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Professional
Standards
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Three Sets of Auditing
Standards
Three sets of auditing standards
AICPA (Auditing Standards Board) for nonpublic
companies in US.
PCAOB for public companies in US
International Auditing Standards with differing
authorities in various countries
2-2
Authority of Organizations
2-3
Principles Underlying a GAAS Audit 1/6
Purpose of an audit
Premise of an audit
Personal responsibilities of the auditor
Auditor actions in performing the audit
Reporting results of an audit
2-4
Principles Underlying a GAAS Audit 2/6
2-5
Principles Underlying a GAAS Audit 3/6
2-6
Principles Underlying a GAAS Audit 4/6
2-7
Principles Underlying a GAAS Audit 5/6
2-8
Principles Underlying a GAAS Audit 6/6
2-9
The 10 Generally Accepted Auditing
Standards
General Standards
Standards of Field Work
Reporting Standards
2-10
Generally Accepted Auditing
Standards--General Standards
2-11
Generally Accepted Auditing Standards--
Standards of Field Work
2-12
Generally Accepted Auditing Standards-
-Standards of Reporting
2-13
Terminology in Auditing Standards
(Figure 2.3)
Responsibility Meaning Words Used to
Level Indicate Responsibility
2-14
The GAAS Hierarchy (Figure 2.3)
2-15
Auditor Responsibility for the Detection
of Errors and Fraud (1 of 2)
environment
Discussion among audit team members
2-16
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.
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.
2-17
Auditor Responsibility for Client Identifying
Noncompliance with Laws
Noncompliance with laws that could have a direct
and material effect on financial statement amounts
and disclosures--same as for errors and fraud. An
audit obtains reasonable assurance of detecting
noncompliance with these laws.
Other Laws (no direct effect on financial statement
amounts):
Specific procedures:
• Inquire of management as to compliance
• Inspect correspondence with licensing or regulatory authorities
Be aware of possible occurrence.
If information comes to the auditor’s attention, apply audit
procedures directed at determining whether
noncompliance with a law has occurred. An audit does
not provide assurance that noncompliance with these
laws will be detected.
2-18
The Standard Auditors’ Report for
Nonpublic Companies
Title
Addressee
Content Sections (paragraphs)
Introductory (“We have audited”)
Management’s responsibility
Auditor’s Responsibility
Opinion Paragraph
Signature (firm name)
City and state of office issuing audit report
Date
2-19
The AICPA Standard Auditors’ Report--
Introductory Paragraph
2-20
The AICPA Standard Auditors’ Report—
Management’s Responsibility Paragraph
2-21
The AICPA Standard Auditors’ Report:
Auditors’ Responsibility Paragraphs (1 of 2)
2-22
The AICPA Standard Auditors’ Report:
Auditors’ Responsibility Paragraphs (2 of 2)
2-23
The AICPA Standard Auditors’ Report--
Opinion Paragraph (unqualified)
2-25
Other Types of Auditors’ Reports
Standard unmodified report (unqualified per PCAOB standards)
Financial statements follow GAAP and auditor does not add additional
commentary for any issue
Other reports
Unmodified with emphasis of matter (or other emphasis)
• Example: A lack of consistency in application of accounting
principles
Qualified opinion
• Scope limitation or departure from GAAP
Adverse opinion
• Departure from GAAP so significant that financial statements as a
whole are misleading
Disclaimer of opinion
• Unable to arrive at an opinion due to a very significant scope
limitation
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Public Company Audit Report
2-27
Applicability of SSAEs
2-28
Elements of Quality Control
Leadership responsibilities for quality
within the firm (“tone at the top”)
Relevant ethical requirements
Acceptance and continuance of clients
and engagements
Human Resources
Engagement performance
Monitoring
2-29
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.
2-30
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.
2-31
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.
2-32
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.
2-33
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.
2-34
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.
2-35
Quality Control Procedures
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.
2-36
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
2-37
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
2-38
PCAOB Inspections
Conducted by PCAOB staff
Focus
Primarily evaluating performance of sample of
individual audit and review engagements; a
risk based approach to selection and
inspection is used.
Selected quality control and management
issues only. This differs from a peer review.
Report
Written report to SEC, part of which is made
public 2-39
Peer Reviews
Members of AICPA
Conducted by CPAs or other CPA firms
Two types of peer reviews
System review
2-41
International Audit Report
Contains expanded description of management’s
responsibility and explanation of the audit process
similar to the nonpublic company audit report
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
May be signed using the personal name of the
auditor or the audit firm or both
2-42