Chapter 2 professional audit

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Chapter 2
Professional Standards

2. ©2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Presentation Outline
I. Types of Practice Standards
II. Generally Accepted Auditing Standards
(GAAS)
III. Attestation Standards
IV. Quality Control Standards for CPA Firms
V. The Public Company Accounting Oversight
Board (PCAOB)

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I. Types of Practice Standards
Client
Public
Companies
Private
Companies
Governmental
Entities
Foreign
Companies
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.pcaobus.org www.aicpa.org www.gao.gov www.ifac.org

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II. Generally Accepted Auditing
Standards (GAAS)
A. Engagement Overview and GAAS
B. General Standards
C. Standards of Fieldwork
D. Evidence Considerations
E. Characteristics of Appropriate Evidence
F. Reporting Standards
G. Independent Auditor’s Report (AS 1, AS 2)
H. Types of Audit Report Opinions

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A. Engagement Overview and GAAS
OBTAIN
(OR RETAIN)
CLIENT
INTERNAL
CONTROL
EVALUATION
EVIDENCE
GATHERING
REPORTING
ENGAGEMENT
PLANNING
General Standards
Standards of Fieldwork
Reporting
Standards
GAAS is used to measure the quality of the auditor’s
performance. They are the same from audit to audit.
Audit procedures are the particular and specialized actions that
auditors take to obtain evidence in a specific audit engagement.

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B. General Standards
The General Standards affect all phases of the audit,
including client acceptance or retention.
1. The audit must be performed by a person or persons
having adequate technical training and proficiency as an
auditor.
2. In all matters relating to the assignment, an independence
in mental attitude is to be maintained by the auditor or
auditors.
3. Due professional care is to be exercised in the
performance of the audit and the preparation of the
report.

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C. Standards of Fieldwork
The Fieldwork Standards guide the planning, internal control
evaluation, and the evidence gathering phases of the
engagement.
1. The auditor must adequately plan the work and must properly
supervise any assistants.
2. The auditor must obtain a sufficient understanding of the entity and
its environment, including its internal control, to assess the risk of
material misstatement of the financial statements whether due to
error or fraud, and to design the nature, timing, and extent of further
audit procedures.
3. The auditor must obtain sufficient appropriate audit evidence
through audit procedures performed to afford a reasonable basis for
an opinion regarding the financial statements under audit.

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D. Evidence Considerations
The auditor must "obtain
sufficient, appropriate audit
evidence” to support opinion.
– Sufficient Evidence
• Enough to support opinion
• Persuasive enough to convince another
person (judge, jury?)
• Essentially a matter of professional
judgment
– Appropriate Evidence
• Competent, valid, relevant, reliable

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E. Characteristics of Appropriate Evidence
• Relevance
• Testing what you want to test (e.g., direction
of testing)
• Evidence Source
• Generally an externally generated piece of
evidence more reliable than an internal
(client-generated) piece of evidence
• Evidence Hierarchy
• Direct personal knowledge
• External evidence
• External-internal evidence
• Internal Evidence
• Verbal and written
• Objective v. Subjective Evidence

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F. Reporting Standards
The Reporting Standards guide the reporting phase of the audit engagement.
1. The report shall state whether the financial statements are presented in
accordance with GAAP.
2. The report shall identify those circumstances in which such principles
have not been consistently observed in the current period in relation to the
preceding period.
3. Informative disclosures in the financial statements are to be regarded as
reasonably adequate unless otherwise stated in the report.
4. The report shall either contain an expression of opinion regarding the
financial statements, taken as a whole, or an assertion to the effect that an
opinion cannot be expressed. When an overall opinion cannot be
expressed, the reasons therefore should be stated. In all cases where an
auditor's name is associated with financial statements, the report should
contain a clear-cut indication of the character of the auditor's work, if any,
and the degree of responsibility the auditor is taking.

