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0-SFCPA-AUD > Ethics, Responsibilities, Principles (15-25%) > Flashcards

Ethics, Responsibilities, Principles (15-25%) Flashcards

1
Q

Issuer Audits (Public Companies) and Non-Issuer Audits (Non-Public Companies) are subject to what auditing standards? Issued by who?

A 
Issuer Audits (Public Companies):
subject to AS's (auditing standards) issued by PCAOB

Non-Issuer Audits (Non-Public Companies):
subject to AU-C’s (clarified auditing standards) issued by ASB (Auditing Standards Board)

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2
Q

What are the objectives of a Non-Issuer Audit (Non-Public Companies)?

A
  • obtain reasonable assurance that FS are free from material error
  • FS reported on & communicated as required by GAAS (Generally Accepted Auditing Standards), in accordance with auditor’s findings
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3
Q

What are the objectives of a Issuer Audit (Public Companies)?

A
  • expression of an opinion (from independent auditor) on the fairness with which they present, in all material aspects, financial position, results of operations, and its cash flows in conformity with GAAP principles
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4
Q

What is considered an assertion? and what role does it play in the audit process?

A

underlying claims made by management about the FS - key to the whole audit process

ex: when management gives auditor their listing of PP&E, management is essentially making the claim/assertion that items on the list exist, list is complete (nothing left out), that they actually own the items listed, and values are listed correctly

auditor then assesses the risk of material misstatement based on those assertions and performs audit procedures

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5
Q

What are the 2 categories of assertions?

A
  • account balances and related disclosures at period end - BS (6 assertions)
  • classes of transactions & events and related disclosures for the period under audit - IS (6 assertions)
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6
Q

What are the assertions under the account balances and related disclosures at period end - BS category of assertion (6)?

A

VERC-CP

  • VALUATION, ALLOCATION, ACCURACY: all assets, liabilities, and equity are included in FS at proper amounts
  • EXISTENCE: all assets, liabilities, and equity actually exist
  • RIGHTS & OBLIGATIONS: entity holds/controls right to its assets and liabilities - any restrictions need to be disclosed
  • COMPLETENESS: all assets, liabilities, and equity that should have been recorded, have been recorded (nothing left out)
  • CLASSIFICATION: A/L/E have been recorded in proper accounts
  • PRESENTATION: A/L/E interests appropriately aggregated/disaggregated and clearly described + related disclosures are relevant & understandable
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7
Q

What are the assertions under the classes of transactions & events and related disclosures for the period under audit - IS (6)?

A

CACOC-P

  • CLASSIFICATION: transactions have been recorded in the proper amounts
  • ACCURACY: amounts & other data have been recorded properly
  • COMPLETENESS: all transactions & events that should have been recorded, have been recorded (nothing left out)
  • OCURRENCE: transactions & events recorded actually occurred
  • CUTOFF: transactions have been recorded in the proper period
  • PRESENTATION: A/L/E interests appropriately aggregated/disaggregated and clearly described + related disclosures are relevant & understandable
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8
Q

Federal Government Programs/Activities are subject to what auditing standards? issued by who?

A

GAO (Governmental Accountability Office) issues GAS (Governmental Auditing Standards) called the Yellow Book - also referred to as GAGAS (Generally Accepted Government Auditing Standards)

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9
Q

What are the objectives of a Governmental Audit?

A

similar to non-governmental audit - determining whether FS are presented fairly based on applicable reporting framework

in addition, GAGAS audits require separate reporting on internal controls & adherence to applicable laws/regulations - therefore, scope is larger than a non-governmental audit

CCC = controls, compliance, crime

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10
Q

What is a single audit?

A

any state of local government agency that spends at least $750,000 in federal funding must receive

point is to verify federal funds have been spent according to program the funds were received for

materiality is determined separately for each major federal financial assistance program

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11
Q

An audit subject to yellow book standards includes what 3 types of reports?

A

1- audit report

2- report on internal controls (this can be combined with audit report)

3- report on applicable compliance with laws & regulations (this cannot be combined with audit report)

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12
Q

When is an auditor required to report any fraud or illegal acts to outside authorities?

A
  • management fails to report information as required by law

- management fails to take timely action to respond to the fraud or illegal act

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13
Q

What are the 2 categories for non-audit engagements?

A
  • engagements dealing with historical FS that are not a full audit engagement (reviews, compilations, preparation)
  • engagements dealing with written representations or subject matter other than historical FS (examinations, reviews, agreed upon procedures)
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14
Q

What are the types of engagements under the ‘engagements dealing with historical FS that are not a full audit engagement?’ and who governs them?

