chapter 2 - class 2

7/31/2019 Chapter 2 - Class 2

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Welcome Back

Class #2 Agenda

Any Chapter 1 questions?

Chapter 2 Professional Standards

Chapter 3 Ethics

Quiz Individual

Quiz Group Solution


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Public Company Accounting Oversight Board Auditing, Attestation, Quality Control, Independence,

Ethical Standards for audits of public companies

American Institute of Certified PublicAccountants Auditing, Attestation, Quality Control, Independence

Ethical, Accounting and Review Standards forengagements involving nonpublic companies

State Boards of Accountancy License CPAs and CPA firms to practice in jurisdictions

Authority of Organizations


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Principles Underling a GAAS

Audit Purpose of an audit Premise of an audit

Personal responsibilities of the auditorAuditor actions in performing the audit

Reporting results of an audit


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Audit Purpose of an auditProvide 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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Audit Premise of an auditManagement (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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Audit Personal responsibility of the auditor

Appropriate competence and capabilities

to perform audit in accordance with

standards, including maintainingprofessional skepticism and exercising

professional judgment throughout the

audit. Professional skepticismA questioning mind

and a critical assessment of audit evidence.


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AuditAuditor actions in performing the audit

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.


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AuditReporting 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 financialreporting framework.


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The 10 Generally Accepted

Auditing StandardsGeneral Standards

Standards of Field Work

Reporting Standards

NOTE: These standards only apply toaudits conducted according to PCAOB

standards. The preceding Principlesreplaced the 10 GAAS standards fornonpublic company audits.


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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


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Standards--Standards of Field Work

Auditor must adequately plan andproperly supervise work

Auditor must obtain a sufficientunderstanding of entity, and itsenvironment, including internal controlto assess risk of material misstatementand to design further audit procedures

Auditor must obtain sufficientappropriate audit evidence to afford areasonable basis for the opinion


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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 byexpressing an opinion or stating that one cannot

be expressed, and the reason therefor


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Terminology in Auditing Standards

(Figure 2.3)

Responsibility

Level

Meaning Words Used toIndicate Responsibility

Unconditional

Responsibility

Auditor must fulfill responsibilities Must

Shall (PCAOB only)

Is required (PCAOB only)

PresumptivelyMandatory

Auditor must comply with requirements unless

auditor demonstrates and documents that

alternative actions were sufficient to achieve the

objectives of the standards

Should

Responsibility toConsider

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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The GAAS Hierarchy (Figure 2.3)


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Auditor Responsibility for the

Detection of Errors and Fraud (1 of 2)

Obtain information to assess the inherent risks andfraud risks

Information about the company and itsenvironment

Discussion among audit team members

Inquiries of management and others

Risk assessment analytical procedures, includingthose involving revenue

Assess the risk of errors and fraud that may cause thefinancial statements to contain a materialmisstatement.


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Auditor Responsibility for the

Detection of Errors and Fraud (2 of 2)

Based on that assessment, plan and perform theaudit to obtain reasonable assurance thatmaterial misstatements, whether caused byerrors or fraud, will be detected.

Exercise due care in planning, performing andevaluating the results of audit procedures, andthe proper degree of professional skepticism toachieve reasonable assurance that material

misstatements due to error or fraud will bedetected.


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Auditor Responsibility for Client

Identifying Noncompliance with Laws

Noncompliance with laws that could have a directand material effect on financial statement amountsand disclosures--same as for errors and fraud. Anaudit obtains reasonable assurance of detectingnoncompliance with these laws.

Other Laws (no direct effect on financial statementamounts): Specific procedures:

Inquire of management as to compliance

Inspect correspondence with licensing or regulatory authorities

Be aware of possible occurrence.

If information comes to the auditors attention, apply auditprocedures directed at determining whethernoncompliance with a law has occurred. An audit doesnot provide assurance that noncompliance with theselaws will be detected.


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Group Case


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The Standard Auditors Report for

Nonpublic Companies

Title

Addressee

Content Sections (paragraphs) Introductory (We have audited) Managements responsibility

Auditors Responsibility

Opinion Paragraph

Signature (firm name) City and state of office issuing audit report

Date


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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.

The AICPA Standard Auditors

Report--Introductory Paragraph


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Management is responsible for the preparation andfair presentation of these consolidated financialstatements in accordance with accounting principlesgenerally accepted in the United States of America;this includes the design, implementation, and

maintenance of internal control relevant to thepreparation and fair presentation of consolidatedfinancial statements that are free from materialmisstatement, whether due to fraud or error.

The AICPA Standard Auditors Report

Managements Responsibility Paragraph


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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 anddisclosures 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 includesevaluating 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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In our opinion, the consolidated financialstatements referred to above present fairly, inall material respects, the financial position of

ABC Company and its subsidiaries as of

December 31, 20X1 and 20X0, and theresults of their operations and their cash flowsfor the years then ended in accordance withaccounting principles generally accepted in

the United States of America.

The AICPA Standard Auditors

Report--Opinion Paragraph


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Other Types of Auditors Reports

Standard unmodified report (unqualified per PCAOB standards)

Financial statements follow GAAP and auditor does not add additionalcommentary 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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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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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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QC Element 1: Leadership responsibilities

for quality within the firm

Firms internal culture recognizes that quality isessential 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 responsibilitiesso that commercial considerations do not

override the quality of work performed.


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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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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 aggressiveaccounting and internal control over financial reporting.


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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 thecircumstances.

Example: Design effective recruitment processes and

procedures to help the firm select individuals meeting

minimum academic requirements established by thefirm, and maturity, integrity and leadership.


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QC Element 5: Engagement

Performance

Firms engagements are consistently performed in

accordance with professional standards and regulatory

and legal requirements, with policies and procedures

addressing:

1. Engagement performance.

2. Supervision responsibilities.

3. Review responsibilities.

Example: Design policies and procedures that address

the tracking of progress of each engagement.


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QC Element 6: Monitoring

Firms 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 firms quality

control policies and procedures.


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Quality Control Procedures

Depend on size of firm, number of offices

and nature of firms 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 responsibilitiesto clients and public.

chapter 2 - class 2

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