Test 1 Flashcards
What is a Business Risk?
factors, events, and conditions that could prevent the organization from achieving its business objectives (auditors concerned with the risk, but do not audit business risk)
What is Information Risk?
the probability that the information circulated by an entity will be false or misleading
What is Auditing?
a systemic process of objectively obtaining and evaluating evidence (sufficient and appropriate) regarding assertions (made by management) about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the result to interested users (via an audit opinion)
What is the purpose of an audit?
enhance the degree of confidence that intended users can place in their financial statements
What are the features of Assurance engagements?
-REQUIRES INDEPENDENCE!
-Increase the reliability of financial/non-financial information; lends credibility to information
-Facilitates decision making
EX: XBRL reporting, information risk assessment and assurance, regulatory compliance
What are the features of Attestation engagements?
-REQUIRES INDEPENDENCE!
-Subset of assurance engagements
-Provide assurance as to the reliability of specific financial/nonfinancial assertion(s) made by management
-Includes a written report of the CPA’s findings (opinion)
EX: reviews of financial statements, agreed-upon procedures
What are the features of Audit engagements?
-HIGHEST FORM OF ASSURANCE
-REQUIRES INDEPENDENCE!
-Subset of attestation and assurance engagements
-Provide assurance as to the reliability of specific financial statement assertions by management
-Includes a written report of the CPA’s findings (opinion) that financial statements and footnotes are presented fairly in all material respects (reasonable, not absolute assurance)
EX: audits of financial statements, estimation of internal controls (publicly traded companies)
What are some Non-Assurance Services (need NOT to be independent)?
-Tax services
-Management Consulting and Advisory services
-Fraud investigations
-Information technology consulting
-Bookkeeping
What was created in response to SOX in 2002 and what does it do?
Public Company Accounting Oversight Board (PCAOB, under the SEC)
-Registration of companies
-Monitoring and enforcement
-Standard setting
What are the 5 types of Management Assertions?
- Existence or Occurrence
- Rights and Obligations
- Completeness
- Valuation or Allocation
- Presentation and Disclosure
What are the 3 areas of Management Assertions?
- Events and Transactions
- Account Balances
- Presentation and Footnote Disclosures
What is Professional Skepticism?
having an attitude that “includes a questioning mind and critical assessment of evidence”
What are the 5 major types of audits?
- Audits of Financial Statements
- Integrated Audits - audits of publicly traded companies
- Compliance Audits - compliance of the organization with some established criteria
- Operational Audits - recommendations to improve efficiency and effectiveness
- Forensic Audits - investigate a crime and gather evidence designed to convict fraudster
What are the 4 E’s to becoming a CPA?
- Education - bachelors degree, 150 semester hours
- Examination - AICPA creates and administers the CPA exam
- Ethics - pass AICPA ethics exam
- Experience - min 2,000 hours under licensed CPA
Who issues/revokes CPA licenses?
the State Boards of Accountancy (e.g. Idaho, Colorado)
NOT THE AICPA!!
Who is the authority of public companies?
PCAOB
Who is the authority of non-public companies?
AICPA
What are the responsibilities of the Generally Accepted Auditing Standards (GAAS)?
T = Training and Proficiency - experience and expertise
I = Independence - in fact and in appearance
P = (Due) Professional Care - level of performance by reasonable auditor in simular circumstances
What are the performances/fieldwork of GAAS?
P = Planning and Supervising - preparation of the audit plan and establishing materiality
I = Internal Controls and Understanding of Entiry - risk assessment
C = Corroborative Audit Evidence - appropriate (relevant and reliable) and sufficient
What are the Reporting of GAAS?
A = Accounting Principles - prepared in accordance with GAAP
C = Consistency - consistently applied the rules
D = Disclosures
E = Expression of Opinion by Auditor based
What are the 4 types of Audit Opinions?
- Unqualified = “clean” opinion, no modifications
- Qualified = “Except for…,” limited items, F/S’s in conformity with GAAP
- Adverse = F/S’s not in conformity with GAAP
- Disclaimer = auditors do not express an opinion
What are the components of System of Quality Control?
H = Human Resources
E = Engagement/client acceptance and continuance
L = Leadership responsibilities for quality within the firm
P = Performance of the engagement
M = Monitoring
E = Ethical requirements
What does the AICPA do?
-establish standards for nonpublic companies
-prepare and grade CPA exam
-Research and publication
-Continuing professional education
-Professional self-regulation
What does the PCAOB do?
- establish standards for public companies
-register public accounting firms that audit public companies
-perform inspections of the public accounting firms (>100 = annual; <100 every three years)
-conduct investigations and disciplinary proceedings of registered firms
What are the 6 principles of the Code of Professional Conduct? (MATCHING)
- Responsibilities - exercise sensitive professional and moral judgment
- Public Interest - members accept obligation to serve and honor the public
- Integrity - perform responsibilities with highest level of integrity
- Objectivity and Independence - be objective, independent, and free of conflicts of interest
- Due Care - observe profession’s standards and improve competence, no negligence
- Scope and Nature of Services - observe Code of Professional Conduct during an audit
What is the (1) Independence Rule
-independence of mind and appearance (responsibility placed on Co’s audit committee)
-the firm must be independent to perform attest services
-no partner/professional employee may own more than 5% of attest client’s stock
-effects of interest of family members, relatives, and friends
What is the (2) Integrity and Objectivity Rule
-prohibition of misrepresentation applies to all aspects of public accounting (i.e. knowingly allows material misstatements)
-doubt may be resolved in favor of client in rendering tax services
What is the (3) General Standards Rule
complies with:
-professional competence
-due professional care
-planning and supervision
-sufficient relevant data
What is the (4) Standards Rule
comply with GAAS
What is the (5) Accounting Principles Rule
comply with GAAP
What is the (6) Acts Discreditable Rule
-retaining records is discreditable (CPA works papers that belong to CPA firm
-rob a bank
What is the (7) Fees and Other Types of Remuneration Rule
-contingent fees (not permitted for attest engagements, allowed for non-attest)
-commission: receiving fees for recommending products or services of clients or third parties (permitted for non-attest, if disclosed; prohibited for attest engagements)
-Referal Fees Rule: receiving fees for recommending the services of CPA’s
What is the (8) Advertising Fees Rule
-advertising and solicitation of new clients in permitted
-may advertise as long as it is not false, misleading, or deceptive
What is the (9) Confidential Client Information Rule
- not privileged
-CPA cannot disclose confidential information without client’s consent (unless to remain in compliance with standards, are subpoenaed, as part of peer/quality review, or part of ethics violation)
What is the (10) Form of Organization Rule
-allows fictitious names as long as they are not false, misleading, or deceptive
-all partners must be a CPA or member of the AICPA, if included in firm name
