The document discusses professional standards and regulations for auditors and accounting firms. It covers the authorities that set standards, such as the PCAOB and AICPA. It also discusses generally accepted auditing standards, including general standards, standards of fieldwork, and standards of reporting. The hierarchy of accounting guidance under GAAP is presented. The roles of auditing organizations in regulating the profession are defined.
2. Authority of Organizations
Public Company Accounting Oversight Board
Auditing, Attestation, Quality Control, Independence,
Ethical Standards for audits of public companies
American Institute of Certified Public
Accountants
Auditing, Attestation, Quality Control, Independence
Ethical, Accounting and Review Standards for
engagements involving nonpublic companies
State Boards of Accountancy
License CPAs and CPA firms to practice in jurisdictions
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4. Generally Accepted Auditing
Standards--General Standards
Adequate technical training and
proficiency
Independence in mental attitude is to be
maintained
Due professional care is to be exercised
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5. Generally Accepted Auditing
Standards--Standards of Field Work
Auditor must adequately plan and
properly supervise work
Auditor must obtain a sufficient
understanding of entity, and its
environment, including internal control
to assess risk of material misstatement
and to design further audit procedures
Auditor must obtain sufficient
appropriate audit evidence to afford a
reasonable basis for the opinion
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6. Generally Accepted Auditing
Standards--Standards of Reporting
State whether the financial statements are
presented in accordance with GAAP
Identify circumstances in which such principles
have not been consistently applied
Informative disclosures are adequate unless
otherwise stated in the report
Report should clearly state the degree of
responsibility being assumed by the auditors by
expressing an opinion or stating that one cannot
be expressed, and the reason therefor
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7. Terminology in Auditing Standards
(Figure 2.2)
Responsibility Meaning Words Used to Indicate
Level Responsibility
Unconditional Auditor must fulfill responsibilities “Must”
Responsibility “Is required”
“Shall” (PCAOB only)
Presumptively Auditor must comply with requirements unless “Should”
Mandatory auditor demonstrates and documents that
alternative actions were sufficient to achieve the
objectives of the standards
Responsibility to Auditor should consider; whether the auditor “Might”
Consider complies with the requirements depends on the “Could”
exercise of professional judgment in the Other phrases indicating a
circumstances responsibilities to consider
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8. The GAAS Hierarchy (Figure 2.3)
Category Status Audit Guidance
1. Standards Auditors should be prepared to justify The 10 GAAS
departures from these standards. SASs
Other standards for
PCAOB, govt. audits, etc.
2. Interpretative Recommendations on the application of Appendices to SASs
Publications the SASs. If not followed, the auditors Interpretation of SASs
should be prepared to explain how they Auditing guidance in AICPA
complied with the SAS provisions Audit and accounting Guides
addressed. AICPA auditing Statements
of
Position
3. Other Auditing No authoritative status, but may help Auditing articles
Publications the auditor understand and apply the Continuing education
standards programs
Textbooks
Guidebooks
Audit programs
Checklists
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9. Auditor Responsibility for the
Detection of Errors and Fraud (1 of 2)
Obtain information to assess the inherent risks and
fraud risks
Information about the company and its
environment
Discussion among audit team members
Inquiries of management and others
Planning analytical procedures, including those
involving revenue
Assess the risk of errors and fraud that may cause the
financial statements to contain a material
misstatement.
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10. Auditor Responsibility for the
Detection of Errors and Fraud (2 of 2)
Based on that assessment, plan and perform the
audit to obtain reasonable assurance that
material misstatements, whether caused by
errors or fraud, will be detected (including those
procedures required by AU 316 (SAS No. 99,
113)
Exercise due care in planning, performing and
evaluating the results of audit procedures, and
the proper degree of professional skepticism to
achieve reasonable assurance that material
misstatements due to error or fraud will be
detected.
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11. Auditor Responsibility for
the Detection of Illegal Acts
Those that could have a direct and material
effect on financial statement amounts--same as
for errors and fraud. An audit obtains
reasonable assurance of detecting these types
of illegal acts.
Those with an indirect effect on financial
statement amounts:
Be aware of possible occurrence.
If information comes to the auditor’s attention, apply
audit procedures directed at determining whether an
illegal act has occurred. An audit does not provide
assurance that indirect-effect illegal acts will be
detected.
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12. The Standard Auditors’ Report for
Nonpublic Companies
Title
Addressee
Content
Introductory Paragraph
Scope Paragraph
Opinion Paragraph
Signature
Date
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13. The Standard Auditors’ Report--
Introductory Paragraph
We have audited the accompanying balance sheet
of XYZ Company as of December 31, 20X1 and the
related statements of income, retained earnings, and
cash flows for the year then ended . These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an
opinion on these financial statements based on our
audit.
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14. The Standard Auditors’ Report—
Scope Paragraph
We conducted our audit in accordance with auditing
standards generally accepted in the United States of
America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing
the accounting principles used and significant estimates
made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
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15. The Standard Auditors’ Report--
Opinion Paragraph
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of XYZ Company as of December 31,20X1, and the results
of its operations and its cash flows for the year then ended
in conformity with accounting principles generally accepted
in the United States of America.
