Quiz 1 Flashcards
Management Assertions
Statements made by a company’s management about the accuracy and completeness of its financial statements.
Assertions are used by the auditor to consider
the different types of potential
misstatements that may occur
Assertions about classes of
transactions and events, and
related disclosures, for the period
under audit: Think _____
Income Statement
Assertions about account
balances, and related disclosures,
at the period end: Think ______
Balance Sheet
Assurance
Provides INDEPENDENT and professional services that improve the quality or context of information for Decision Makers
Relationship between auditing, attest, and assurance services
Assurance is the most broad –> Attest is the second most broad –> Auditing is the most specific
Attest Services
Focuses on whether the management’s subject matter complies with applicable criteria for measurement and disclosure (Like auditing but goes beyond financial statements)
*The Big Three Fundamental Concepts in Conducting a Financial Statement Audit:
- Materiality
- Audit Risk
- Evidence
Audit Risk
Risk the auditor mistakenly expresses a clean audit opinion
when the financial statements are materially misstated
Audit Evidence
all the information used by the auditor to determine the
conclusions on which the audit opinion is based
Sufficient vs Appropriate Evidence
Sufficient = quantity of evidence
Appropriate = quality of evidence
Two measures of appropriateness:
Reliability and Relevance
*Audit Opinion Types:
Unqualified
Qualified/Except for
Adverse
Disclaimer
Unqualified Opinion
The gold standard. The best type of opinion an organization can receive from an auditor. It means that the financial statements have been audited properly
Qualified Opinion
Material misstatement included in financials
Adverse Opinion
Pervasive material misstatement (FS not fairly stated)
Disclaimer Opinion
Unable to provide an opinion
Relationship between materiality and extent of testing
High Materiality = Low Testing
Low Materiality = High Testing
*Relationship between audit risk and extent of testing
High Audit Risk = Low Testing
Low Audit Risk = High Testing
Types of Auditors:
External
Internal
Government
Forensic
*Sarbanes-Oxley Public Company
Accounting Reform and Investor Protection Act. (SOX)
Passed in 2002 because of all of the fraud cases happening. Regulation of the audit profession. Established independence requirements for external auditors. Creation of the Public Company Accounting Oversight Board (PCAOB)
Corporate Governance
managers are overseen and supervised
What does the PCAOB do?
Audit the auditor. Oversee audits, determine audit standards.
Audit Standards
Rules an auditor must Follow
The 4 principles underlying an audit:
Purpose
Responsibilities
Performance
Reporting
What is the straw that stirs the drink?
Independence
What code must you follow for auditing private companies?
AICPA Code
What code must you follow for auditing public companies?
AICPA + PCAOB + SEC Codes
Layout and enforceability of the AICPA Code of Professional Conduct
Starts broad with Principles, moves to general rules, and then to detailed interpretations
Principles not enforceable
General Rules enforceable
Interpretations not enforceable but departures must be justified
*Important covered member example
A partner, partner equivalent, or manager who provides more than 10 hours of non-attest
services to the attest client within any fiscal year
non-attest service – accounting related, think maybe tax preparation
All the time, Independence requirements extend to the CPA’s:
immediate family members (spouse, spouse equivalent, dependents)
Members are prohibited from any financial relationship that may impair independence. This includes
direct or material indirect financial interest.
Great example of an indirect financial interest
Mutual fund
Are blind trusts allowed to keep independence?
NO
Is an insurance policy issued by attest client allowed to keep independence?
As long as the policy was purchased under the insurance
company’s “normal” terms and conditions and does not offer an investment
option
Unpaid fee for services provided more than one year prior to the date of the audit =
Independence impaired
Unpaid audit fee due to bankruptcy =
Allowed
Former employee of an Attest Client (joins CPA firm) is not independent when:
Independence is impaired if the CPA performs a managerial or other significant role for an entity’s organization during the time period covered by an attest
engagement
*Expressed intention by management to commence litigation against the CPA alleging deficiencies in audit work (Impairs independence) IF
Auditor must conclude that the client intention to sue is probable (if remote then independence is fine)
Do Tax Preperation services impair independence?
No, they are allowed
Partner Rotation
Lead and quality review Partners must rotate after 5 years and stay off for 5 years (“Five On,
Five Off Rule”)
Other partners must rotate off after 7 years and stay off for 2 years (“Seven On, Two Off
Rule”)
One year cooling off period
An employee of CPA firm that leaves to work for client may not
work in a financial oversight role until one year has passed
*Audit Date
Day where the auditors conclude auditing and feel like enough work is done. Different than the fiscal year date.
*Very important element contained in an audit report.
The audit report location and date
*Critical Audit Matters (CAMS)
Any matter arising from the audit of the financial statements that are communicated, or required to be communicated, to the audit
committee and that:
- relate to accounts (or disclosures) that are material to the financial statements
- involved especially challenging, subjective or complex auditor judgement
he auditor has no responsibility to make any inquiry or carry out any auditing procedures for the period after
Auditing date
*Explanatory Language
Additional language that is necessary to give Financial Statement users extra information. Extra information that provides a fuller understanding of the audit report
If there are multiple auditors on a report
They all share the opinions and accept full responsibility.
Principal auditor must assess
The professional reputation and independence of
other auditor as well as quality of its work: Based on this Disclose or Not
Disclose
When the Other Auditor does not issue a CLEAN Opinion
-If not material to overall Financial Statements, then no need to refer to departure.
-If material, then need to refer to the issue driving other auditor’s qualified
opinion. Must indicate how the departure affects the overall audit opinion
Auditor has responsibility to evaluate whether there is substantial doubt about the
entities ability to operate as a going concern over a reasonable period of time:
one year from issuance of the financial statements
*Three reasons we depart from an unqualified opinion:
-Scope Limitation
-Not in conformity with GAAP
-Auditor not independent
Scope Limitation
Results from an inability to obtain sufficient appropriate evidence about some component of the financial statements.
*Three levels of materiality
-Immaterial
-Material, not pervasive
-Pervasively material
Pervasively material
Affects everything, very widespread
Scope limitation leads to
Either qualified or disclaimer
Not in conformity with GAAP leads to
Either qualified or adverse
Auditor not independent leads to
Disclaimer only
The auditor’s report is generally addressed to the
Stockholders of the company