A

AICPA’s SSARs (Statements on Standards for Accounting & Review Services) govern them

apply to non-issuers (non-public companies)

  • REVIEWS: provides limited assurance (attest engagement)
  • COMPILATIONS: provides no assurance (attest engagement)
  • PREPARATION OF FS: provides no assurance (non-attest engagement)
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15
Q

What are the types of engagements under the ‘engagements dealing with written representations or subject matter other than historical FS?’ and who governs them?

A

AICPA’s SSAE’s (Statements on Standards for Attestation Engagements) governs them

  • EXAMINATION engagements
  • REVIEW engagements (different than FS review)
  • AGREED UPON PROCEDURES (AUP) engagements
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16
Q

What is a Review (FS)?

A

assurance engagement & attestation engagement that provides limited assurance that there are no material modifications that should be made to the FS (expresses conclusion not opinion)

*auditor must be independent

  • process knowledge of a client’s industry
  • apply analytical procedures
  • perform inquiries of management
  • obtain representation letter
  • determine materiality and design & perform procedures to address all material items
  • each page of FS should reference “See Accountant’s Review Report”
  • not required to obtain understanding of controls
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17
Q

What is a Compilation (FS)?

A

attestation engagement, but non-assurance engagement, assisting management to draft the FS without providing any level of assurance

  • auditor does not need to be independent (but should disclose if they are not)
  • no procedures whatsoever are performed
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18
Q

What is Preparation of FS?

A

non-attestation engagement & non-assurance engagement, accountant takes information from management and prepares FS

  • auditor does not need to be independent
  • should be an engagement letter that outlines managements responsibilities & accountants responsibilities
  • each page of FS should include a statement that no assurance is provided
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19
Q

What is an Examination Engagement?

A

in-depth engagements where ultimately obtain reasonable assurance about the subject matter being fairly stated or in accordance with applicable criteria

  • differs from audit - not dealing with historical FS
  • auditor must be independent
  • report issued that provides opinion as to whether the subject matter confirms to criteria
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20
Q

What is a Review Engagement (non FS)?

A

engagements where obtain limited reasonable assurance about the subject matter being fairly stated or in accordance with applicable criteria

  • differs from FS Review - not dealing with historical FS
  • auditor must be independent
  • report issued that contains a conclusion about whether there is a need for any material modifications in order to be in accordance with criteria
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21
Q

What is a Agreed-Upon Procedures (AUP) Engagement?

A

performs procedures and reports findings based on criteria set by the specified parties or developed by self (must have specified parties approval)

  • auditor must be independent
  • report issued that describes the procedures performed and the findings as a result of the procedures
  • report can be general-use now, no longer restricted to specific users (if to be restricted, include statement on restrictions)
22
Q

What is the main points of the AICPAs Code of Professional Conduct?

A

for CPA’s to go above & beyond the minimum requirements to show the public that CPA’s willing to accept responsibility to the public

*CPA’s should be competent with the professional services they provide, and should also cooperate with other CPA’s to improve the accounting profession

23
Q

What are the 3 main groups of rules that CPA’s must honor under the AICPA’s Code of Professional Conduct?

A
  • INTEGRITY
  • OBJECTIVITY
  • INDEPENDENCE
  • gifts from clients:
  • cannot violate client’s or CPA’s laws/regulations
  • even if not violating any laws, still needs to be reasonable under the circumstances
24
Q

What should a CPA do when CPA disagrees with their superior about the treatment of a significant transaction?

A

If discussion with superior, does not get resolved, the CPA should go over the superior’s head.

25
Q

What is required when outsourcing professional services?

A

requires notification and approval of client

if client does not want any of their services outsourced, the CPA should either not outsource the work or not accept the engagement

*administrative services can still be outsourced

26
Q

How does receiving contingent fees work?

A

CPA can NOT receive a contingent fee for attest-related services (impairs independence)

CPA can receive a contingent fee for a private letter ruling

27
Q

How does receiving commissions work?

A

accepting commission for recommending a product to an audit client is essentially a kickback and is PROHIBITED

TAX accountants CAN accept referral fees and commissions IF they are DISCLOSED to the client

28
Q

What are the 4 areas that threats to independence are concentrated?

A
  • FINANCIAL relationships: audit partner cannot own stock in an audit client
  • EMPLOYMENT relationships: audit partner cannot be on the board of an audit client
  • FAMILY relationships: audit partner should not audit his brother’s company
  • CONSULTING relationships: audit firm cannot provide internal audit consulting to an audit client
29
Q

Who is considered a Covered Member?

