Audit Chapter 2 Q&A Questions
Performance is one of the principles underlying an audit. List three performance responsibilities.
Performance responsibilities include: • obtain reasonable assurance about whether financial statements are free of material misstatement • plan work and supervise assistants • determine and apply materiality level(s) • identify and assess risks of material misstatements based on understanding of the entity and its environment, including internal controls • obtain sufficient appropriate audit evidence
Who is responsible for establishing audit standards for audits of US public companies? Who is responsible for establishing audit standards for audits of US private companies? Explain.
The Public Company Accounting Oversight Board (PCAOB) was established by the Sarbanes-Oxley Act of 2002. The PCAOB has responsibility for establishing auditing standards for U.S. public companies, while the Auditing Standards Board (ASB) of the AICPA establishes auditing standards for U.S. private companies. Prior to the creation of the PCAOB, the ASB had responsibility for establishing auditing standards for both public and private companies. Because existing auditing standards were adopted by the PCAOB as interim auditing standards for public company audits, there is considerable overlap in the two sets of auditing standards.
Principles related to the auditor's responsibilities in the audit stress three important personal qualities that the auditor should possess. List and discuss these three qualities.
1. Appropriate competence and capabilities. The auditor is required to have formal education in auditing and accounting, adequate practical experience for the work being performed, and continuing professional education. 2. Comply with relevant ethical requirements. The AICPA Code of Professional Conduct outlines the ethical requirements for CPAs who practice in accounting firms or work in organizations as part of management. The Code and auditing standards stress the need for independence in audit engagements. 3. Maintain professional skepticism and exercise professional judgment. Professional skepticism is an attitude that includes a questioning mind, being alert to conditions that might indicate possible misstatements due to fraud or error, and a critical assessment of audit evidence. In making judgments about the presence of a material misstatement, auditors are responsible for applying relevant training, knowledge, and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement.
State what is meant by the term "peer review." What are the implications of peer review for the profession?
A peer review is a review, by CPAs, of a CPA firm's compliance with its quality control system. A mandatory peer review means that such a review is required periodically. AICPA member firms are required to have a peer review every three years. Registered firms with the PCAOB are subject to quality inspections. These are different than peer reviews because they are performed by independent inspection teams rather than another CPA firm. Peer reviews can be beneficial to the profession and to individual firms. By helping firms meet quality control standards, the profession gains if reviews result in practitioners doing higher quality audits. A firm having a peer review can also gain if it improves the firm's practices and thereby enhances its reputation and effectiveness, and reduces the likelihood of lawsuits. Of course, peer reviews are costly. There is always a trade-off between cost and benefits.
The element of quality control is personnel management. The purpose of the requirement is to help assure CPA firms that all new personnel are qualified to perform their work competently. A CPA firm must have competent employees conducting the audits if quality audits are to occur. For a CPA firm, quality control comprises the methods used to ensure that the firm meets its professional responsibilities to clients and others. Quality control is closely related to but distinct from auditing standards. The standards recognize that a quality control system can provide only reasonable assurance, not a guarantee that auditing standards are followed. A CPA firm must make sure that auditing standards are followed on every audit. Quality controls are the procedures used by the entire CPA firm to ensure that the principles in auditing standards are followed on every audit. Quality controls are established for the entire CPA firm, whereas auditing standards are applicable to individual engagements.
The element of quality control is personnel management. The purpose of the requirement is to help assure CPA firms that all new personnel are qualified to perform their work competently. A CPA firm must have competent employees conducting the audits if quality audits are to occur. For a CPA firm, quality control comprises the methods used to ensure that the firm meets its professional responsibilities to clients and others. Quality control is closely related to but distinct from auditing standards. The standards recognize that a quality control system can provide only reasonable assurance, not a guarantee that auditing standards are followed. A CPA firm must make sure that auditing standards are followed on every audit. Quality controls are the procedures used by the entire CPA firm to ensure that the principles in auditing standards are followed on every audit. Quality controls are established for the entire CPA firm, whereas auditing standards are applicable to individual engagements.
List and describe the six elements of quality control. Who establishes the standards for quality control?
• Leadership responsibilities for quality within the firm — The firm should promote a culture that quality is essential in performing engagements and should establish policies and procedures that support that culture. • Relevant ethical requirements — All personnel on engagements should maintain independence in mind and in appearance, perform all professional responsibilities with integrity and maintain objectivity in performing their professional responsibilities. • Acceptance and continuation of client relationships and engagements — Policies and procedures should be established for deciding whether to accept or continue a client relationship or specific engagement. These policies and procedures should minimize the risk of associating with a client whose management lacks integrity. The firm should also only undertake engagements that can be completed with professional competence. • Human resources — Policies and procedures should be established to provide the firm with reasonable assurance that all new personnel are qualified to perform their work competently, work is assigned to personnel who have adequate technical training and proficiency, all personnel should participate in continuing professional education and professional development activities that enable them to fulfill their assigned responsibilities, and personnel selected for advancement should have the qualifications necessary for the fulfillment of their assigned responsibilities. • Engagement performance — Policies and procedures should exist to ensure that the work performed by engagement personnel meets applicable professional standards , legal and regulatory requirements, and the firm's standards of quality. • Monitoring — Policies and procedures should exist to ensure that the other quality control elements are being effectively applied. Quality control standards are established by the Auditing Standards Board for auditors of private companies and by the Public Company Accounting Oversight Board for auditors of public companies.
