1. Chapter 02 Professional Standards McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Three Sets of Auditing Standards Three sets of auditing standards
AICPA (Auditing Standards Board) for nonpublic companies in US. (non-issuers)
PCAOB for public companies in US (issuers)
International Auditing Standards with differing authorities in various countries
Likely be acceptable within five years in all countries involving multinational security offerings.
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3. Authority of Audit-Related Organizations
Public Company Accounting Oversight Board
Auditing, Attestation, Quality Control, Independence, Ethical Standards for audits of public companies (issuers)
American Institute of Certified Public Accountants
Auditing, Attestation, Quality Control, Independence Ethical, Accounting and Review Standards for engagements involving nonpublic companies (non-issuers)
International Auditing & Assurance Standards Board
Within the next 5 years, IAASB standards will likely be acceptable in every country for multinational security offerings
State Boards of Accountancy
License CPAs and CPA firms to practice in jurisdictions

4. Regulation of the Public Accounting Profession
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5. Principles Underling a GAAS Audit 1/6
FIVE Brand New Principles (apply to audits of nonpublic entities):
Purpose of an audit
Premise of an audit
Personal responsibilities of the auditor
Auditor actions in performing the audit
Reporting results of an audit
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6. Principles Underling a GAAS Audit 2/6
1. Purpose of an audit—Provide an opinion on financial statements are in accordance with the applicable financial reporting framework.
The framework is ordinarily GAAP.
The applicable framework corresponds to the “suitable criteria” of an attest engagement.
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7. Principles Underling a GAAS Audit 3/6
2. Premise of an audit—Management (and those charged with governance) have responsibility to:
Prepare financial statements in accordance with applicable financial reporting framework.
Provide auditor with needed information and unrestricted access to those in the entity.
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8. Principles Underling a GAAS Audit 4/6
3. Personal responsibility of the auditor—Appropriate competence and capabilities to perform audit in accordance with standards, including maintaining professional skepticism and exercising professional judgment throughout the audit.
Professional skepticism—A questioning mind and a critical assessment of audit evidence.
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9. What Sherlock Holmes and Auditors Have in Common: Evaluating Evidence with Professional Skepticism
Read title. Hmmm. It’s quite elementary, my dear Watson, elementary.

10. A Healthy Dose of Skepticism
Eight-year old Ashley Bauer has Williams Syndrome
In an ideal world, you would likely trust whatever your senses told you, what you saw or heard would be true. But in the real world, information must be filtered with a healthy dose of skepticism, if you going to survive.
Take eight-year old Ashley Bauer, for example. She has a developmental disorder know as Williams Syndrome (anybody heard of this before?). When Ashley was born, she had a 1/7500 chance of getting this syndrome, which is caused by the failure of some two dozens genes. A prominent symptom of Williams Syndrome is an absolute zero sense of skepticism about anybody or anything. In Ashley’s case, she is highly sociable and develops an immediate and complete trust in strangers. Ashley especially likes to greet strangers at the park or in a shopping mall and give them a big hug and kiss. One can only imagine the challenges of raising a child like this in a world full of dangerous crooks and molesters.
Unfortunately, Ashley is not the only one who trusts others too much. Every day, many people, especially the elderly, get hoodwinked in all kinds of shenanigans. I’ve helped a few elderly who were tricked into giving out their bank information to a crook. It’s common to hear them say: “But that man was so nice, how could he do such a terrible thing!” My own 88-year old mother seems especially prone to rumors, no matter how many times I tell her to check with Snopes before forwarding. Indeed, even my vicious watch dog, an 8-pound Bichon, will lather a complete stranger with many wet kisses, not to mention a thief. I’m sad to say it, but in this day and age, we all need a healthy dose of skepticism.

11. Just Kidding!! The Gullibility Region of the Brain
(called in inferior supra-credulus)
Just Kidding!!
Researchers have recently discovered a part of the brain called the inferior supra-credulus, which is unusually active in people who believe in horoscopes. Fortunately, scientists have developed a vaccine which can stop sensationalism in its tracks or prevent people from buying things simply because of the pictures on the packaging. Just kidding. Did I get you, at least for a moment!! I wondered how gullible you would be.

