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Chapter 2

Professional Standards

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1. Basis of Auditing Objectives of auditing Responsible parties involved in

auditing Similarities with other disciplines Limitations of auditing

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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- )

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2. Practice Standards (continued)

Sources of other Standards Statements on Stds for Attestation

Engagements — SSAEs — AT Statements on Stds for Accounting and Review

Services — SSARSs — AR Consulting Standards — CS Quality Control Standards — QC Peer Review Standards — PR Tax Practice Standards — TX

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2. Practice Standards (continued)

Sources Personal Financial Planning Standards —

PFP Code of Ethics Standards — ET AICPA Bylaws Standards — BL Continuing Education Standards — CPE

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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 Ethics and Independence Standards – IT Quality Control Standards – QC

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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

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2. Practice Standards - Terminology in auditing standards

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ResponsibilityLevel

Meaning Words to Indicate Responsibility

UnconditionalResponsibility

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

2. Practice Standards – The GAAS Hierarchy

Category Status Audit Guidance1. Standards Auditors should be prepared to justify

departures from these standards.

GAAS principles (10 stds/prin) SASs Other standards from PCAOB, GAO, SEC

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

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2. Practice Standards (continued)

ClientPublic Entities

(Issuers)

Private Entities(Nonissuers)

GovernmentalEntities

ForeignEntities

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 (ASs)

Statements on Auditing Standards (SASs)

Government Auditing Standards (The “Yellow Book”)

International Standards on Auditing (ISAs)

Summary of Practice Standards

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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

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Comparison of AICPA GAAS to Principles: Responsibilities

3. GAAS and Principles

General Standards Responsibilities Principle

1. 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

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Comparison of AICPA GAAS to Principles: Performance

3. GAAS and Principles

Standards of Field Work Performance Principle

1. Planning and supervision

2. Understanding of entity and environment to assess risk of material misstatement

3. Obtain sufficient appropriate evidence

To obtain reasonable assurance:

•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

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Comparison of AICPA GAAS to Principles: Reporting

3. GAAS and Principles

Standards of Reporting Reporting Principle

1. Financial statements in accordance with GAAP

2. GAAP applied consistently (only report if not consistent)

3. Adequacy of disclosures (only report if not adequate)

4. Express or disclaim an opinion

• Express an opinion or state that an opinion cannot be expressed

• Opinion is based on conformity of financial statements with applicable financial

reporting framework

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4. Evidence SAS 122 3rd Standard of Field Work:

The auditor must obtain sufficient appropriate audit evidence by performing audit procedures…

Definition All the information used by the auditor in

arriving at the conclusions on which the audit opinion is based

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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

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4. Evidence (continued) Relationship between assertions

and evidence Relevance of assertions

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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

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4. Evidence (continued) Types of Evidence (continued)

Physical evidence Mathematical evidence Oral evidence Confirmations Written representations Analytical procedures Electronic evidence

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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

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5. Attestation Standards SSAEs apply to

forecasts and projections pro forma information internal control compliance with laws, regs, contracts MD & A agreed-upon procedures

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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

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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

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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

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Review Questions for Discussion Chapter 2

2.12.22.72.152.16

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2.19

2.21

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