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2-1 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter 2 Professional Standards “ All my growth and development led me to believe that if you really do the right thing, and if you play by the rules, and if you ’ ve got good enough, solid judgment and common sense, that you ’ re going to be able to do whatever you want to do with your life …. ” – Barbara Jordan, first African-American woman from the South ever elected to the U.S. House of Representatives (1936-1996)
2-2 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. Chapter 2 Objectives 1.Name the various practice standards for internal, governmental, independent auditors. 2.List and explain the 10 AICPA generally accepted auditing standards (GAAS). 3.Explain audit evidence in terms of its competence and persuasiveness. 4.Describe the standard unqualified audit report in terms of its communication of audit standards and other messages. 5.List the reasons for having general attestation and assurance standards and explain how attestation standards differ from generally accepted auditing standards. 6.List and explain important quality control standards for CPA firms.
2-3 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. Practice Standards Generally Accepted Auditing Standards Measures of the quality of the AUDITOR'S PERFORMANCE Same from audit to audit STANDARDS vs. PROCEDURES Standards for Attestation and Assurance Services Quality Control Standards Others (Not discussed in this chapter) International Standards on Auditing (ISAs) Generally Accepted Governmental Auditing Standards (GAGASs) Statements of Internal Audit Standards (SIASs)
2-4 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. Exhibit 2-1 Generally Accepted Auditing Standards General Standards Standards of Fieldwork Reporting Standards
2-5 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. Engagement Overview and GAAS OBTAIN (OR RETAIN) CLIENT INTERNAL CONTROL EVALUATION SUBSTANTIVE PROCEDURES ISSUE REPORT ENGAGEMENT PLANNING General Standards Standards of Fieldwork Reporting Standards
2-6 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. General Standards The General Standards affect all phases of the audit, including client acceptance or retention. 1.The audit is to 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.
2-7 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. Standards of Fieldwork The Fieldwork Standards guide the planning, internal control evaluation, and the evidence gathering phases of the engagement. 1.The work is to be adequately planned, and assistants, if any, are to be properly supervised. 2.A sufficient understanding of the entity and its environment, including its internal control, is to be obtained to assess the risk of material misstatement of the financial statements due to error or fraud, and to design the nature, timing, and extent of further audit procedures. 3.Sufficient, competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.
2-8 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. Evidence The auditor must "obtain sufficient, competent evidential matter" to support opinion. –Sufficient Evidence Enough to support opinion Persuasive enough to convince another person (judge, jury?) Essentially a matter of professional judgment –Competent Evidence Valid, relevant, reliable.
2-9 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. Characteristics of Competent 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
2-10 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. 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.
2-11 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. Independent Auditor’s Report (PCAOB 1) 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 31,2004 and 2003, and the related statements of operations, stockholders’ equity, 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, 2004 and 2003, 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. Smith & Smith, CPAs February 22, 2005 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
2-12 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. 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.
2-13 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. 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)
2-14 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. 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
2-15 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. The Public Company Accounting Oversight Board 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.
2-16 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. 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 SAS’s) will function as the PCAOB’s Interim Professional Auditing Standards for audits of public companies.
2-17 McGraw-Hill/Irwin ©2005 by the McGraw-Hill Companies, Inc. All rights reserved. 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.
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