12. Forensic Accountants/Auditors
Jorge Barcelo 2008 WWU business grad Manager of Deloitte’s LA Office of Forensic Services
Interestingly enough, there are many professionals who are paid to be skeptical: police detectives, crime scene technicians, forensic psychologists, medical examiners, and, as our topic today, forensic accountants or auditors. Did you know that accounting is a top major hired by the FBI, who employs some 1400 accountants? I don’t know if any of you have seen the TV series entitled White Collar, but the FBI agent, Peter, was an accountant and Neal (Matt Bomer) actually took acctg in college. I suppose this makes sense, because money is often at the heart of all crime. I love this picture here, showing the tools of a white collar detective – Ok, hands up everyone, whip out my calculator.
Forensic accounting or auditing is rapidly growing area. George (Jorge) Barcelo, 2008 WWU business grad, was a forensic auditor in the LA office of Deloitte, one of the largest accounting firms, with 185,000 employees. George gave a SofB Colloquium a while back about how his staff would sneak into a suspect business office in the middle of the night, and take pictures of certain documents and download all the computer files and communications. They not only gathered evidence about crime, but they also learned about all the illicit office romances going on.

13. Your Attitude Towards Clients: Which is it?1 2
INNOCENT UNTIL PROVEN GUILTY
Neither:
“The auditor neither assumes that management is dishonest nor assumes unquestioned honesty.”
On the scale of justice,
1 or 2; ask
Who Me?

14. Some Reasons for Concern
In cases where the SEC has brought fraud-related charges against auditors, insufficient professional skepticism was found in a majority of cases.
In a review of audit firms, the PCAOB found that auditors relied too heavily on what their clients told them and did not sufficiently test or challenge management’s forecasts, views, or representations.
Read boxes. 2 of 3 cases.
Of course, the SEC has no room to talk, given its own abject failure to detect Bernie Madoff’s $18B scam.

15. How is Professional Skepticism Acquired?
CAUGHT OR TAUGHT
So how is professional skepticism acquired? When we took our first breath in the delivery room, were we naturally infused with a healthy dose of skepticism? Or is skepticism something we learn over time?
In my mind, we clearly come prepackaged with a lot of tendencies, I know that I certainly have many of my father’s characteristics, for good and for bad.
At the same time, we learn to be skeptical from life’s experiences. I’ve noticed that college students tend to be somewhat idealistic (bless them) since many have had little exposure to real world shenanigans.

16. Characteristics of Skeptics Holmes and his sidekick Watson
Confident in ability to prove others wrong
Cynical about what others say
Attentive to details (even unrelated minutia)
Tests each hypothesis carefully
Doesn’t jump to conclusions
Persistent as a bloodhound
Researchers in psychology and auditing have found some common characteristics of skeptics. These characteristics are illustrated well by the English master detective, Sherlock Holmes. Long after the police make up their minds about a case, Holmes is still following clues like a persistent bloodhound. He studiously thinks things through from beginning to end before he draws a conclusion. He knows that even the most clever detective can be fooled if he does not carefully test his conclusions. Holmes has a side-kick, Watson, who invariably indulges in premature speculation. Holmes courteously listens to these conjectures with his characteristic look of skepticism, and either quashes them by pointing out a simple fact, or expresses doubt about the direction that Watson is going. Holmes is sensitive to the subtle nuances of the case, while Watson follows the most obvious clues in a straight-ahead manner, invariably skipping important steps in a rush to judgment. Says Holmes, It’s quite elementary my dear Watson, elementary.”
Here are the common characteristics of skeptics that researchers have found:
A skeptic will have the confidence to stand up to others and to prove them wrong
A skeptic will be cynical about human nature and the dubious claims of others
A skeptic will be attentive to even the minutest detail, such as a letter with no fold lines
A skeptic will subject each theory to a carefully testing of the evidence
A skeptic does not jump to conclusions (this vivacious bloodhound is not jumping to conclusions, but jumping for more evidence)
A skeptic has a tenacious determination to follow the evidence to its ultimate conclusion

