Professional Standards Chapter 2 Professional Standards ACCT-4080 Chapter 2

1. Basis of Auditing Objectives of auditing Responsible parties involved in auditing Similarities with other disciplines Limitations of auditing ACCT-4080 Chapter 2

2. Practice Standards AICPA standards Citation Methods SAS Number AU Section Number (AU-C) Professional Standards, Vol. I and II (and III) Sources of Auditing Standards Statements on Auditing Procedures — SAPs (1-54) Statements on Auditing Stds — SASs — AU (1-131) ACCT-4080 Chapter 2

2. Practice Standards (continued) Sources of other Standards Statements on Stds for Attestation Engagements — SSAEs — AT-C Statements on Stds for Accounting and Review Services — SSARSs — AR-C Consulting Standards — CS Quality Control Standards — QC Peer Review Standards — PR Tax Practice Standards — TX ACCT-4080 Chapter 2

Practice Standards (continued) Sources Personal Financial Planning Standards — PFP Code of Ethics Standards — ET AICPA Bylaws Standards — BL Continuing Education Standards — CPE ACCT-4080 Chapter 2

Practice Standards (continued) Clarity Project Purpose: to make standards easier to read, understand, and apply to converge US GAAS with ISAs issued by IAASB Project started in 2004 AU sections renumbered to ISA numbers New format for standards introduction, objective, definitions, requirements, application and other explanatory material Effective for audits of financial statements for years ending on or after December 15, 2012 Primarily was issued as one SAS – SAS 122 SSARS Clarity Project completed (SSARS 21) – effective December 2015 Attestation Clarity Project just completed (SSAE 21) – effective May 2017 ACCT-4080 Chapter 2

Practice Standards (continued) International Standards International Auditing and Assurance Standards Board — IAASB (Part of IFAC) International Auditing Standards (ISAs) International Standards on Assurance Engagement (ISAE) IFAC Code of Ethics (International Financial Reporting Standards — IASB) PCAOB Standards 2003 adopted 101 existing SASs Auditing Standards – AS Reorganized standards Ethics and Independence Standards – IT Quality Control Standards – QC ACCT-4080 Chapter 2

2. Practice Standards - Terminology in auditing standards Responsibility Level Meaning Words to Indicate Responsibility Unconditional Auditor must fulfill responsibilities “Must” “Is required” “Shall” (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” to Consider Auditor should consider; whether the auditor complies with the requirements depends on the exercise of professional judgment in the circumstances “Might” “Could” Other phrases ACCT-4080 Chapter 2

2. Practice Standards (continued) Summary of Practice Standards Client Public Entities (Issuers) Private Entities (Nonissuers) Governmental Entities Foreign 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 (AS) Statements on Auditing Standards (SASs) (AU-C) Government Auditing Standards (The “Yellow Book”) International Standards on Auditing (ISAs) ACCT-4080 Chapter 2

3. GAAS and Principles General standards (responsibilities principle) adequate technical training independence due professional care Fieldwork standards (performance principle) adequately planned & supervised internal control sufficient appropriate evidence Reporting standards (reporting principle) GAAP consistency adequate disclosure opinion ACCT-4080 Chapter 2

Responsibilities Principle 3. GAAS and Principles Comparison of AICPA GAAS to Principles: Responsibilities Addresses whether auditor can accept engagement General Standards Responsibilities Principle Training and proficiency 2. Independence in mental attitude 3. Due professional care Auditors are responsible for: Competence and capabilities Ethical requirements Professional skepticism and professional judgment ACCT-4080 Chapter 2

Standards of Field Work Performance Principle 3. GAAS and Principles Comparison of AICPA GAAS to Principles: Performance Provides guidance on conducting the audit Standards of Field Work Performance Principle Planning and supervision 2. Understanding of entity and its environment, including its internal control, sufficient to assess risk of material misstatement 3. Obtain sufficient appropriate evidence To obtain reasonable assurance the auditor must: Plan work and supervise assistants Determine and apply appropriate materiality levels Identify and assess risks of material misstatement based on understanding of business and internal control Obtain sufficient appropriate evidence ACCT-4080 Chapter 2

Standards of Reporting 3. GAAS and Principles Comparison of AICPA GAAS to Principles: Reporting Provides guidance on issuing audit report Standards of Reporting Reporting Principle Financial statements in accordance with GAAP GAAP applied consistently (only report if not consistent) Adequacy of disclosures (only report if not adequate) Express or disclaim an opinion The report: Must express an opinion or state that an opinion cannot be expressed Opinion must be based on conformity of the financial statements with the applicable financial reporting framework ACCT-4080 Chapter 2

4. Evidence SAS 122 Performance Principle: The auditor must obtain sufficient appropriate evidence Definition of evidence All the information used by the auditor in arriving at the conclusions on which the audit opinion is based ACCT-4080 Chapter 2

4. Evidence (continued) Sufficiency and Appropriateness Interrelated Sufficiency – quantity (affected by RMM and quality of evidence) Appropriateness – quality (affected by its relevance and reliability) Limitations (cost, persuasiveness) Generalizations about reliability Source – knowledge, location, reliability of ICS, direct/indirect, directly by auditor Nature – documentary form, originals, reliability of form (e.g., ability to be altered, certainty of sender), document experts ACCT-4080 Chapter 2

4. Evidence (continued) Types of Evidence Underlying Accounting Data journals, general and subsidiary ledgers, accounting manuals, work sheets, spreadsheets, cost allocations, reconciliations, etc. Corroborating Information auditor’s direct personal knowledge documentary evidence created outside and transmitted directly to auditor created outside and held by client created by and held by client client representations ACCT-4080 Chapter 2

4. Evidence (continued) Types of Evidence (continued) Physical evidence Mathematical evidence Oral evidence Confirmations Written representations Analytical procedures Electronic evidence ACCT-4080 Chapter 2

5. Attestation Standards Apply to attest services affirm to be genuine when a CPA expresses a conclusion about the reliability of subject matter or an assertion that is the responsibility of another party includes financial and nonfinancial services ACCT-4080 Chapter 2

5. Attestation Standards SSAEs apply to forecasts and projections pro forma information internal control compliance with laws, regs, contracts MD & A agreed-upon procedures ACCT-4080 Chapter 2

6. Quality Control for Firms AICPA National Peer Review Committee (formerly known as the Center for Public Company Audit Firms) Private Companies Practice Section (PCPS) PCAOB registration PCAOB inspections State level peer review Quality Enhancement Program in Nebraska ACCT-4080 Chapter 2

6. Quality Control for Firms An audit firm must establish a system of QC to provide it reasonable assurance that the firm will comply with professional, regulatory, and legal requirements QC standards apply to all firms and all services provided Specific QC policies and procedures vary by firm size ACCT-4080 Chapter 2

6. Quality Control for Firms AICPA Elements of Quality Control leadership responsibilities ethical requirements acceptance and continuance of clients and engagements human resources engagement performance monitoring ACCT-4080 Chapter 2

Review Questions for Discussion Chapter 2 2.1 2.3 2.7 2.8 2.12 2.15 2.16 2.17 2.19 2.21 2.25 ACCT-4080 Chapter 2