ACC 450 CHAPTER 2

Pervasive

(especially of an unwelcome influence or physical effect) spreading widely throughout an area or a group of people.

Fraudulent Financial Reporting

-Intentional misstatements in financial statements. -Carries a median loss of $2 million. This is 13 times greater than the median loss for misappropriation of assets. -The CEO or CFO is involved in a large majority of cases. -The most common fraud techniques are improper revenue recognition, overstatement of existing assets, and capitalization of expenses.

Standard Unmodified Opinion (Unqualified is term PCAOB uses):

A "clean opinion" that may be issued when (1) financial statements presented in conformity with GAAP, (2) audit was performed in accordance with GAAS, including no significant scope limitations, and (3) when no conditions resulting in emphasis of matter or other matter paragraphs exist.

The public accounting firm must observe generally accepted auditing standards (or, if applicable, PCAOB Standards) in order to merit confidence in its opinion. The result of following these procedures is an audit report that includes a reasonable, but not absolute, assurance that the financial statements do not contain material misstatements due to errors or fraud. Reasonable assurance implies that there is a low level of risk remaining that the auditor expresses an opinion that the financial statements are properly stated when they are not. Reasonable and not absolute assurance is necessary due to (1) the nature of financial reporting (e.g., the necessary use of judgment), (2) the nature of audit procedures (e.g., they often do not provide absolutely conclusive evidence), and (3) the need to conduct an audit within a reasonable period of time at a reasonable cost. Accordingly, the auditor expresses an opinion on the financial statements, not a statement of fact.

A CPA firm does not guarantee the financial soundness of a client when it renders an opinion on financial statements, nor does the CPA firm guarantee the absolute accuracy of the statements. Yet the CPA firm's opinion is respected and accepted. What is expected of the CPA firm in order to merit such confidence?

International Auditing and Assurance Standards Board (IAASB)

A committee of the International Federation of Accountants, established to issue standards on auditing and reporting practices to improve the degree of uniformity of auditing practices and related services throughout the world.

Unmodified Opinions (with emphasis of matter paragraphs) example: going concern opinions

A paragraph is included that refers to a matter appropriately presented or disclosed in the financial statements

International Federation of Accountants (IFAC)

A worldwide organization of national accounting bodies established to help foster a coordinated worldwide accounting profession with harmonized standards.

International Auditing Standards

A. Issued as statements referred to as International Standards of Auditing (ISAs). B. Developed by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC).

last; 6

AICPA: Audit Report of NonPublic Company. Opinion paragraph is __________ Standard report is ______ paragraphs

peer reviews

AICPA: CPA firms perform ___________ of selected firms.

Audit of Financial Statements

AICPA: What is the authority over Audits of Nonpublic Companies?

The issuance of a standard audit report tells us that the audit was performed in accordance with generally accepted auditing standards and, accordingly, it was planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement due to error or fraud. The audit included performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. These procedures were determined based on the auditors' judgment, including their assessment of the risks of material misstatements of the financial statements. The auditors also evaluated the appropriateness of accounting policies used by the client, the reasonableness of significant accounting estimates, and the overall presentation of the financial statements.

Alan Weston, CPA, completed an audit of Kirsten Manufacturing Company and issued a standard audit report. What does this tell us about the extent of the auditing procedures included in the audit?

Standard Reports

An audit report with (1) an unmodified (unqualified) opinion and (2) no additional matters emphasized (e.g a change in accounting principles) beyond the information required in all audit reports.

International Accounting Standards Board (IASB)

An independent, privately funded accounting standard setter that is committed to developing a single set of high-quality, understandable, and enforceable global accounting standards. Develop the International Financial Reporting Standards (IFRS)

presumptively mandatory responsibility

Auditor must comply with requirement in all cases in which the requirement is relevant, except in rare circumstances when the auditor makes a judgment that it is necessary to depart from the standard.

Unconditional Responsibility

Auditor must comply with responsibilities in all cases where such a requirement is relevant.