17. Characteristics of Skeptics
Examination of Evidence
Questioning mind
Suspension of judgment
A persistent and perceptive search for knowledge
Understanding Evidence Providers
A desire and ability to understand people
Characteristics to Act on the Evidence
Self-confidence
Self-determination
Over time, researchers have refined the common characteristics of skeptics. In particular, the work of Kathy Hurd from the U. of Wisconsin, has been quite enlightening. Dr. Hurd has discovered six attributes of skeptics.
Examination of Evidence
Questioning mind: when an auditor is unlikely to accept information at face value but first requires proof or justification (Dr. Hurd calls this the BS Meter). My wife can attest how I like to scoff at the claims made by TV commercials.
Suspension of judgment: when an auditor is slow to a form an opinion and does not jump to conclusions easily (he wrestle’s with the evidence in a patient and methodical manner)
A persistent and perceptive search for knowledge: involves a curious, observant and relentless inquiry by auditors who enjoy following their noses, researching stuff, and getting downs to details. When the hound’s around, the facts are found.
Understanding Evidence Providers
A desire and ability to understand people: when an auditor can see behind the scenes due to an interpersonal understanding about why people behave in certain ways. Requires an intuitive comprehension about what motivates people.
Characteristics to Act on the Evidence
Self-confidence: auditors with higher levels of self-assurance will more likely act on questionable information and challenge the position of others. I guess you need a hint of arrogance to be skeptical.
Self-determination: independent-minded auditors will not accept other’s claims until proven and will not easily fall prey to “group think”. Skeptics need to have a rebellious independent streak, like a cat.
BTW: Do you think dogs or cats are more skeptical by nature?

18. A Survey to Test Skepticism
Over time, Dr. Hurd has developed a survey to measure innate levels of skepticism.
It has been completed by thousands of auditors in a variety of settings, with very consistent results
If you’d like to take the survey yourself, to see how your skepticism measures up, shoot me an and I’ll sent the survey to you. It takes about 5 min. to complete. There are 30 questions.
Some questions repeat themselves in a slightly different way in order to establish inter-question consistency

19. Score Range 30 - - - - - - - - - 130 - 140- - - - - - - - - 180
Low Avg High
TRUE OR FALSE:
Men usually score higher than women
Those with children score higher than those without
Divorced people score higher
New auditors have scores higher than experienced auditors
An audit manager’s emphasis on professional skepticism increases the skepticism of juniors
Auditors with more fraud-training have higher scores
As mentioned, Dr. Hurd has surveyed thousands of auditors over time in a variety of setting and the results have been pretty consistent. Let’s see how well you can guess what the results showed.
F -- Ladies often have a sixth sense of reading people. 9 times out of 10 when my wife says I don’t like the look of that guy over there, sure enough, he turns out to be rotten. Maybe skeptical attitude developed from all the girlie catfights in junior high.
T -- I once had a student when I taught at Union College named Manish Pandey, a Buddhist from Tibet. He believed that human nature was inherently good. I told him, just wait till he had kids. Children are like mosquitoes, the moment they stop buzzing you know their into something.
T -- I suppose when one goes through a divorce, faith and trust in fellow humans can’t help but be shaken.
T -- As a result of having little exposure to fraud, auditors over time become less skeptical as their careers advance. New auditors still have all those fraud cases they studied in school ringing in their ears, and they haven’t succumbed to the lulling routine of the job yet. In one study, accounting students attributed a decrease in bad debt expense to intentional misstatement whereas seasoned auditors thought it was due to an unintentional error.
T -- An audit manager’s emphasis on professional skepticism significantly increases the level of skepticism among junior auditors. An example of such emphasis in brainstorming sessions about fraud.
T – Good news. If you are, by nature, overly trusting, you can learn to be more skeptical, by nurture.
Surveyed 70 auditors at a conference in Atlanta to see if these conclusions still held true. Here are the results. Next slide.