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16. The GAAP Hierarchy
Authoritative Body Pronouncements
Pronouncements of Bodies Composed of
Expert Accountants, That Are Exposed for
Public Comment
Pronouncements of Bodies of Expert
Accountants That Are Not Exposed for Public
Comment
Widely Recognized Practices and
Pronouncements
Other Accounting Literature
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17. Other Types of Auditors’ Reports
Standard unqualified report
Financial statements follow GAAP and auditor does not add explanatory
language for any issue
Other reports
Unqualified with explanatory language
• Example: A lack of consistency in application of accounting
principles
Qualified opinion
• Examples: Scope limitation or departure from GAAP
Adverse opinion
• Examples: Departure from GAAP so significant that financial
statements as a whole are misleading
Disclaimer of opinion
• Example: Unable to determine an opinion due to a very significant
scope limitation
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18. Public Company Audit Report
Titleis “Report of Registered Independent
Public Accounting Firm”
Refers to standards of the PCAOB rather
than GAAS
Includes a fourth paragraph that refers to
report on internal control
City and State (or Country) of audit firm
must be included
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20. Elements of Quality Control
Leadership responsibilities for quality
within the firm (“tone at the top”)
Relevant ethical requirements
Personnel management
Acceptance and continuance of clients
and engagements
Engagement performance
Monitoring
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21. QC Element 1: Leadership responsibilities
for quality within the firm
Firm’s internal culture recognizes that quality is
essential in performing engagements and
recognizes the need to
perform work that complies with professional
standards and regulatory and legal requirements and
issue reports that are appropriate in the
circumstances.
Example: Assign management responsibilities
so that commercial considerations do not
override the quality of work performed.
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22. QC Element 2: Relevant ethical
requirements
Firm and its personnel comply with
relevant ethical requirements
Example: At least annually, the firm should
obtain written confirmation of compliance
with its independence policies and
procedures from all firm personnel who
are required to be independent
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23. QC Element 3: Acceptance and
Continuance
Firm will undertake to continue relationships and
engagements only where the firm:
1. Has considered client integrity.
2. Is competent to perform the engagement.
3. Can comply with legal and ethical requirements.
Example: Background information is gathered on all
prospective audit clients, including the attitude of
principal owners, key management, and those charged
with governance on matters such as aggressive
accounting and internal control over financial reporting.
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QC Element 4: Human Resources
Firm has personnel with the capabilities, competence,
and commitment to ethical principles to:
1. Perform engagements in accordance with professional
standards and regulatory and legal requirements.
2. Enable the firm to issue reports that are appropriate in the
circumstances.
Example: Design effective recruitment processes and
procedures to help the firm select individuals meeting
minimum academic requirements established by the
firm, and maturity, integrity and leadership.
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25. QC Element 5: Engagement
Performance
Firm’s engagements are consistently performed in
accordance with professional standards and regulatory
and legal requirements, with policies and procedures
addressing:
1. Engagement performance.
2. Supervision responsibilities.
3. Review responsibilities.
Example: Design policies and procedures that address
the tracking of progress of each engagement.
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26. QC Element 6: Monitoring
Firm’s policies and procedures
established for each of the elements are
suitably designed and effectively applied.
Example: Working papers, reports, and
client financial statements are reviewed to
assess compliance with the firm’s quality
control policies and procedures.
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27. Quality Control Procedures
Not specified by AICPA
Depend on size of firm, number of offices
and nature of firm’s practices
Every CPA firm should have quality
control procedures applicable to every
aspect of its practice
Establish controls to provide assurance
that the CPA firm meets its responsibilities
to clients and public
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28. Regulation of the Public Accounting
Profession
Public Companies
Public Company Accounting Oversight Board
• Registration of public accounting firms that audit public
companies
• Conduct inspections of public company practice of
registered public accounting firms
Nonpublic Companies
AICPA & State Boards of Accountancy
• Peer review for nonpublic practice segments
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29. PCAOB
Composed of 5 members – only two may
be CPAs
Members appointed by SEC and may
serve no more than two five-year terms
All accounting firms that audit SEC
registrants must register with PCAOB
Pledge to cooperate with PCAOB inquiries
PCAOB can impose monetary damages, suspend
firms or make referrals to Justice Department
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30. Peer Reviews
Members of AICPA
Conducted by CPAs or other CPA firms
Two types of peer reviews
System review
• Study of CPA firms’ system of quality control
• Select sample of firms’ engagements and examine related
working paper files
Engagement review
• Sample of CPA work including reports to evaluate
appropriateness
• Less in scope than system review
Report: pass, pass with deficiencies, or fail
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31. PCAOB Inspections
Conducted by PCAOB staff
Focus:
Primarily evaluating performance of sample of
individual audit and review engagements
selected quality control issues only. This
differs from a peer review.
Report
Written report to SEC, part of which is made
public
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32. International Accounting
Standards
International
Financial Reporting
Standards (IFRS)
Developed by International Accounting
Standards Board (IASB)
SEC accepts IFRS for foreign companies that
issue securities in US markets
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33. International Audit Report
Contains expanded description of management’s
responsibility
Contains an enhanced explanation of the audit
process
May state “present fairly, in all material respects” or
“give a true and fair view”
Report may indicate that the financial statements
comply with the provisions of the country’s relevant
statutes or laws
Must include city of the auditors’ office
May be signed using the personal name of the
auditor or the audit firm or both
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