Responsibility to Consider (this third level of responsibility is only established in PCAOB documents)

Auditor should consider: whether auditor follows depends on exercise of professional judgment in the circumstances

The international audit report differs from one based on PCAOB reporting standards in the following ways: (1) The international report has an expanded description of management's responsibility for the financial statements and internal controls. (2)The report also includes an expanded explanation of the audit process, which includes a description of the auditors' responsibility for internal control. (3)The international report allows the accountants the following reporting options: a. Instead of indicating that the financial statements "present fairly, in all material respects," the accountants may substitute the phrase "give a true and fair view." b. The report may indicate that the financial statements comply with the country's relevant statutes or laws. c. The report may be signed using the personal name of the auditor, the firm, or both. (4) The city in which the auditors maintain an office is required to be included in the international report.

Comment on the following: The SEC's acceptance of the use of International Financial Reporting Standards in filings replaces use of PCAOB Auditing Standards for audits of international companies.

reported amounts and disclosures; fines, litigation or other consequences.

Considering Compliance with Laws and Regulations in an Audit. Laws and regulations types a) The provisions of some laws have direct effect on the financial statements in that they determine the __________________________ in the company's financial statements (e.g., tax law violations). b) Other laws are to be complied with, but do not have a direct effect on the financial statements (e.g., occupational safety and health, equal employment opportunity). Noncompliance with laws of this sort may result in ________________

Among the more common situations that prevent the issuance of an unmodified opinion upon completion of an audit are the following: (1) Certain necessary auditing procedures were omitted at the request of the client, or for reasons beyond the control of the client or the auditors. (2) The statements contained misstatements (or omissions) and the client refuses to change them.

Davis & Co., Certified Public Accountants, after completing an audit of Samson Company, decided that it would be unable to issue an unmodified opinion. What circumstances might explain this decision?

A system review involves peer reviewers' study and appraisal of a CPA firm's system of quality control to perform accounting and auditing work. A systems review includes determining whether the CPA firm's system of quality control for its accounting and auditing practice (nonpublic clients) is designed and complied with to provide the CPA firm with reasonable assurance of performing and reporting in conformity with applicable standards, including the quality control standards. An engagement review is a type of peer review in which the peer reviewer selects a sample of a CPA firm's actual accounting work, including accounting reports issued and documentation prepared by the CPA firm. This form of peer review is only available for CPA firms that do not perform audits, but do perform accounting work, including reviews and compilations. The objective of an engagement review is to evaluate whether the CPA firm's reports are issued and procedures performed appropriately in accordance with applicable professional standards.

Distinguish between the system review and the engagement review types of peer reviews.

No. The attestation standards are meant to provide a general framework for the overall attestation function and do not supersede the generally accepted auditing standard that were developed for audits of annual historical financial statements. As a practical matter, the attestation standards are most directly relevant to attest engagements that are not covered by specific authoritative standards, such as attesting to attributes of computer software.

Do the AICPA attestation standards supersede any of the AICPA generally accepted auditing standards? Explain.

The AICPA's Statement on Quality Control Standards identify six "elements" (areas) in which the Institute feels that quality control procedures are appropriate, but it does not require any specific quality control procedures. The Statement recognizes that specific procedures will vary among firms, depending upon the size of the firm, the number of offices, and the nature of the firm's practice.

Do the AICPA's Statements on Quality Control Standards require every CPA firm to implement similar quality control procedures? Explain.

AICPA

Establishes standards for nonpublic companies

PCAOB

Establishes standards for public companies

I do not agree. An audit from an independent accounting firm should be performed to check for errors in the financial statements.

Evaluate the following quotation: "If a CPA firm completes a nonpublic company audit of Adam Company's financial statements following AICPA generally accepted auditing standards and is satisfied with the results of the audit, an unmodified audit report may be issued. On the other hand, if no audit is performed of the current year's financial statements, but the CPA firm has performed satisfactory audits in prior years, has confidence in the management of the company, and makes a quick review of the current year's financial statements, a qualified report may be issued." Do you agree? Give reasons to support your answer.

a. Engagement performance. The objective of quality control procedures in this area is to provide assurance that work performed is in accordance with professional standards and regulatory and legal requirements, with policies and procedures addressing: (1) engagement performance, (2) supervision responsibilities, and (3) review responsibilities. b. Human resources. The objective of quality control procedures in this area is to provide assurance that the firm has personnel with the capabilities, competence, and commitment to ethical principles to: (1) perform its engagements in accordance with professional standards and regulatory and legal requirements, and (2) enable the firm to issue reports that are appropriate in the circumstances. c. Monitoring. The objective of quality control procedures in this area is to determine that the policies and procedures established for each of the elements are suitably designed and effectively applied.

