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2-1 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 2 Professional Standards: “The Rules of the Road”
2-2 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Practice Standards Generally Accepted Auditing Standards 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)
2-3 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Generally Accepted Auditing Standards Measures of the quality of the AUDITOR'S PERFORMANCE Same from audit to audit STANDARDS vs. PROCEDURES
2-4 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. General Standards The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. Due professional care is to be exercised in the performance of the audit and the preparation of the report.
2-5 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. STANDARDS OF FIELDWORK The work is to be adequately planned, and assistants, if any, are to be properly supervised. A sufficient understanding of the client’s internal controls is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed. 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.
2-6 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. REPORTING STANDARDS The report shall state whether the financial statements are presented in accordance with GAAP. 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. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. 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.
2-7 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Independent Auditor’s Report Independent Auditor's Report To the Board of Directors and Stockholders Alpha.Com, Inc. We have audited the accompanying balance sheets of Alpha.Com, Inc. as of December 31,2002 and 2001, and the related statements of income, retained earnings, 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 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 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 Alpha.Com, Inc. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Anderson, Olds, and Watershed, CPAs, LLC February 22, 2003 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
2-8 McGraw-Hill/Irwin ©2002 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 ©2002 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 ©2002 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)
2-11 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Attestation Engagements Financial –Supplementary financial statistics –Pro forma financial information –Financial forecasts and projections Non-financial –Compliance with contractual requirements –Descriptions of internal control systems –Inventory quantities and locations
2-12 McGraw-Hill/Irwin ©2002 by The McGraw-Hill Companies, Inc. All rights reserved. Quality Control Standards for CPA firms Quality Control Standards –Independence, Integrity, Objectivity –Personnel Management –Acceptance and Continuance of Clients –Engagement Performance –Monitoring Guides the performance of firm-wide audit and attestation practice
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