1. Professional Standards
Chapter 2
Professional Standards 1

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

3. 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 2

4. Generally Accepted Auditing Standards--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 3 3

5. Generally Accepted Auditing Standards--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 4 4

6. Terminology in Auditing Standards (Figure 2.2)
Responsibility
Level
Meaning
Words Used 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”
Responsibility 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 indicating a responsibilities to consider

7. The GAAS Hierarchy (Figure 2.3)
Category
Status
Audit Guidance
1. Standards
Auditors should be prepared to justify departures from these standards.
The 10 GAAS
SASs
Other standards for PCAOB, govt. audits, etc.
2. Interpretative Publications
Recommendations on the application of the SASs. If not followed, the auditors should be prepared to explain how they complied with the SAS provisions addressed.
Appendices to SASs
Interpretation of SASs
Auditing guidance in AICPA
Audit and accounting Guides
AICPA auditing Statements of
Position
3. Other Auditing Publications
No authoritative status, but may help the auditor understand and apply the standards
Auditing articles
Continuing education
programs
Textbooks
Guidebooks
Audit programs
Checklists

8. Auditor Responsibility for the Detection of Errors and Fraud
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.
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 SAS No. 99.
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

9. 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. 6 6

10. The Standard Auditors’ Report for Nonpublic Companies
Title
Addressee
Content
Introductory Paragraph
Scope Paragraph
Opinion Paragraph
Signature
Date 7 7

11. The Standard Auditors’ Report--Introductory Paragraph
We have audited the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year 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 audit. 8 8

12. The Standard Auditors’ Report— Scope Paragraph
We conducted our audit 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 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. 9 9

13. The Standard Auditors’ Report--Opinion Paragraph
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. 10 10

14. 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 11 11

15. Public Company Audit Report
Title is “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

16. Applicability of SSAEs

17. Elements of Quality Control
Independence, Integrity, and Objectivity
Personnel Management
Acceptance and Continuance of Clients and Engagements
Engagement Performance
Monitoring 13 13

18. Regulation of the Public Accounting Profession
Public Companies
Public Company Accounting Oversight Board & the SEC
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

19. 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 14 14