Financial Statement Audits Flashcards
List some benefits of an audit to a private company (also known as a nonissuer).
1) More favorable cost of capital; 2) Insights into adequacy of internal controls; and 3) Benchmark an entity’s performance with other similar entities.
Who is primarily responsible for the fairness of an entity’s financial statements?
Management. The financial statements are the representation of management.
What is meant by Generally Accepted Auditing Standards (GAAS) under the clarified auditing standards?
The Statements on Auditing Standards issued by the AICPA’s Auditing Standards Board.
Define “Generally Accepted Accounting Principles (GAAP).”
The standards by which the quality of the financial statements is judged.
What is the auditor’s primary role?
To provide an impartial (independent) assessment of the reliability of management’s financial statements.
In the U.S.A, who issues auditing standards applicable to audits of governmental entities?
U.S. Government Accountability Office (GAO).
In the U.S.A, who issues auditing standards applicable to audits of public companies (also known as issuers)?
Public Company Accounting Oversight Board (PCAOB).
In the U.S.A, who issues auditing standards applicable to audits of private companies and other entities known as nonissuers?
AICPA’s Auditing Standards Board.
Identify the topics associated with each of the AICPA’s 7 principles for audit standard setting.
1) Purpose
2) Premise
3) Responsibilities
4) Reasonable assurance
5) Performance requirements to achieve reasonable assurance
6) Inherent limitations
7) Reporting
Identify the 4 primary themes associated with the AICPA’s 7 principles for audit standard setting.
1) Purpose/premise
2) Responsibilities
3) Performance
4) Reporting
Identify the topics associated with the three general standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
1) Training
2) Independence
3) Due professional care
Identify the topics associated with the three field work standards formerly known as Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
1) Planning and supervision
2) Internal control
3) Evidence
Identify the topics associated with the four reporting standards for Generally Accepted Auditing Standards (GAAS), which are still applicable to the PCAOB’s auditing standards.
1) GAAP
2) Consistency
3) Disclosure
4) Opinion
What type of professional requirement is indicated by the word should in AICPA professional standards?
Presumptively mandatory requirement.
What type of professional requirement is indicated by the word must in AICPA professional standards?
Unconditional requirement.
What is meant by the term interpretive publications?
These consist of the appendices to the SASs, auditing interpretations of the SASs, the AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position.
What is meant by the term engagement quality control review?
A process designed to provide an objective evaluation, before the report is released, of the significant judgments the engagement team made and the conclusions it reached. (Such a process is only for those audit engagements for which the firm has determined that an engagement quality control review is required, and is not applicable to all audits.)
Services for which a CPA firm is required to have a sytem of quality control.
Audits, attestation, compilation and review services. (Not applicable to tax or consulting services.)
Who is responsible for the administration of a quality control system?
May be vested in one person but everyone shares responsibility.
List the six elements of a quality control system.
1) Leadership responsibilities for quality within the firm; 2) Relevant ethical requirements (especially independence); 3) Acceptance and continuance of client relationships; 4) Human resources; 5) Engagement performance; 6) Monitoring
List the four basic steps in the audit process.
Planning
Internal Control Consideration
Substantive Audit Procedures
Reporting.
What are some considerations that must be given by the auditor during the planning phase of the audit?
Determine whether to accept or continue the audit engagement
Assess the risk of material misstatement
Evaluate requirements for staffing and supervision
Prepare the required written audit program (also called the “audit plan”).
What considerations should be given by the auditor regarding internal controls prior to beginning an audit or performing substantive audit procedures?
Obtain the required understanding of the design of internal control for planning purposes.
Perform tests of controls to evaluate operating effectiveness of internal control if contemplating reliance on specific controls.
List the two types of substantive audit procedures.
Analytical Procedures
Tests of details.
List the two types of test of details.
Tests of ending balances
Tests of transactions.
How is an auditor’s unmodified audit report structured under the clarified auditing standards?
n unmodified auditor’s report is presented in 4 sections:
An introduction (1 sentence).
Management’s responsibility section (1 sentence).
Auditor’s responsibility section (3 paragraphs, consisting of 9 sentences).
Opinion (1 sentence).
Prior to the clarified auditing standards, how was an Unqualified Audit Report structured?
An unqualified audit report was presented in three paragraphs:
Introduction (three sentences),
Scope (five sentences), and
Opinion (one sentence).
List the four types of opinions that an auditor may give on financial statements.
Unmodified
Qualified
Adverse
Disclaimer.
List the reason(s) for which an entity may receive a qualified opinion.
Misstatement, such as a GAAP departure (material, not pervasive effect) Scope limitation (material, not pervasive effect).
List the reason(s) for which an entity may receive an adverse opinion.
Misstatement, such as a GAAP departure (material and pervasive effect).
List the reason(s) for which an entity may receive a disclaimer of opinion.
Scope limitation (material and pervasive effect).
To what services are Statements on Standards for Accounting and Review Services (SSARs) applicable?
Statements on Standards for Accounting and Review Services are applicable to reviews and compilations of the financial statements of private companies, that is, non-issuers.
What is a Compilation?
A compilation is an assembly of the financial records of a private company into a financial statement format without expressing any degree of assurance on the reliability of those financial statements.
What type of assurance is associated with an “audit” of an entity’s financial statements?
Positive assurance. Positive assurance is considered a high level of assurance.
What type of assurance is associated with a “review” of an entity’s financial statements?
Negative assurance, which is considered a moderate level of assurance.
