Auditing Study Guide

Chapter 1
Auditing: the accumulation and evaluation of evidence about information to determine and report on
the degree of correspondence between the information and established criteria

Assurance Service: an independent professional service that improves the quality of information for
decision makers

Attestation Service: a type of assurance service in which the CPA firm issues a report about a subject
matter or assertion that is the responsibility of another party

Information Risk: the risk that information upon which a business decision is made inaccurate

Chapter 2
Public Company Accounting Oversight Board (PCAOB): board created by the Sarbanes-Oxley Act;
oversees auditors of public companies and broker-dealers, including establishing auditing, attestation,
and quality control standards and performing inspections of registered accounting firms

American Institute of Certified Public Accountants (AICPA): a voluntary organization of CPA’s that sets
professional requirements, conducts research, and publishes materials relevant to accounting, auditing,
advisory services, and taxes

Securities and Exchange Commission (SEC): a federal agency that oversees the orderly conduct of the
securities markets; the SEC assists in providing investors in public corporations with reliable information
upon which to make investment decisions

International Auditing and Accounting Standards Board (IAASB): a board of the international
Federation of Accountants which works to improve the uniformity of auditing practices and related
services throughout the world by issuing pronouncements on a variety of audit and attest functions and
by promoting their acceptance worldwide.

Chapter 3
Standard Unmodified Opinion Audit Report: the report a CPA issues when all auditing conditions have
been met, no significant misstatements have been discovered and left uncorrected, and it is the
auditor’s opinion that the financial statements are fairly stated in accordance with the applicable
financial reporting framework; when all conditions of the audit have been met

Unmodified opinion audit report with emphasis-of-matter paragraph or nonstandard report wording:
an unmodified opinion audit report in which the financial statements are fairly presented, but the
auditor believes it is important, or is required, to provide additional information or the wording of other
paragraphs of the report require revision; When a complete audit took place with satisfactory results
and financial statements are fairly presented, but the auditor believes that is important or is required to
provide additional information
Qualified Opinion: a report issued when the auditor believes that the overall financial statements are
fairly stated but that either the scope of the audit was limited or the financial data indicated a failure to
follow GAAP; When the Auditor concludes that the overall financial statements are fairly presented, but
the scope of the audit has been materially restricted or applicable accounting standards were not
followed in preparing the financial statements

Adverse Opinion: a report issued when the auditor believes the financial statements are so materially
misstated or misleading as a whole that they do not present fairly the entity’s financial position or the
results of its operations and cash flows in conformity with GAAP; The auditor concludes that the
financial statements are not fairly presented

Disclaimer of Opinion: a report issued when the auditor is not able to become satisfied that the overall
financial statements are presented or the auditor is not independent; When the auditor is unable to
form an opinion as to whether the financial statements are fairly presented, or he or she is not
independent

Chapter 4
Ethics can be defined as a set of moral principles or values while ethical dilemmas are situations in
which a decision must be made about the appropriate behavior to which process in finding a solution is

The AICPA code of professional conduct consists of principles and rules, in addition to interpretations
which provide the framework for the rules that govern the CPA’s performance of professional
responsibilities. The bylaws require that members comply with the rules of the code*

Confidential Client Information is information that may not be disclosed without specific consent of the
client except under authoritative professional or legal investigation whereas Privileged Information is
information that the professional cannot be legally required to provide; information that an accountant
obtains from a client is confidential but not privileged

Chapter 5
Ultramares doctrine: a common-law approach to third-party liability, established in 1931 in which
ordinary negligence is insufficient for liability to third parties because of the lack of privity of contract
between the third party and the auditor, unless the third party is a primary beneficiary

Escott et al v. BarChris Construction Corporation (1968): The CPA firm was held liable for a lack of due
diligence required under the 1933 act when performing its review of events occurring subsequent to the
balance sheet date and brought two consequences: Auditing standards were changed to require greater
emphasis on procedures that the auditor must perform for events subsequent to the balance sheet date
and A greater emphasis began to be placed on the importance of the audit staff understanding the
client’s business and industry

The 1136 Tenants: a civil case concerning a CPA’s failure to uncover fraud as a part of unaudited
financial statements and brought about two developments: Engagement letters between the CPA and
client were strongly recommended for all engagements, but especially for unaudited engagements. The
letter should clearly define the intent of the engagement, the CPA’s responsibilities, and any restrictions
imposed on the CPA; The accounting and review services committee (ARSC) was formed as major
committee of the AICPA to set forth guidelines for unaudited financial statements of nonpublic
companies

Hochfelder v. Ernst & Ernst: is a leading securities law case and as a CPA liabilities case, the U.S.
Supreme Court ruled that scienter, which is knowledge and intent to deceive, is required before CPAs
can be held liable for violation of Rule 10b-5 and, in the court’s opinion, when a statute speaks so
specifically in terms of manipulation and deception, and of implementing devices and contrivances- the
commonly understood terminology of intentional wrongdoing- and when it’s history reflects no more
expansive intent, we are quite unwilling to extend the scope of the statute to negligent conduct.

Terms:

Business Failure: The situation when a business is unable to repay its lenders or meet the expectations
of its investors because of economic or business conditions

Audit Failure: A situation in which the auditor issues an incorrect audit opinion as the result of an
underlying failure to comply with the requirements of auditing standards

Audit Risk: The risk that the auditor will conclude after conducting an adequate audit that the financial
statements are fairly stated and an unmodified opinion can therefore be issued when, in fact, they are
materially misstated

Prudent Person Concept: the legal concept that a person has a duty to exercise reasonable care and
diligence in the performance of obligations to another

Defenses