20. Principles Underling a GAAS Audit 5/6
4. Auditor actions
To express an opinion, auditors obtain reasonable assurance about whether financial statements are free from error or fraud.
The auditor is unable to obtain absolute assurance due to:
Nature of financial reporting.
Nature of audit procedures.
Need to conduct audit within a reasonable period of time and cost.
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21. Principles Underling a GAAS Audit 6/6
5. Reporting the results of an audit—Express in a written report an opinion on findings (or statement that opinion cannot be expressed).
The opinion is on whether the financial statements are in accordance, in all material respects, with the applicable financial reporting framework.
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22. The 10 Generally Accepted Auditing Standards
General Standards
Standards of Field Work
Reporting Standards
NOTE: These standards only apply to audits conducted according to PCAOB standards. The preceding “Principles” replaced the 10 GAAS standards for nonpublic company audits.
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23. The Ten Commandments of Auditing (GAAS)
General
Reporting
Field Work
Training
Independence
Professional Care
GAAP
Consistent
Disclosure
Opinion
Planning
Internal Control
Evidence
More Detailed Statements: Statements on Auditing Standards (SASs)

24. Generally Accepted Auditing Standards (GAAS) --General Standards
T = Adequate technical training and proficiency
I = Independence in mental attitude is to be maintained
P = Due professional care is to be exercised 2 2

25. Generally Accepted Auditing Standards--Standards of Field Work
P = Auditor must adequately plan and properly supervise work
I = 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
E = Auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion 3 3

26. Generally Accepted Auditing Standards--Standards of Reporting
G = State whether the financial statements are presented in accordance with GAAP
C = Identify circumstances in which such principles have not been consistently applied
D = Informative disclosures are adequate unless otherwise stated in the report
O = 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 4 4

27. Terminology in Auditing Standards (Figure 2.3)
Responsibility
Level
Meaning
Words Used to Indicate Responsibility
Unconditional
Auditor must fulfill responsibilities
“Must”
“Shall” (PCAOB only)
“Is required” (PCAOB only)
Presumptively Mandatory
Auditor must comply with requirements unless auditor demonstrates and documents that alternative actions were sufficient to achieve the objectives of the standards
“Should”
Responsibility to Consider
Auditor should consider; whether the auditor complies with the requirements depends on the exercise of professional judgment in the circumstances
“May”
“Might”
“Could”
Other phrases indicating a responsibilities to consider
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28. The GAAS Hierarchy (Figure 2.3)
Principles come FIRST
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29. Auditor Responsibility for the Detection of Errors and Fraud
Errors/irregularities are unintentional misstatements, but fraud is intentional.
Not all errors/irregularities are equal (materiality and nature)
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, and 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.
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. 5 5

30. 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 (e.g. cheat on taxes payable). An audit obtains reasonable assurance of detecting these types of illegal acts.
Those with an indirect effect on financial statement amounts (e.g. Form I-9 failures):
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. 6 6

31. The Standard Auditors’ Report for Nonpublic Companies
TYPES
Unmodified (unqualified)
everything is ok or clean
Qualified
everything ok except for …
Adverse
Everything is bad (kicked off exchange)
Disclaimer
Wasn’t able to complete enough work to know 7 7

32. Model Audit Report
The Shareholders:
We have eyeballed the ball park figures on the statement of lies, retained deficits and source and application of executive petty cash. Our examination included a general rationalization of the accounting standards and such test of the accounting records and other unsupported entries as we considered unavoidable, subject to the constraints of our time budget and audit fee.
Our gut feeling is that these ball park figures are solid numbers and we are fit to roll with them, having been prepared in accordance with generally accepted corporate memos applied randomly on a basis consistent with that of producing a satisfactory profit.
Yours in haste,
Aurthor Unknown, CPA
Siberia
February 30, 2014

