Financial Statement Audits- GAAS & Principles

Question 1

the ten standards or seven principles. who uses what?

Answer 1

Historically, the AICPA identified 10 standards comprising GAAS that used to serve as a framework for U.S. auditing standards. The AICPA replaced these 10 standards with 7 principles in connection with its Clarified Auditing Standards. (The AICPA no longer uses the term “GAAS” to refer to these 10 standards. Rather, the AICPA uses the term GAAS to refer to the body of professional standards issued in the form of Statements on Auditing Standards.) However, the PCAOB still incorporates the 10 traditional GAAS standards as a framework relevant to the PCAOB auditing standards. From a PCAOB perspective, there are 10 standards that comprise the traditional GAAS and that used to serve as the criteria to evaluate the quality of the auditor’s performance.

AICPA no longer uses the 10 standards. instead they use 7 principles
PCAOB still uses the 10 standards

Question 2

Acronym for ten standards

Answer 2

TID PIE GCDO

General Standards – There are 3 of these (“TID”). They are “personal” in nature as they relate to qualities that the auditor brings to the assignment:
1. Training – “The auditor must have adequate technical training and proficiency to perform the audit.”

2. Independence – “The auditor must maintain independence in mental attitude in all matters relating to the audit.”
3. Due care – “The auditor must exercise due professional care in the performance of the audit and the preparation of the report.”

B. Field Work Standards – There are 3 of these (“PIE”). They are related to the evidence-gathering activities that form the foundation for the auditor’s conclusions.

1. Planning and supervision – “The auditor must adequately plan the work and must properly supervise any assistants.”
2. Internal control – “The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to fraud or error, and to design the nature, timing, and extent of further audit procedures.”
3. Evidence – “The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.”

C. Reporting Standards – There are 4 of these (“GCDO”). Each of them says something about the language that is required in the auditor’s report.

1. GAAP – “The auditor must state in the auditor’s report whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP).”
2. Consistency – “The auditor must identify in the auditor’s report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.”
3. Disclosure – “When the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor’s report.”
4. Opinion – “The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor’s report. In all cases where an auditor’s name is associated with financial statements, the auditor should clearly indicate the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking, in the auditor’s report.”

Question 3

the seven principles are organized around 4 primary themes

Answer 3

1. purpose/premise-
2. responsibilities
3. performance
4. reporting

PR-PR (memory aid)

Question 4

AICPA uses____

PCAOB uses______

Answer 4

7 principles

10 Standards

Question 5

the seven principles are not______and have no authoritative status

Answer 5

requirements

Question 6

Purpose/premise principal

Answer 6

. The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. An auditor’s opinion enhances the degree of confidence that intended users can place in the financial statements.
B. An audit in accordance with generally accepted auditing standards is conducted on the premise that management and, where appropriate, those charged with governance, have responsibility for

Question 7

responsibilities principal

Answer 7

Responsibilities – Note that the term responsibilities principle takes the place of what previously had been called General Standards describing characteristics the auditor brings to the engagement.
1. Auditors are responsible for having appropriate competence and capabilities to perform the audit; complying with relevant ethical requirements; and maintaining professional skepticism and exercising professional judgment, throughout the planning and performance of the audit.

Question 8

performance principal

Answer 8

Performance – Note that the term performance principle takes the place of what previously had been called Fieldwork Standards governing the auditor’s evidence-gathering activities.

1. To express an opinion, the auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error.
2. To obtain reasonable assurance, which is a high, but not absolute, level of assurance, the auditor
   a. Plans the work and properly supervises any assistants;
   b. Determines and applies appropriate materiality level or levels throughout the audit;
   c. Identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity’s internal control; and
   d. Obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks.
3. The auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement because of inherent limitations, which arise from
   a. The nature of financial reporting;
   b. The nature of audit procedures; and
   c. The need for the audit to be conducted within a reasonable period of time and so as to achieve a balance between benefit and cost.

Question 9

reporting principal

Answer 9

Based on an evaluation of the audit evidence obtained, the auditor expresses, in the form of a written report, an opinion in accordance with the auditor’s findings, or states that an opinion cannot be expressed. The opinion states whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.