Explain the basic objective of establishing quality control procedures in the following areas. a)Engagement performance. b) Human resources. c) Monitoring.

Part 1: Engagement level goes on part 1 report and gets released to the public all the time. Very common. Part 2: Issues that arise in more quality control systems. If issues are found, they are given a certain amount of time that is determined by the PCAOB to correct the issue and the public is not made aware. Stays between the firm and the PCAOB. Part 2 is rare, but incredibly important.

How does the PCAOB Report their findings in PCAOB inspections?

Regardless of how careful and professional an audit of financial statements the public accounting firm has made, it cannot guarantee their correctness. The statements themselves include a variety of estimates; for example, the estimate of the allowance for uncollectible accounts and the choice of depreciation rates. Also, the auditors rely on a program of tests rather than on verifying every transaction. Some errors, therefore, may go undetected. The audit gives the auditors a firm basis for expressing an informed opinion on the financial statements, but no more than that.

If a CPA firm has performed a thorough professional audit of a client's financial statements, should it not be able to issue a report dealing with facts rather than the mere expression of an opinion? Explain.

Unmodified

In terms of the 3 types of audit opinions (standard unmodified, unmodified, and modified), the SEC only accepts ______________

Professional skepticism is being alert to financial statements and have a questioning mind.

In the context of an audit of financial statements, explain what is meant by professional skepticism.

International Auditing and Assurance Standards Board (IAASB)

International auditing standards are developed by the _________________________ of the International Federation of Accountants (IFAC)

Valuation of financial instruments. Revenue recognition related to long-term contracts. Goodwill valuation. Matters related to acquisition of a business

International standards provide the following examples of key audit matters: (4)

auditor's

It is the ___________ responsibility to catch misstatements whether due to error or fraud

Qualified Opinion: Due to material misstatement OR scope limitation. is NOT pervasive. Adverse Opinion: Due to material misstatement. IS pervasive. Disclaimer of opinion: Due to scope limitation. IS pervasive.

Modified Opinions: What are the main differences between qualified opinions, adverse opinions, and disclaimers of opinions?

adverse opinion

Modified Opinions: When an auditor find a material misstatement and is pervasive, we issue a(n) ___________

disclaimer of opinion

Modified Opinions: When there is scope limitation and is pervasive, we issue a(n) __________

Plan Audit -> Obtain Understanding of client and its environment including internal controls -> Assess risk of misstatements -> Design further procedures -> Perform tests of controls OR perform substantive procedures -> Complete the audit -> Issue audit report

OVERVIEW OF A FINANCIAL STATEMENT AUDIT

peer reviews

PCAOB Inspections: Firms are still required to have ___________.

three

PCAOB Inspections: Firms performing audits of fewer than 100 public companies are required to have inspections every __________ years.

annually

PCAOB Inspections: Firms performing audits of over 100 public companies are required to have inspections ___________.

100 (Guess how many are included here?) 10

PCAOB Inspections: Firms performing audits of over _____ public companies are required to have inspections annually. (Guess how many are included here?)

first; 4

PCAOB: Audit Report of Public Company. Opinion paragraph is __________ Standard report is ______ paragraphs

inspections

PCAOB: Performs ____________ to compliance with SOX, PCAOB, SEC requirements, etc.

Audit of Financial Statements Audit of the Effectiveness of Internal Controls

PCAOB: What is the authority over Integrated Audits of a public company?

ineffective The peer doing the review almost never found anything wrong, and if they did, the repercussions werent very serious. Dont have teeth.

Peer Reviews: Critics argue that this process is ___________ because CPA firm can choose their peer reviewers and the system is generally nonpunitive (Fogarty 1996; Defond 2010). 97% of peer reviews result in unmodified opinions (Lennox & Pittman 2009).

