Chap002 (1)


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  • Chap002 (1)

    1. 1. Chapter 2 Professional StandardsMcGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
    2. 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 2-2
    3. 3. Regulation of the Public Accounting Profession 2-3
    4. 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 2-4
    5. 5. Generally Accepted AuditingStandards--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 2-5
    6. 6. Generally Accepted AuditingStandards--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 2-6
    7. 7. Terminology in Auditing Standards (Figure 2.2)Responsibility Meaning Words Used to IndicateLevel ResponsibilityUnconditional 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 standardsResponsibility 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 2-7
    8. 8. The GAAS Hierarchy (Figure 2.3)Category Status Audit Guidance1. 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 SASsPublications 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 Position3. Other Auditing No authoritative status, but may help  Auditing articlesPublications the auditor understand and apply the  Continuing education standards programs  Textbooks  Guidebooks  Audit programs  Checklists 2-8
    9. 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. 2-9
    10. 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. 2-10
    11. 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. 2-11
    12. 12. The Standard Auditors’ Report for Nonpublic Companies Title Addressee Content  Introductory Paragraph  Scope Paragraph  Opinion Paragraph Signature Date 2-12
    13. 13. The Standard Auditors’ Report-- Introductory ParagraphWe have audited the accompanying balance sheetof XYZ Company as of December 31, 20X1 and therelated statements of income, retained earnings, andcash flows for the year then ended . These financialstatements are the responsibility of the Companysmanagement. Our responsibility is to express anopinion on these financial statements based on ouraudit. 2-13
    14. 14. The Standard Auditors’ Report— Scope ParagraphWe conducted our audit in accordance with auditingstandards generally accepted in the United States ofAmerica. Those standards require that we plan andperform the audit to obtain reasonable assurance aboutwhether the financial statements are free of materialmisstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessingthe accounting principles used and significant estimatesmade by management, as well as evaluating the overallfinancial statement presentation. We believe that our auditprovides a reasonable basis for our opinion. 2-14
    15. 15. The Standard Auditors’ Report-- Opinion ParagraphIn our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial positionof XYZ Company as of December 31,20X1, and the resultsof its operations and its cash flows for the year then endedin conformity with accounting principles generally acceptedin the United States of America. 2-15
    16. 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 2-16
    17. 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 2-17
    18. 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 2-18
    19. 19. Applicability of SSAEs 2-19
    20. 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 2-20
    21. 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. 2-21
    22. 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 2-22
    23. 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. 2-23
    24. 24. 2-24QC 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. 2-24
    25. 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. 2-25
    26. 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. 2-26
    27. 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 2-27
    28. 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 2-28
    29. 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 2-29
    30. 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 2-30
    31. 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 2-31
    32. 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 2-32
    33. 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 2-33