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.
Identify the topics associated with each of the AICPA’s 7 principles for audit standard setting.
- Purpose
- Premise
- Responsibilities
- Reasonable assurance
- Performance requirements to achieve reasonable assurance
- Inherent limitations
- Reporting
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.
- Planning and supervision
- Internal control
- Evidence.
Identify the 4 primary themes associated with the AICPA’s 7 principles for audit standard setting.
- Purpose/premise
- Responsibilities
- Performance
- Reporting
What are the two categories of AICPA Professional Standards “Professional Requirements”?
- Unconditional Requirements
2. Presumptive Mandatory Requirements
What words are used by the AICPA to indicate Unconditional Professional Requirements?
Must
Is Required
What words are used to indicate Prescriptively Mandatory Requirements?
Should
Define what is meant by “Generally Accepted Auditing Standards”
Pronouncements issued by the Auditing Standards Board. These are formally known as “Statements on Auditing Standards” or SASs.
There are other “Interpretive Publications” which are not SASs and do not constitute GAAS, however, if an auditor does not follow an interpretive publication, they must explain how they complied with the SASs while deviating from the interpretive publication.
Finally, there are other auditing publications, which are helpful for knowledge and interpreting SASs, however these do not hold any authoritative status.
Describe “Explanatory Material” as it relates to GAAS and the SASs
Explanatory Material is descriptive guidance within the body of the standards but they do not impose a requirement.
What words are used in the SASs that would indicate Explanatory Material?
May
Might
Could
List some interpretive publications, and explain their requirement status:
Interpretive publications are:
Appendices to SASs
Auditing guidance included in AICPA Audit and Accounting Guides
Auditing interpretations of the SASs
AICPA Auditing Statements of Position
What are the three levels of Auditing Publications and their requirement status:
- Statements on Auditing Standards (SASs)
MUST BE FOLLOWED - Interpretive Publications
SHOULD FOLLOW, EXPLAIN WHY DID NOT FOLLOW - Other Auditing Publications
NO AUTHORITATIVE POWER
What type of professional requirement is indicated by the word should in AICPA professional standards?
Presumptively mandatory 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 type of professional requirement is indicated by the word must in AICPA professional standards?
Unconditional requirement.
What is an Engagement Quality Control Review
A process designed to provide an objective evaluation, before the audit report is released, of the significant judgement the engagement team made and the conclusions in reached in formulating the auditor’s report.
Who is responsible for the Quality Control of an engagement?
The engagement partner
What is the main difference between the SAS and ISA requirements on the timing of an Engagement Quality Control Review?
SAS requires the review must be completed before the partner RELEASES the Audit Report
ISA requires that the quality control review be completed before the partner DATES the Audit Report
What are the 6 Elements of a Quality Control System?
- Leadership responsibilities for quality - “tone at top”
- Relevant ethical requirements - independence
- Acceptance and continuance of client relationships
- Human Resources
- Engagement performance
- Monitoring
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.)
List the six elements of a quality control system.
- Leadership responsibilities for quality within the firm
- Relevant ethical requirements (especially independence)
- Acceptance and continuance of client relationships
- Human resources
- Engagement performance
- Monitoring
Services for which a CPA firm is required to have a system 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.
What are the 4 components from beginning to end of an audit?
- Engagement Planning
- Internal Control Considerations
- Substantive Audit Procedures
- Reporting
What are the two types of Substantive Procedures?
- Analytical procedures
2. Tests of Details
Define Analytical Procedures
Those evidence-gathering procedures that suggest “reasonableness” (or “unreasonableness”) based upon a comparison to appropriate expectations or benchmarks, such as prior year’s financial statements, comparability to industry data ( including ratios) or other interrelationships involving financial and/or non-financial data.
Define Tests of Details and Describe the Two Types
Evidence-gathering procedures consisting of either of two types:
- Tests of ending balances – Where the final balance is assessed by testing the year-end balance (e.g., testing a sample of individual customers’ account balances that make up the general ledger accounts receivable control account balance).
- Tests of transactions – Where the final balance is assessed by examining debits and credits that caused the balance to change from last year’s audited balance to the current year’s balance.
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 four basic steps in the audit process.
- Planning
- Internal Control Consideration
- Substantive Audit Procedures
- Reporting.
List the two types of substantive audit procedures.
- Analytical procedures
2. Tests of Details
List the two types of test of details.
- Tests of ending balances
2. Tests of transactions.
List the reason(s) for which an entity may receive a disclaimer of opinion.
Scope limitation (material and pervasive effect)
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 reason(s) for which an entity may receive an adverse opinion.
Misstatement, such as a GAAP departure (material and pervasive effect).
How is an auditor’s unmodified audit report structured under the clarified auditing standards?
An 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, 9 sent).
- Opinion (1 sentence).
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 four types of opinions that an auditor may give on financial statements.
- Unmodified
- Qualified
- Adverse
- Disclaimer
What paragraph of an audit report (clarified) mentions the auditor’s responsibility to express an opinion on the financial statements?
The responsibility paragraphs of the auditor’s standard report.
Does the standard audit report EXPLICITLY or IMPLICITLY mention the auditor’s consistent application of accounting principles?
Implicitly
Why must the auditor’s report contain either an expression of opinion regarding the financial statements, or an assertion that an opinion cannot be expressed?
To prevent misrepresentations regarding the degree of responsibility the auditor assumes
How many paragraphs are in an auditor’s standard unmodified report?
Five
- management responsibility
2-4 auditor’s responsibility
5 opinion
After the auditor’s signature, what information must be included about the auditing company?
Auditor’s city and state
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.
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 type of assurance is associated with a “review” of an entity’s financial statements?
Negative assurance, which is considered a moderate level of assurance.
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.
Is an engagement letter required for a compilation of financial statements?
Yes