The management of Pike Company is primarily responsible for the fairness of the company's financial statements. The retention of certified public accountants to perform an audit and express an opinion on the statements does not relieve management of its obligation to give an honest and complete accounting of its conduct of corporate affairs.

Pike Company has had an annual audit performed by the same firm of certified public accountants for many years. The financial statements and copies of the audit report are distributed Page 62to stockholders each year shortly after completion of the audit. Who is primarily responsible for the fairness of these financial statements? Explain.

TOPIC

Public Company Accounting Oversight Board (established in 2002 by Sarbanes-Oxley Act) has authority to issue STANDARDS (similar to the SASs) for public companies. Thus far, the PCAOB has adopted all of the SASs (issued by the AICPA) (called Interim Standards) and has issued some of their own standards (AS No. 1 - AS No. 18) that are applicable for auditors and audits of public companies. On December 31, 2016, the PCAOB reorganized its standards. The PCAOB standards are now codified by _________.

1) Auditor finds a material misstatement 2) Scope limitation; auditor isn't able to audit a part/ section to their satisfaction

Qualified Opinions can result from 2 things:

1. Leadership responsibilities for quality with the firm ("tone at the top") 2. Relevant ethical requirements 3. Acceptance and continuance of client relationships and specific engagements. 4. Human resources 5. Engagement performance 6. Monitoring

Quality Control Standards: Issued by the Auditing Standards Board, these standards are meant to help assure that CPA firms follow professional standards on every engagement: There are six elements:

low

Reasonable assurance is achieved when audit risk is at an acceptably _____ level

Because they used to be lawyers and audit partners, etc (which both already pay a lot of money), so the high salary incentivizes the position so they'll want it.

Salary Information: PCAOB Board Members $515,000 President of the US $400,000 Vice President $215,000 Supreme Court Justice $203,000 Federal Reserve Chairman $186,600 Why does the PCAOB board members make so much more money?

approved by SEC

Securities and Exchange Commission Pronouncements: Various types of pronouncements which affect CPAs. PCAOB standards do not become effective until ________________. Also, it is the SEC which gave authority to promulgate accounting standards to the FASB.

(1) financial statements presented in conformity with GAAP, (2) audit was performed in accordance with GAAS, including no significant scope limitations, and (3) when no conditions resulting in emphasis of matter or other matter paragraphs exist.

Standard Unmodified Opinion (Unqualified is term PCAOB uses): A "clean opinion" that may be issued when ....... (3 things)

Unqualified

Standard Unmodified Opinions: ________________ is a term PCAOB uses

In the opinion paragraph of the auditor's standard report the auditors make representations as to the following: (1) The fairness of the financial statements, in all material respects. (2) Application of generally accepted accounting principles. (3) By implication consistent application of generally accepted accounting principles. (4) By implication adequate disclosure.

State the principal assertions made by the auditors in the "Opinion on the Financial Statements" section of the PCAOB auditors' standard report. Assume that the auditors issued a separate report on internal control.

Auditing Standards (SAS)

Statements on ___________________ (_____) (also called AU's) A. Source: Auditing Standards Board (AICPA) B. Nature: Interpretations of GAAS C. Effects: Auditors must follow or justify departure D. SAS's vs. AUs E. AUs becoming more established currently. -AU 200-299 General Principles and Responsibilities -AU 300-499 Risk Assessment and Response to Assessed Risk -AU 500-599 Audit Evidence -AU 600-699 Using the Work of Others -AU 700-799 Audit Conclusions and Reporting -AU 800-899 Special Considerations -AU 900-999 Special Considerations in the US

Standards

Status: Basically must be applied, but also consider the Figure 2.2 requirements. Audit Guidance: -Statements on Auditing Standards (SASs) (or AU's) -Other standards that apply for PCAOB and government audits, etc. What category is this in the GAAS Hierarchy?

Other Auditing Publications

Status: No authoritative status, but may help the auditor understand and apply the standards Audit Guidance: -Various AICPA publications, including Auditing Practice Releases, Technical Practice Aids, Audit Risk alerts, Professional Issues Task Force Practice Alerts and other publications. -Auditing articles in professional journals, textbooks, etc. What category is this in the GAAS Hierarchy?

