaluation of the evidence.
Those Charged with Governance
“Those charged with governance” are the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. In some cases, those charged with governance are responsible for approving the entity’s financial statements (in other cases, management has this responsibility). In some entities, governance is a collective responsibility that may be carried out by a board of directors, a committee of the board of directors, a committee of management, partners, equivalent persons, or some combination thereof. Those charged with governance are specifically excluded from management, unless they perform management functions. (AR-C 70.07)
“Those charged with governance” often refers to the audit committee of an entity, if one exists, but the meaning of the term is not limited to the audit committee. AU-C 260 establishes standards and provides guidance on the auditor’s communication with those charged with governance in relation to an audit of financial statements.
Applicable financial reporting frameworks (AFRF)
Applicable financial reporting frameworks (AFRF) are the principal laws and regulations used by management and those charged with governance in the preparation of the financial statements of an entity.
All requirements found in the applicable financial reporting framework are appropriate as long as the financial statements comply with all the requirements found in the applicable financial reporting framework.
Appropriate
According to the AU-C Glossary: “Appropriateness is the measure of the quality of audit evidence, that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.”
Defalcation
Defalcation is a form of accounting fraud, a misappropriation of assets, a mishandling of funds, or embezzlement.
Independence
To be independent is to be free from conflicts of interest and bias, self-governing, impartial, not subject to control by others, not requiring or relying on something else, not contingent, and acting with integrity and objectivity (i.e., with judgment that is unimpaired and without bias or prejudice).
Independence Rule (ET 1.200.001): “A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.” (ET 1.200.001.01)
Independence is the cornerstone on which the audit, or attest, function of the accounting profession is based. It is the independence of the auditor that assures the public of the fair presentation of the audited financial statements. The audit opinion is the “Independent Auditor’s Report” (AU-C 600.A98 requires that the word “independent” appear in the title of the report).
The auditor’s independence recognizes the need for fairness—fairness to the owners and managers of the company and also to creditors and those who may rely wholly or in part on the auditor’s report.
Independence is the ability to act with integrity and objectivity and not to compromise one’s judgment or conceal or modify an honest opinion. Auditors (both external and internal) must be capable of acting in an honest, unbiased fashion, maintaining the ability to use judgment free from influence by or subordination to the will, opinion, and judgment of others.
The CPA must be independent not only in fact but also in appearance. This means both that a true conflict must not exist (the fact of independence) and that the appearance, or impression, of conflict must not exist (the appearance of independence). Hence, there must not be a compromise to the perception of the independence of the CPA in the mind of a reasonable observer, no matter how innocent the questionable circumstances may truly be. Any appearance of the lack of independence would erode the public’s confidence in the profession as quickly as the fact of a lack of independence.
The “reasonable person” concept is applicable, i.e., whether or not a reasonable person, having all the facts and the normal strength of character, concludes that a specific relationship is lacking in independence, represents a conflict of interest, or is a threat to a CPA’s integrity or objectivity.
Interim financial information
Interim financial information is financial information prepared and presented in accordance with an applicable financial reporting framework that comprises either a complete or condensed set of financial statements covering a period or periods less than one full year or covering a 12-month period ending on a date other than the entity’s fiscal year-end.