33. The Standard Auditors’ Report for Nonpublic Companies
Title
Addressee
Content Sections (4 paragraphs)
Introductory (“We have audited”)
Management’s responsibility
Auditor’s Responsibility
Opinion Paragraph
Signature (firm name; not partner)
City and state of office issuing audit report
Date
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34. The AICPA Standard Auditors’ Report--Introductory Paragraph
We have audited the accompanying consolidated balance sheets of ABC Company and its subsidiaries, as of December 31, 20X1 and 20X0, and the related consolidated statements of income, retained earnings, and cash flows for the years then ended.
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35. The AICPA Standard Auditors’ Report—Management’s Responsibility Paragraph
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
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36. The AICPA Standard Auditors’ Report: Auditors’ Responsibility Paragraphs
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
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37. The AICPA Standard Auditors’ Report--Opinion Paragraph
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ABC Company and its subsidiaries as of December 31, 20X1 and 20X0, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
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38. Advice from Arthur Anderson: Be careful what you say
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Enron Corp.: We have audited the accompanying consolidated balance sheet of Enron Corp. (an Oregon corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, These financial statements are the responsibility of Enron Corp.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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 Enron Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. As discussed in Note 18 to the consolidated financial statements, Enron Corp. and subsidiaries changed its method of accounting for costs of start-up activities and its method of accounting for certain contracts involved in energy trading and risk management activities in the first quarter of Arthur Andersen LLP Houston, Texas February 23, 2001
Advice from Arthur Anderson: Be careful what you say

39. GAAP Other sources of GAAP
FASB issues GAAP for nongovernmental entities
Authoritative: FASB Codification and Accounting Standards Updates
Nonauthoritative Pronouncements:
Widely recognized practices
FASB concepts Statements
AICPA Issues Papers
International Financial Reporting Standards
Various others
Other sources of GAAP
GASB--State and local governments
FASAB--Federal government
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40. 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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41. Public Company Audit Report
Title is “Report of Registered Independent Public Accounting Firm.”
Refers to standards of the PCAOB rather than GAAS.
Includes a paragraph that refers to report on internal control.
Somewhat more brief than the nonpublic company report.
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42. Public Company Audit Report
Auditor's Report
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Microsoft Corporation:
We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2012 and 2011, and the related consolidated statements of income, cash flows, and stockholders' equity for each of the three years in the period ended June 30, 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Microsoft Corporation and subsidiaries as of June 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2012, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2012, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 26, 2012, expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/   DELOITTE & TOUCHE LLP Seattle, Washington July 26, 2012

43. Applicability of SSAEs
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44. 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
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45. 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 money considerations do not override the quality of work performed.
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46. 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.
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47. 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.
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48. 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.
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49. 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:
Engagement performance.
Supervision responsibilities.
Review responsibilities.
Example: Design policies and procedures that address the tracking of progress of each engagement.
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50. 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.
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51. 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.
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52. Regulation of the Public Accounting Profession
Sarbanes-Oxeley (SOX) created the PCAOB to regulate CPA firms who did public company audit
Registration of public accounting firms that audit public companies
Conduct inspections of public company practice of registered public accounting firms
For a brief summary of SOX, click here.
Nonpublic Companies
AICPA & State Boards of Accountancy
Peer review for nonpublic practice segments
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53. 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
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54. 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
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55. PCAOB Inspections Conducted by PCAOB staff Focus Report
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
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56. 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
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57. International GAAP (iGAAP)
International Accounting Standards Board (IASB), based in England, creates International Financial Reporting Standards (IFRS).
IFRS has already been, or in the process of being, adopted by over a hundred countries, including the U.S.
SEC is hoping that IFRS will be followed by U.S. public companies soon but it remains to be seen how quickly this will happen. When IFRS are fully adopted, US GAAP for public companies will cease to exist. Early adoption of IFRS was allowed in the U.S. starting in 2009.
IFRS differ from U.S. GAAP in many ways. In general, IFRS are principle-based while U.S. GAAP is much more prescriptive. Click here for more details.
FASB will likely still produce GAAP for U.S. private companies, which will result in Big GAAP and Little GAAP.

58. Principle-based
Application-based

59. The world’s two big accounting standard bodies
Russell Golden
Chair of FASB
Hans Hoogervorst, Chair of IASB
FASB (Norwalk, Connecticut)
IASB (London ,England)

60. International Audit Report
Similar to AICPA’s nonpublic company 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
Likely be acceptable within five years in all countries involving multinational security offerings.
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