Interpretive Publications If AICPA publishes something its usually guidance of interpretations

Status: Recommendations on the application of SASs. The auditor should consider them. Audit Guidance: -Auditing interpretations -Audit guidance in AICPA Audit and Accounting Guides. -AICPA Statements of Position—Auditing and Attestation What category is this in the GAAS Hierarchy?

Clarified Statements on Auditing Standards (SASs)

The AICPA's Auditing Standards Board (ASB) issues auditing standards in the form of _____________________________________ following a process that includes deliberations in meetings open to the public, public exposure of proposed SASs, and a formal vote.

date of issue; topic

The SAS numbering system organizes SASs by _________________, whereas the AU-C numbering system organizes them by ___________

improper revenue recognition overstatement of existing assets capitalization of expenses.

The most common fraud techniques are (3)

Misappropriation of assets

Theft of company's assets, the effect of which has not been appropriately reflected in the financial statements.

Key audit matters

Those matters that, in the auditor's professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance

dump the client for the other legal violations for reputation reasons

Though noncompliance with laws that dont affect the financial statements (i.e racial discrimination) arent the auditor's responsibility, the auditor may __________________

SASs

Thus far, the PCAOB has adopted all of the ________ (issued by the AICPA) and has issued standards of their own that are applicable for auditors and audits of public companies.

Public Companies (issuers)

US establishment of auditing standards: Public Company Accounting Oversight Board. The PCAOB has its own series of standards. It began with the ASB standards in place as of April 16, 2003 , and is updated for its own pronouncements titled Auditing Standard No. X, with the X representing the current number in the sequence. On December 31, 2016, the PCAOB reorganized its standards. The PCAOB standards are now codified by TOPIC. This is for Audits of _____________________ (______________).

Nonpublic companies (nonissuers)

US establishment of auditing standards: The AICPA's Auditing Standards Board (ASB) issues "Statements on Auditing Standards" (SASs) which are the "generally accepted auditing standards" for these companies. These SASs are codified into AU sections in volume 1 of the AICPA Professional Standards. They are written in the context of an audit of financial statements by an auditor. There are now over 131 SASs, although virtually all were revised and "clarified" in 2010-12 to make them more in accord with International Auditing Standards. This is for Audits of _______________________ (______________).

PCAOB: Standards: auditing, quality control, independence, ethical behavior Regulation: Registers CPA firms and performs inspection to CPA firms Source of authority: Can sanction CPA firms for noncompliance with its standards and provisions of Sarbanes's Oxley Act. AICPA: Standards: auditing, assentation, quality control, independence, ethics Regulation: Does not regulate CPA firms or nonpublic companies Source of authority: Enforces standard on its number Standards Board of Accountancy: Standards: Establishes own standards but generally adopts AICPA and PCAOB. Regulation: CPA firms in various jurisdictions Source of authority: State board regulates CPA firms in various jurisdictions and has authority to revoke the right of a CPA or individual CPA to practice in the state.

Various organizations develop standards for audits and regulate CPA firms. Compare and contrast the roles of the AICPA, the PCAOB, and the state boards of accountancy along the following dimensions: a. Standard setting. b. Regulation of CPA firms. c. Source of authority.

Generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP)

What are Two sets of Standards directly related to financial statements?

A. Standards for financial accounting—Financial Accounting Standards Board B. Standards of accounting and financial reporting by state and local governmental organizations—Government Accounting Standards Board. C. Accounting reporting standards of US Government—Federal Accounting Standards Advisory Board.

What are US establishments of financial reporting frameworks (sources of GAAP)? (3)

1. Material direct effect (falls under auditors responsibilities) on financial statement amounts (generally those requiring an adjusting journal entry)—Design the audit to obtain reasonable assurance that the financial statements are free from material misstatements arising from noncompliance (same as above for misstatements due to error or fraud). 2. Other laws that do not have a direct effect (do not fall under auditors responsibilities) on amounts and disclosures—Limited to undertaking specified audit procedures that may identify noncompliance that may (ultimately) have a material effect on the financial statements. example of other laws: racial discrimination. its against the law, but doesn't affect financial statements so it is not auditors responsibility. Procedures: A. Inquire of management and, where appropriate, those charged with government about compliance. B. Inspect correspondence if any, with the relevant licensing or regulatory authorities. C. Remain alert to possibility of such acts throughout the audit. D. When noncompliance is identified or suspected the auditor must pursue.

