Nature and Scope AUD

Question 1

Accounting and Review Services Committee (ARSC)

Answer 1

committee issues the Statements on Standards for Accounting and Review Services (SSARSs), which govern the performance of compilation and review engagements

Question 2

How do the OMB’s Uniform Guidance rules define a subrecipient?

Answer 2

A subrecipient is a nonfederal entity that receives a subaward from a pass-through entity to carry out part of a federal program; it does not include an individual that is a beneficiary of such a program. A recipient of other federal awards directly from a federal awarding agency also qualifies as a subrecipient.

Question 3

AU-C 805

Answer 3

The objective of the auditor, when applying generally accepted auditing
standards (GAAS) in an audit of a single financial statement or of a specific
Special Considerations
element, account, or item of a financial statement, is to address appropriately
the special considerations that are relevant to
a. the acceptance of the engagement;
b. the planning and performance of that engagement; and
c. forming an opinion and reporting on the single financial statement or the specific element, account, or item of a financial statement

Question 4

The AICPA Code of Professional Conduct

Answer 4

The AICPA Code of Professional Conduct was adopted to provide guidance and rules to all members in the operation of their professional responsibilities. Members include those in public practice, government, industry, and education jobs.

Question 5

Compilation

Answer 5

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.

Question 6

Internal Scope Audit

Answer 6

“The established scope must be sufficient to achieve the objectives of the engagement. The scope of the engagement must include consideration of relevant systems, records, personnel, and physical properties, including those under the control of third parties.”

In a specific audit, the scope defines the area of activities covered and the depth of the audit testing procedures.

Question 7

OMB Circular A-133 is entitled

Answer 7

“Audits of States, Local Governments, and Non-Profit Organizations” and was issued by the Office of Management and Budget (OMB). It prescribes the specific policies, procedures, and guidelines to implement the Single Audit Act of 1984 and the Single Audit Act Amendments of 1996, 2003, 2007, and 2013. It sets forth standards for obtaining consistency and uniformity among federal agencies for the audit of states, local governments, and non-profit organizations expending federal awards.

Question 8

Review Engagement

Answer 8

is an attestation engagement in which the practitioner obtains limited assurance by obtaining sufficient appropriate review evidence about the measurement or evaluation of subject matter against criteria in order to express a conclusion about whether any material modification should be made to the subject matter in order for it be in accordance with (or based on) the criteria or to the assertion in order for it to be fairly stated.

Question 9

Quality Controls Standards

Answer 9

standards are a CPA firm’s system of specified standards that are required to be developed to assure that firm is in compliance with professional standards for the services it provides. Services included are:

Auditing, Accounting, and Review,
Consulting Practices, and
Tax Practices.

Question 10

Statements on Standards for Accounting and Review Services (SSARS)

Answer 10

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.

Question 11

Generally Accepted Auditing Standards

Answer 11

Auditing Standards Board (ASB) in the form of Statements on Auditing Standards (SAS’s) and codified into AU-C sections

Question 12

Statements on Auditing Standards (SAS)

Answer 12

The 10 generally accepted auditing standards (GAAS) are interpreted and expanded upon in Statements on Auditing Standards (SAS), issued periodically by the Auditing Standards Board of the AICPA. They provide the detail and guidance needed to meet the 10 GAAS standards.

The 10 standards have changed to AU-C 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards. The Auditing Standards Board (ASB) believes that if an auditor fulfills the overall objective of the auditor and meets applicable ethical requirements, the auditor will have fulfilled the requirements currently stated in the 10 standards.

Question 13

The Government Accounting Standards Board (GASB)

Answer 13

is the body authorized to promulgate standards of financial accounting and reporting for governmental units. It was created by the Financial Accounting Foundation (FAF) in 1984 as successor to NCGA and is recognized by the AICPA Code of Professional Conduct as an authorized body whose pronouncements must be followed in order to conform to the Compliance with Standards Rule and Accounting Principles Rule (ET 1.310.001 and 1.320.001).

The GASB’s authority derives from Appendix A of the AICPA Code of Professional Conduct.

The GASB is an independent authoritative body created in 1984, under the oversight of FASB and the Governmental Advisory Council of the Financial Accounting Foundation (FAF) and is authorized by the AICPA Code of Professional Conduct as a promulgator of generally accepted accounting principles (GAAP).

Question 14

Assurance

Answer 14

is a concept of the attest function. It is the practitioner’s satisfaction about the reliability of an assertion being made by one party for use by other parties. Assurance is the degree of certainty with which a practitioner can support, through evidence gathered, the correctness of a conclusion about the reliability of a written assertion that is the responsibility of another party. Assurance can be described in subjective terms only.

A generic definition of assurance might be “a positive declaration intended to give confidence.” In this sense, the unmodified attest opinion is the highest form of assurance an assertion can carry. Remember that an audit is only one type of attest engagement—one that examines historical financial statements. The authoritative literature uses the term “positive opinion,” rather than the word “assurance,” in connection with the expression of a conclusion based on an examination. Adverse and qualified opinions are also positive opinions in the sense that the evidence supports the expression of an opinion. (In other words, “positive” means “definite” or “confident” rather than “good.” A positive opinion can be adverse.)