A

someone who falls under the independence rules based on their situation

  • member of attest engagement team
  • person in a position to influence the attest engagement
  • partner or manager that provides more than 10 hours of non-attest services to the client within the fiscal year
  • partner in the same office as the lead engagement partner

*cannot have direct/indirect investment in attest client (member’s spouse cannot either)

30
Q

What are some SEC rules that apply to auditors/audit firms?

A
  • must be in good standing & registered under the laws of the CPA’s state
  • must be independent & capable of exercising objective & impartial judgement
  • CPA firm & CPA’s direct family members cant have direct investments in audit client (stocks/bonds)
  • members/employees of firm cannot own more than 5% of stock of an audit client
  • audit client cant make direct investment in audit firm
  • cant have credit card issued from an audit client if balance owed to client is over $10,000
31
Q

What are the main groups of rules that CPA’s must honor under the GAO Standards?

A

similar to AICPA’s Code of Professional Conduct

apply to firms that audit federal government agencies, or school/entities that receive federal grants

  • INTEGRITY
  • OBJECTIVITY
  • PUBLIC INTEREST
  • PROPER USE of government information & resources (never use for personal gain)
  • PROFESSIONAL BEHAVIOR, including avoiding conflicts of interest, complying with applicable laws & regulations, and meeting technical & professional standards
32
Q

What are the 3 types of impairments to independence for GAO Standards?

A
  • internal/personal (inside)
  • external (outside)
  • organizational (all around)
33
Q

What are the CPE hour requirements for AICPA audits and GAGAS audits?

A

120 hours required of CPE in total

24 hours required of Yellow Book CPE every 2 years for auditors that perform GAGAS audits

34
Q

What are the threats to independence under GAGAS?

A
  • SELF-INTEREST threat (personal - inside):
    financial reasons or other personal interests will influence
  • SELF-REVIEW threat (personal - inside):
    auditor has previously provided non-audit services, might not appropriately evaluate previous judgements/services provided
  • BIAS threat (personal - inside):
    auditor might take position or make judgement that is not objective based on political, ideological, social, or other personal convictions
  • FAMILIARITY threat (personal - inside):
    relationship with management or personnel of an audited entity
  • UNDUE INFLUENCE threat (external - outside):
    influences/pressures from external sources to audit organization
  • MANAGEMENT PARTICIPATION threat (organizational - all around):
    auditor taking on role in management or performing management functions on half of audited entity
  • STRUCTURAL threat (organizational - all around):
    placement of audit organization within governmental entity, in combination with structure of government entity could affect organizations ability to perform work & report results
35
Q

What are the key tenants of professional skepticism that go along with due professional care that an auditor should exercise?

A
  • questioning mind and a critical assessment of audit evidence
  • gathering & objectively evaluating evidence requires consideration of competency and sufficiency of evidence
  • neither assumes management is lying nor assumes unquestioned honesty
  • not be satisfied with less than persuasive evidence simply because of a belief that management is honest
36
Q

What are the preconditions of an audit?

A
  • determine whether financial reporting framework to be applied is acceptable
  • obtain agreement of management of acknowledgement/understanding of responsibility:
    - preparation & presentation of FS in accordance with framework
    - design, implementation, maintenance of internal controls relevant to FS are free from material misstatement, whether due to fraud or error
    - provide auditor with:
    - access to all information/records relevant
    - additional information auditor may request
    - unrestricted access to persons to obtain evidence
37
Q

What does the engagement letter contain?

A
  • objective and scope of audit of FS
  • responsibilities of auditor
  • responsibilities of management
  • statement addressing inherent limitations of audit that could still lead to missing a material misstatement
  • identification of applicable reporting framework
  • reference the expected form and content of any reports to be issued by auditor
38
Q

What happens when an auditor releases their report?

A

Non-Public:
-auditor should document the report release date in audit documentation, and the final audit file (paper or electronic copy) should be assembled no later than 60 days after the report release date

-retention period for final audit file should not be less than 5 years from report release date

Public (PCAOB):
-auditor should document the report release date in audit documentation, and the final audit file (paper or electronic copy) should be assembled no later than 45 days after the report release date

-retention period for final audit file should not be less than 7 years from report release date

39
Q

Communication from auditor to management should include an overview of the audit process (beforehand) - what should the auditor communicate?