What are the 2 auditor responsibilities considering compliance with laws and regulations in the audit?

#1: Public: Uses PCAOB standards Private: Uses GAAS (AICPA Standards) #2: Public: issues an internal control OPINION Private: explicitly says there is no opinion on internal controls

What are the 2 differences between audit reports of public and private companies?

1) Errors 2) Fraud -Fraudulent Financial Reporting - Misappropriation of Assets

What are the 2 main causes of misstatements?

1. Assess the risk of errors and fraud that may cause the financial statements to contain material misstatement 2. Based on that assessment, design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. 3. 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 material errors or fraud will be detected.

What are the 3 auditor responsibilities in Misstatements due to errors or fraud?

1. Standard Unmodified Opinion 2. Unmodified Opinions 3. Modified Opinions a. Qualified Opinions b. Adverse Opinion c. Disclaimer of opinion

What are the 3 types of Audit Opinions?

a. Qualified Opinion b. Adverse Opinion c. Disclaimer of opinion

What are the 3 types of Modified Opinions?

1. What the auditor did ("We have audited....") 2. The opinion of the auditor whether or not the financial statements are materially misstated 3. Some sort of mention of internal controls 4. Management's responsibilities 5. Our responsibilities 6. Standards we used

What are the 6 things in all audit reports?

Should

What are the Words used to Indicate Responsibility for presumptively mandatory responsibility?

May might could other phrases indicating a responsibility to consider

What are the Words used to Indicate Responsibility for responsibility to consider?

Must Shall (PCAOB) Is required (PCAOB only)

What are the Words used to Indicate Responsibility for unconditional responsibility?

Unintentional misstatements or omissions of amounts or disclosures in financial statements.

What are the causes of errors?

Intentional misstatements or omissions of amounts or disclosures in financial statements. Audits are concerned with misstatements arising from two distinct types of acts: fraudulent financial reporting or misappropriation of assets.

What are the causes of fraud?

The duties of the Public Company Accounting Oversight Board include: • Register public accounting firms that prepare audit reports for financial statement issuers. • Establish or adopt auditing, quality control, ethics, independence and other standards relating to audit reports for issuers. • Conduct inspections of registered public accounting firms. • Perform other duties or functions to promote high professional standards for audits, enforce compliance with the enabling act establishing the Board (i.e., the Sarbanes-Oxley Act of 2002 discussed in Chapter 1), set the budget, and manage operations.

What are the duties and responsibilities of the Public Company Accounting Oversight Board?

A. Inquire of management and, where appropriate, those charged with government about compliance. B. Inspect correspondence if any, with the relevant licensing or regulatory authorities. C. Remain alert to possibility of such acts throughout the audit. D. When noncompliance is identified or suspected the auditor must pursue.

What are the procedures for when an auditor finds a noncompliance on other laws that don't affect the financial statements so they are not the auditor's responsibility?

A material amount is an amount that is sufficiently important to influence decisions made by reasonable users of financial statements. The amount may differ by account based on specific account characteristics. For example, a $100,000 shortage of cash may be extremely material to a small company, and a shortage of that amount might lead to bankruptcy. But, a $100,000 valuation overstatement of equipment may be of less significance if the company continues to produce its products and operate as in the past. Materiality is discussed further in Chapter 6.

What is a "material" amount from the perspective of auditors? Give an example of how that amount may differ based on the nature of the item.

Financial reporting framework is the set of criteria used to prepare financial statements. An auditor's report provides assurance that financial statements are following the framework.

What is a financial reporting framework? Why is a financial reporting framework important to a financial statement audit?

Committed to international convergence

What is the Convergence of Auditing Standards of AICPA?

Does not currently have a mandate for international convergence

What is the Convergence of Auditing Standards of PCAOB?

1. Standards 2. Interpretive Publications 3. Other auditing Publications

What is the GAAS Hierarchy?

Audits of most U.S nonpublic entities

What is the Scope of Applicability of Standards of AICPA?