The word “assurance” is used primarily in two contexts:

Reasonable assurance reflects the fact that even the highest level of assurance cannot be absolute (due to the need for judgment, the use of estimates, the use of sampling, inherent limitations in internal control structures, and the persuasive, rather than conclusive, nature of most evidence). It reflects the cost-benefit relationship of internal controls—the cost of the control should not exceed the benefits derived. This concept cannot be quantified.
Other reports in which the accountant gives positive, negative, or limited assurance, such as review reports, comfort letters, and special reports in compliance with laws and regulations (per Government Auditing Standards) are the following:
Positive assurance: “The results of tests indicate that, with respect to items tested, the information meets the specified standard.”
Negative assurance: “Nothing came to our attention (as a result of specified procedures) that would indicate that the specified information does not meet specified standards.” This is never used in an audit report. It is used in specific engagements, such as in a comfort letter to underwriters and special reports.
Limited assurance: “We are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States.” It is issued in relation to a review of financial statements and in certain reports on a review of interim financial information.

Question 15

Compilation

Answer 15

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.

Question 16

Independence

Answer 16

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.

Question 17

Applicable financial reporting frameworks (AFRF)

Answer 17

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.

Question 18

Program Audits

Answer 18

Program audits are performed to determine if the projected objectives established by a legislative body for a particular program have been achieved. The audit evaluates objectives according to the following:

Attainment of desired results or benefits
Effectiveness of programs and related functions
Compliance with requirements of laws and regulations related to program

Question 19

Single Audit Act Amendment of 2013

Answer 19

As implemented by OMB Circular A-133, is federal legislation that establishes uniform requirements for the audits of federal financial assistance provided to state and local governments. It requires state and local governments and not-for-profit organizations that expend total federal financial assistance equal to or in excess of a specified amount in a fiscal year to have an audit performed in accordance with the Act (as implemented by OMB Circular A-133).

Question 20

Financial Accounting Standards Board (FASB)

Answer 20

The Financial Accounting Standards Board (FASB) is an independent authoritative body, created in 1973 to replace the AICPA Accounting Principles Board, and authorized by the AICPA Code of Professional Conduct as a promulgator of generally accepted accounting principles (GAAP). The FASB’s main purpose is to establish accounting and reporting standards for large, publicly owned corporations whose shares of stock are traded and registered in the United States

Question 21

Director of The Office of Management and Budget

Answer 21

has the authority to develop government-wide guidelines and policy on performing audits to comply with the Single Audit Act.

Question 22

Cognizant Agency

Answer 22

The cognizant agency is the federal agency which, on behalf of all federal agencies, is responsible for reviewing, negotiating, and approving cost allocation plans, indirect cost rate, and similar rates; monitoring nonfederal audit reports; conducting federal audits as necessary; and resolving cross-cutting audit findings.

Question 23

Statements on Standards for Attestation Engagements (SSAE)

Answer 23

are issued by senior technical bodies of the AICPA. They apply to practitioners engaged to perform an examination or a review; or issue an agreed-upon procedure report on subject matter, or an assertion about the subject matter that is the responsibility of another party (these are called “attest engagements”). Examining and reporting on management’s assertion that the entity’s schedule of investment returns is presented in accordance with specific criteria would fall under these standards.

Question 24

Statements on Quality Control Standards

Answer 24

are issued by the ASB. Firms that are enrolled in an AICPA-approved practice-monitoring program are obligated to adhere to quality control standards established by the AICPA. The AICPA’s Quality Control Standards do not address the quality-control ramifications of the Sarbanes-Oxley Act nor do they address the quality control ramifications of the PCAOB standards that must be followed by auditors of issuers.

Question 25

Government Accountability Office

Answer 25

The Government Accountability Office is a legislative branch government agency that provides auditing, evaluation, and investigative services for the United States Congress. It is the supreme audit institution of the federal government of the United States

Question 26

The Financial Accounting Standards Board (FASB)

Answer 26

The Financial Accounting Standards Board (FASB) is an independent authoritative body, created in 1973 to replace the AICPA Accounting Principles Board, and authorized by the AICPA Code of Professional Conduct as a promulgator of generally accepted accounting principles (GAAP). The FASB’s main purpose is to establish accounting and reporting standards for large, publicly owned corporations whose shares of stock are traded and registered in the United States.

Question 27

Generally accepted accounting principles (GAAP)

Answer 27

are not broad guidelines, but the conventions, rules, and procedures (methods of applying the principles and practices) that govern how financial statements are prepared and presented. The principles are dynamic, and updates are regularly published.

GAAP is not just set forth in AICPA rules; GAAP comes from many different sources including, but not limited to, the FASB Codification and rules and interpretive releases from the Securities and Exchange Commission.

The objective of an audit is to state whether the financial statements are presented fairly in conformity with GAAP. However, the mention of GAAP in the report does not indicate that the audit has been conducted in accordance with GAAS.