A

do not provide detailed overview/process to reduce effectiveness or become predictable

  • how auditor will address risks of material misstatements whether due to fraud or error
  • issues regarding internal control and internal audit function (if exists)
  • application of materiality in the context of audit
40
Q

What should happen when auditor finds any significant deficiencies or material weaknesses in internal control?

A

auditor should communicate in writing any significant deficiencies or material weaknesses in internal control to management or those charged with governance

communication should be provided by the audit report and not later than 60 days after the report release date

41
Q

What is a significant deficiency in internal controls?

A

a deficiency or combination of deficiencies in the design or operation of a control that does not prevent, detect, or correct misstatements on a timely basis

less severe than a material weakness

42
Q

what is a material weakness in internal controls?

A

a deficiency or combination of deficiencies that results in a reasonable possibility that a material misstatement will result as a result of the deficiency

more severe than a significant deficiency

43
Q

What should the communication include when auditor finds any significant deficiencies or material weaknesses in internal control?

A
  • definition of material weakness/significant deficiency
  • description of material weakness/significant deficiency
  • purpose of audit is for auditor to express opinion on FS
  • audit includes consideration over internal controls but not for purpose of expressing opinion on internal controls
  • consideration over internal controls not designated to detect all possible deficiencies - there could be other deficiencies that were not identified
44
Q

What are some items that would require communication to management or those charged with governance (besides the scope of audit or internal control deficiencies)?

A
  • significant misstatements discovered by auditor but corrected by management
  • disagreement with management on significant issues that could affect the FS
  • managements consultations with other accountants regarding significant accounting matters
  • any significant difficulties in dealing with management in performing the audit such as not making key information available to the auditor
45
Q

What are the 6 elements to a quality control system (that are guided from the SQCSs - Statements on Quality Control Standards)?

A
  • LEADERSHIP RESPONSIBILITIES (tone at the top):
    • work complies with professional standards
  • RELEVANT & ETHICAL REQUIREMENTS:
    • policies help ensure personnel comply with
  • ACCEPTANCE & CONTINUANCE OF CLIENTS & SPECIFIC ENGAGEMENTS:
    • firm only accepts engagement qualified to perform
    • minimize chance of working with management who lacks integrity
  • HUMAN RESOURCES:
    • sufficient/competent personnel
  • ENGAGEMENT PERFORMANCE:
    • engagements adequately supervised
  • MONITORING:
    • ongoing quality control efforts (review of QC procedures)
46
Q

How are a firms nature & extent of QC (Quality Control) Procedures based?

A
  • firms size
  • nature of firms practice
  • cost/benefit considerations
47
Q

What is a list of items that should be communicated with management by auditor?

A
  • responsibilities
  • adjustments
  • significant accounting policies
  • estimates
  • views of other accountants
  • prior discussions with management
  • disagreements with management
  • problems
  • noncompliance with laws/regulations
  • other information
48
Q

What is SOX (Sarbanes Oxley)?

A

established by PCAOB in 2002 - public accounting oversights board

  • 5 full time members
  • 2 are CPAs
  • require firms to register with board
  • keep workpapers for 7 years
  • tax services permissible if pre-approved
  • audit partner rotation every 5 years
49
Q

What are the 3 groups of the Standards of GAAS (Generally Accepted Auditing Standard)? and what are the 10 elements within them? (known as the 10 GAAS originally created by the AICPA)

A 
TIP PIE GCDO
GENERAL STANDARDS (auditor qualifications/quality of work)
- (T) - training & proficiency
- (I) - independence
- (P) - professional due care

FIELDWORK STANDARDS (what auditor does)

  • (P) - planning & supervised
  • (I) - internal control
  • (E) - evidence

REPORTING STANDARDS (auditors report)

  • (G) - GAAP
  • (C) - consistency
  • (D) - disclosure
  • (O) - opinion
50
Q

What is an Audit Committee?

A

Board of Directors subcommittee - responsible for reporting & disclosure process (gatekeeper & monitor)

  • all members to be independent
  • at least one member must possess accounting & financial management expertise
  • major stock exchanges require that committee consists of at least 3 members, some of whom must be financially literate
51
Q

What are audit procedures performed under the assertions under the account balances and related disclosures at period end (BS) category of assertion (4)?

A

1) EXISTENCE (no A/L exist):
- confirmation
- observation
- vouching

2) COMPLETENESS (no omissions):
- cutoff
- analytical procedures

3) RIGHTS & OBLIGATIONS (no restrictions to A/L):
- inquiry
- examination

4) VALUATION & ALLOCATION (A/L/E interests properly measured):
- recalculation
- tracing
- analytical procedures

0-SFCPA-AUD (4 decks)

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