2
Professional Chapter Standards
"All my growth and development led me to believe that if you really do the right thing, and if you play by the rules, and if you've got good enough, solid judgment and common sense, that you're going to be able to do whatever you want to do with your life...." Barbara Jordan, first African-American woman from the South ever elected to the U.S. House of Representatives
McGrawHill/Irwin
Copyright 2008 by The McGrawHill Companies, Inc. All rights reserved.
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Chapter 2 Objectives
1. 2. 3. 4. 5. 6. Name the various practice standards for internal, governmental, and independent auditors and accounting firms and identify their sources. List and explain the 10 AICPA generally accepted auditing standards (GAAS) and explain how GAAS was or was not followed in specific fact situations. Describe how the audit examination is affected by auditors' responsibility for general standards and the standards of field work. List the standards of reporting and identify how these standards are reflected in the content of the auditors' report. Identify the need for general attestation standards and explain how attestation standards differ from generally accepted auditing standards. List and explain important quality control standards for an accounting firm.
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Practice Standards
Client Public Entities Private Entities Governmental Entities Foreign Entities Rule making body Public Company Accounting Oversight Board (PCAOB) AICPA Auditing Standards Board (ASB) U.S. Government Accountability Office (GAO) IFAC International Auditing and Assurance Standards Board (IAASB)
Standards
Auditing Standards (ASs)
Statements on Auditing Standards (SASs)
Government Auditing Standards (The "Yellow Book")
International Standards on Auditing (ISAs)
Web site
www.pcaob.org
www.aicpa.org
www.gao.gov
www.ifac.org
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Generally Accepted Auditing Standards
Measures of the quality of auditors' performance Same from audit to audit Auditing standards versus auditing procedures
Exhibit 2.1
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Generally Accepted Auditing Standards
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Engagement Overview and GAAS
OBTAIN (OR RETAIN) CLIENT ENGAGEMENT PLANNING RISK ASSESSMENT SUBSTANTIVE PROCEDURES ISSUE REPORT
General Standards (Due Professional Care) Standards of Field Work
Standards of Reporting
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General Standards
Affect all phases of audit 1. Training and proficiency
Experience and expertise Independence in fact vs. independence in appearance Financial and managerial relationships Observe standards of field work and standards of reporting.
2. Independence
3. Due professional care
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Standards of Field Work
Affect conduct of the audit 1. Planning and supervision
Use of audit program Interim and year-end work
1.
Understanding of entity and environment (including I/C)
Assess risk of material misstatement Determine effectiveness of substantive procedures
2.
Sufficient appropriate evidence
Sufficient = quantity Appropriate = quality (relevance, reliability)
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Sufficient evidence
Related to quantity (number of transactions or components examined) Influenced by effectiveness of entity's internal control
Effective internal control Lower level of control risk Reduced effectiveness of substantive procedures
Ineffective internal control
Higher level of control risk
Increased effectiveness of substantive procedures
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Appropriate Evidence
Relates to the quality of evidence Reliability (from highest to lowest)
Auditors' direct personal knowledge External documentary evidence External-internal evidence Internal documentary evidence Verbal and written representations
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Examples of Evidence
Auditors' direct personal knowledge
Observe PPE, inventories
External documentary evidence
A/R confirmations, bank confirmations
External-internal evidence
Vendor invoices for purchases
Internal documentary evidence
Client sales invoices
Verbal and written representations
Management representations (SAS 85)
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Standards of Reporting
Identify contents of auditors' reports 1. Are F/S in conformity with GAAP? 2. Have GAAP been consistently applied (implicit reporting)? 3. Are disclosures (implicit adequate reporting)? 4. Report must express or disclaim an opinion
Independent Auditors' Report (AS 5)
Report Title Report Address Introductory Paragraph Scope Paragraph Opinion Paragraph Internal Control Paragraph (AS 5) Signature Report Date
To the Board of Directors and Shareholders APOLLO SHOES, INC.
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Report of Independent Registered Public Accounting Firm
We have audited the accompanying balance sheets of APOLLO SHOES, INC. as of December 31, 2008 and 2007, and the related statements of income, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2008. These financial statements are the responsibility of the APOLLO SHOES, INC.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of APOLLO SHOES, INC. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), APOLLO SHOES INC.'S' internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated January 29, 2009 expressed an unqualified opinion on the effective operation of internal control over financial reporting.
Smith & Smith, CPAs
January 29, 2009
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Types of Audit Opinions
Unqualified
F/S are in conformity with GAAP
Qualified
Except for one (limited) item, F/S are in conformity with GAAP Can issue for GAAP departure and scope limitation
Adverse
F/S are not in conformity with GAAP Can issue for GAAP departure (more serious)
Disclaimer
Auditors do not express an opinion Can issue for scope limitation (more serious)
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Attestation Standards
Cover a broader range of engagements than GAAS Differences from GAAS
Subject matter must be evaluated against reasonable criteria No requirement to assess risk of material misstatement (unless attestation engagement involves risk of material misstatement) May have limited distribution of report
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Quality Control Standards for Accounting Firms
Guide the performance of firm-wide services Categories Independence, integrity, objectivity Personnel management Acceptance and continuance of clients Engagement performance Monitoring
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The Public Company Accounting Oversight Board (PCAOB)
Establishes standards (Auditing Standards)
Auditors' reports (AS 1) Audit documentation (AS 3) Material weaknesses in internal control (AS 4) Audits of internal control over financial reporting (AS 5)
Standards must be approved by SEC ASB and AICPA standards prior to April 16, 2003 are Interim Auditing Standards
May be modified or amended by Auditing Standards
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The Public Company Accounting Oversight Board (PCAOB)
Monitors accounting firms through inspections
Firms auditing > 100 public entities: annual Firms auditing < 100 public entities: every 3 years
Inspection reports list deficiencies in audits conducted by registered firms (http:// www.pcaob.org/Inspections/Public_Reports/index.aspx )