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G. Independent Auditor’s Report (AS 1, AS 2)
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Apollo Shoes, Inc.
We have audited the accompanying balance sheets of Apollo Shoes, Inc. as of December 31,2006 and 2005, and
the related statements of operations, stockholders’ equity and comprehensive income, and cash flows for the years
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 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 audit provides 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, 2006 and 2005, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles generally accepted in the United States.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Apollo Shoes Inc.’s' internal control over financial reporting as of
December 31, 2006, 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 February 22,
2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal
control over financial reporting.
Smith & Smith, CPAs
February 22, 2007
Report Title
Report Address
Introductory Paragraph:
•Notice of audit,
•F/S Examined
•Auditor, Management responsibilities
Scope Paragraph:
Description of an audit
Opinion
Paragraph
Signature
Report Date
Extra Internal Control
Paragraph (AS 2)

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H. Types of Audit Report Opinions
• Unqualified: The financial statements present
fairly the financial condition and operations of the
company in conformity with U.S. GAAP.
• Qualified: Except for one (limited) item, the
financial statements present fairly ….
• Adverse: The financial statements do not present
fairly ….
• Disclaimer: The auditors do not express an
opinion….

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III. Attestation Standards
• Provides guidance on attest engagements other than audits:
• “An engagement in which a practitioner is engaged to issue or does issue a
report on subject matter or an assertion about the subject matter that is the
responsibility of another party.”
• Same basic set of rules as GAAS, except more general.
• “Attest function” vs. “audit”
• “Practitioner” vs. “auditor”
• “Engagement” vs. “audit”
• Differences between Attestation and Audit Engagements
(Exhibit 2.4)

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IV. Quality Control Standards for CPA Firms
• Quality Control Standards guide the
performance of firm-wide audit and attestation
practice
– Independence, integrity, objectivity
– Personnel management
– Acceptance and continuance of clients
– Engagement performance
– Monitoring

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V. The Public Company Accounting
Oversight Board (PCAOB)
A. Formation of the PCAOB
B. PCAOB: Standard Setting Role
C. PCAOB Monitoring Role

16. ©2007 by the McGraw-Hill Companies, Inc. All rights reserved.
A. Formation of the PCAOB
• The PCAOB was formed to ensure that audit quality is not
compromised and that auditor performance continues to
meet public expectations.
• The membership of the board consists of five SEC-
appointed public members (business executives,
investment analysts) and is supported by fees paid by
publicly traded companies.
• The Board’s tasks include
– registering and monitoring accounting firms that prepare audit
reports for public companies.
– establishing rules to govern auditing, quality control, ethics, and
independence.

17. ©2007 by the McGraw-Hill Companies, Inc. All rights reserved.
B. PCAOB: Standard Setting Role
• Congress has taken the responsibility for creating
standards for the audits of publicly traded companies from
the Auditing Standards Board (ASB) of the AICPA and
turned that responsibility over to the newly created Public
Company Accounting Oversight Board (PCAOB).
• Rather than starting from scratch, the PCAOB has declared
that, for the time being, the previously created practice
standards (e.g., ASB’s SASs) will function as the PCAOB’s
Interim Professional Auditing Standards for audits of
public companies.

18. ©2007 by the McGraw-Hill Companies, Inc. All rights reserved.
C. PCAOB: Monitoring Role
• The Board’s goal is to ensure that audit quality is not
compromised and that auditor performance continues to
meet public expectations.
• Soon after it began operations in early 2003, the PCAOB
began registering professional services firms providing
auditing services to public entities. Firms not registered
are not allowed to conduct audits of public companies.
• Other Board monitoring activities include inspections of
registered auditing firms (similar to peer reviews), special
investigations, and disciplinary proceedings.

19. ©2007 by the McGraw-Hill Companies, Inc. All rights reserved.
Summary
• Standards for public, private, governmental,
and foreign companies.
• Generally accepted auditing standards
• Audit evidence and reporting
• Attestation standards
• Quality control standards and peer review
• Public Company Accounting Oversight
Board (PCAOB)