Audits of U.S public companies

What is the Scope of Applicability of Standards of PCAOB?

Done about every year for larger firm and less often for smaller firms

What is the Time frame for peer reviews?

A. Bylaws of the AICPA B. State Boards of Accountancy C. SEC regulations D. Courts

What is the authority of AICPA GENERALLY ACCEPTED AUDITING STANDARDS (GAAS)?

U.S Congress, as expressed in the Sarbanes-Oxley Act of 2002

What is the authority of AICPA?

Historical, as a self- regulatory profession

What is the authority of PCAOB?

Quality control in a public accounting firm means policies and procedures which help assure that each audit meets at least a minimum standard of quality. Such control is vital because even one substandard audit could cause the firm to be defendant in a lawsuit that could threaten its continued existence. Peer reviews refer to a study and appraisal by an independent evaluator ("peer reviewer") of a CPA firm's work. In a system review, the evaluator considers the CPA firm's system of quality control to perform accounting and auditing work. In an engagement review, the evaluator studies and evaluates a sample of a CPA firm's actual accounting work, including accounting reports issued and documentation prepared by the CPA firm as well as other procedures that the firm performed. Engagement reviews are only available for CPA firms that do not perform audits or other similar engagements. Inspections are similar to peer reviews but are performed by the staff of the Public Company Accounting Oversight Board. However, in performing PCAOB inspections the staff focuses only on selected quality control issues and may consider aspects of practice management, such as the determination of partner compensation. In selecting audits and reviews for inspection, the PCAOB staff uses a risk assessment approach, which focuses on audits that have a high risk of lack of compliance.

What is the meaning of quality control and peer review as these terms relate to the operation of a CPA firm? Is peer review mandatory? Explain.

Govern quality of performance

What is the nature of AICPA GENERALLY ACCEPTED AUDITING STANDARDS (GAAS)?

To provide reasonable assurance that material misstatements due to errors or fraud will be detected

What is the reason we have audits?

Statements on Auditing Standards (AU-C)

What is the terminology of AICPA?

PCAOB Standards by Topic (AS)

What is the terminology of PCAOB?

The auditors' report expresses an opinion on the client's financial statements, not on the accounting records. A major purpose of the audit is to give outsiders assurance that the financial statements are reliable. The client's accounting records are important to the public accounting firm only because they constitute evidence supporting the financial statements. The CPAs also gather evidence from outside the company and from internal sources other than the accounting records.

When a CPA firm completes an audit of a nonpublic business and issues a report, does it express an opinion on the client's accounting records, financial statements, or both? Give reasons.

disclaimer of opinion

means that due to a scope limitation, the auditors were unable to obtain sufficient appropriate audit evidence (a scope limitation) on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive. is not an opinion; it simply states that the auditor does not express an opinion on the financial statements.

adverse opinion

states that the financial statements are not presented fairly in conformity with generally accepted accounting principles. Auditors issue an _____________ when the departures from GAAP are both material and pervasive. All significant reasons for the issuance of an _____(same)_________ should be set forth in a basis for modification paragraph.

qualified opinion

states that the financial statements are presented fairly in conformity with generally accepted accounting principles "except for" the effects of some matter. Qualified reports are issued when the financial statements depart materially from generally accepted accounting principles, or when limitations are placed on the scope of the auditors' procedures. The likely effects, while material, are not considered pervasive.

ultimate

the SEC has _______ authority over the PCAOB

Audit Risk

the risk that the auditors may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated

Responsibility to Consider

this third level of responsibility is only established in PCAOB documents

Quality Control

____________ Standards: A. Congressional Hearings (late 1970's) B. SECRegulation of the Accounting Profession C. Accounting Profession Response was to issue Quality Control Standards—These are CPA firm level standards (as opposed to individual CPA level). Issued by the Auditing Standards Board, these standards are meant to help assure that CPA firms follow professional standards on every engagement: There are six elements: 1. Leadership responsibilities for quality with the firm ("tone at the top") 2. Relevant ethical requirements 3. Acceptance and continuance of client relationships and specific engagements. 4. Human resources 5. Engagement performance 6. Monitoring