Section 1 - Financial Statement Audits Flashcards
Accounting Standard Setting Bodies
FASB - Businesses
GASB - State & Local Govt
FASAB - Federal Govt
IASB - Entities using IFRS
Auditing Standard Setting Bodies
ASB - for “non-issuers” (private companies) [GAAS]
PCAOB - for “issuers” (public companies)
GAO - for governmental entities
IFAC’s IAASB - issues International Standards on Auditing (ISAs)
An auditor may draft an entity’s financial statements based on information from management’s accounting system.
The auditor may provide suggestions about or draft the financial statements based on information from management’s accounting system, provided that the company is not SEC regulated. SEC regulated companies must draft the financial statements themselves or use an alternate source to draft the financials. The auditors are specifically prohibited from drafting AND auditing the financials for SEC-regulated companies.
Which of the following best describes what is meant by the term “generally accepted auditing standards”?
A. Procedures to be used to gather evidence to support financial statements.
B. The ten specific criteria that measure the quality of the auditor’s performance.
C. The Statements on Auditing Standards issued by the Auditing Standards Board.
D. Rules acknowledged by the accounting profession because of their universal application.
C. The Statements on Auditing Standards issued by the Auditing Standards Board.
Since the clarified auditing standards went into effect, GAAS now refers to the set of Statements on Auditing Standards issued by the Auditing Standards Board.
(B looks like a correct answer too)
Prior to the effective date of the clarified auditing standards, this was the AICPA’s answer to this question. However, the Auditing Standards Board has adopted 7 principles as a framework for audit standards setting in place of the original 10 generally accepted auditing standards. GAAS now refers to the set of Statements on Auditing Standards.
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.
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.
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 governmental entities?
U.S. Government Accountability Office (GAO).
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.
List some benefits of an audit to a private company (also known as a nonissuer).
- More favorable cost of capital;
- Insights into adequacy of internal controls;
- Benchmark an entity’s performance with other similar entities.
GAAS - General Standards
Training
Independence
Due Professional Care
Two required components of Training
- Adequate Technical Training
2. Proficiency to Perform the Audit
GAAS - Fieldwork Standards
Planning & Supervision
Internal Control
Evidence
Definition of Internal Control Standard of Fieldwork
The auditor must obtain a SUFFICIENT UNDERSTANDING of the ENTITY and its ENVIRONMENT, including its INTERNAL CONTROL, to ASSESS the RISK OF MATERIAL MISSTATEMENT to the financial statements whether due to FRAUD or ERROR, and to DESIGN the NATURE, TIMING, and EXTENT of further audit procedures.
Two required components of Evidence
- Sufficient
2. Appropriate
GAAS - Reporting Standards
GAAP
Consistency
Disclosure
Opinion
Implicit Requirements of Reporting Standards
Consistency - only mention if INADEQUATE
Disclosure - only mention if INADEQUATE
AICPA’s 4 Categories of Principles
Purpose / Premise
Responsibilities
Performance
Reporting
AICPA’s 7 Principles and Respective Categories
Purpose / Premise
- Purpose - provide opinion whether F/S is fairly stated
- Premise - management is responsible
Responsibilities
- Auditor Responsibilities:
a. competence and appropriate capabilities
b. complying with relevant ethical requirements
c. maintain prof. skepticism and exercise prof. judgement
Performance
4. Obtain reasonable assurance
- Perform the following activities:
a. Plan work and properly supervise
b. Determine and apply appropriate materiality
c. Identify and assess Risk of Material Misstatement
d. Obtain evidence (sufficient & appropriate) - Unable to obtain absolute assurance because
a. nature of financial reporting
b. nature of audit procedures
c. conduct audit within reasonable time (cost benefit)
Reporting
- Auditor must express written opinion:
a. or that opinion cannot be formed
b. within accordance of applicable framework
Explain “Exercise Due Professional Care”
The auditor must critically review the work completed and judgement exercised at every level of supervision. This does not mean that they need to examine ALL 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.
- GAAP
- Consistency
- Disclosure
- Opinion.
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.
- Training
- Independence
- Due professional care.
