Audit Ch. 2

Given the CPA firm is auditing FS, why would they need to understand anything about the clients business?

- Each entity faces a number of risks unique to the nature of its business and industry. The types of operations, the extent of regulation, how the organization obtains capital to fund its business model, and the nature of accounts in the FS, among other factors, each trigger different types of risk that could lead to material misstatements - There are unique accounting standards for certain industries that impact how transactions, accounts, and disclosures are reported in FS. Thus, a thorough understanding of the client's business is critical to assessing the risk of material misstatements in the FS when planning the audit

What major characteristics of the organization and conduct of CPA firms permit them to fulfill their social function competently and independently?

- organizational form - conduct - peer review

The responsibilities principle requires that auditors be responsible for having appropriate competence and capabilities to perform the audit. What are the various ways in which auditors can fulfill this principle?

-Auditors develop their competency and capabilities for performing an audit through formal education in auditing and accounting, adequate practical experience, and continuing professional education -Auditors can demonstrate their proficiency by becoming licensed to practice as CPAs, which requires successful completion of the Uniform CPA Examination. Auditors have to follow specific requirements for licensure which vary from state to state

As a result of efforts by the ASB to converge US _____ with international standards, _________ and International Standards on Auditing are similar in most respects

-GAAS -AICPA auditing standards

Since most ____________ have clients that must file reports with the SEC each year (all companies filing registration statements under the securities acts of 1933 and 1934 must file _______________ and other reports with the SEC ____________, the profession is highly involved with the SEC requirements.

-reasonably large CPA firms -audited financial statements -at least once each year

What does the auditor do in an audit other than verify the mathematical accuracy of the numbers in the FS?

-responsible for obtaining sufficient appropriate audit evidence about whether the FS are free from material misstatements -obtains other types of information to determine that the amounts reported represent valid transactions and accounts are included in those statements -Evidence is gathered to determine that the entity has the rights to assets and has the obligation to repay liabilities reflected in those FS and whether the correct disclosures are included in the FS as required by accounting standards

AICPA member firms are required to have a peer review every ____

3 years

What roles are played by the American Institute of Certified Public Accountants for its members?

AICPA - prepares and grades the CPA examinations and provides continuing education to its members -organization that sets professional requirements for CPAs -conducts research and publishes materials on many different subjects related to accounting, auditing, management advisory services, and taxes

An audit of a US private company with no public quity or debt

AICPA auditing Standards

An audit of a US NFP organization

AICPA auditing standards

An audit of a US private company to be used for a loan from a publicly traded bank

AICPA auditing standards

At all stages of any engagement, an effort is made to involve professional staff at appropriate levels in the accounting and auditing decisions. Various approvals of the manager or senior accountant are obtained throughout the audit.

Engagement Performance

Audit engagement team members enter their electronic signatures in the firm's engagement management software to indicate the completion of specific audit program steps. At the end of the audit engagement, the engagement management software will not allow archiving of the engagement file until all audit program steps have been electronically signed.

Engagement Performance

Appropriate accounting and auditing research requires adequate technical reference materials. Each firm professional has online password access through the firm's Web site to electronic reference materials on accounting, auditing, tax, SEC, and other technical information, including industry data.

Engagement performance

Each audit engagement must include a concurring partner review of critical audit decisions.

Engagement performance

The SEC has considerable influence in setting ______ and disclosure requirements for FS because of its authority for specifying reporting requirements considered necessary for fair disclosure to investors

GAAP

International Standards on Auditing (ISAs) are issued by the _______ and are designed to _____ auditing practices and related services throughout the world.

International Auditing and Assurance Standards Board improve the uniformity of

An audit of a German private company with public debt in Germany

International auditing standards

An audit of a US public company that is a subsidiary of a Japanese company that will be used for reporting by the parent company in Japan

International auditing standards

The partners accept responsibility for leading and promoting a quality assurance culture within the firm and for providing and maintaining a quality assurance manual and all other necessary practical aids and guidance to support engagement quality.

Leadership responsibilities

________________ enable clients to operate their businesses more effectively.

Management consulting services

________________ range from suggestions to improve the client's accounting system to computer installations.

Management consulting services

No employee will have any direct or indirect financial interest, association, or relationship (for example, a close relative serving a client in a decision-making capacity) not otherwise disclosed that might be adverse to the firm's best interest.

Relevant ethical requirements

Two examples of auditing standards are

SAS No. 124 and SAS No. 125

Each office of the firm shall be visited at least annually by review persons selected by the director of accounting and auditing. Procedures to be undertaken by the reviewers are illustrated by the office review program.

Monitoring

Isn't the auditors primary responsibility to detect all kinds of fraud at the client?

No, fraud is a brad legal concept that describes any international deceit meant to deprive another person or party of their property or rights. The auditor does not take responsibility for detecting all types of fraud, given many types of fraud do not impact the FS. Instead, the auditor performs auditing procedures to obtain reasonable assurance that the FS do not contain material misstatements, whether due to fraud or error. Thus, the auditor is concerned with detecting fraud that leads to material misstatement. The auditor is not responsible for detecting fraud that does not lead to a material misstatement

What are the implications of peer review for the profession?

Peer review is a review, by CPAs, of a CPA firm's compliance with its quality control system

What are the purposes of the AICPA Statements on Standards for Attestation Engagements?

Statements on Standards for Attestation Engagements provide a framework for attest engagements, including detailed standards for specific types of attestation engagements

The following is an example of a CPA​ firm's quality control procedure​ requirement: "Any person being considered for employment by the firm must have completed a basic auditing course and have been interviewed and approved by an audit partner of the firm before he or she can be hired for the audit​ staff." Which element of quality control does this procedure affect and what is the purpose of the​ requirement?

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.

One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this objective is provided through

a system of quality control

Two examples of GAAP are

accounting for leases and accounting for fair value assets

____________ involve preparing the client's financial statements from the client's records.

accounting services

Assurance services include ____________, which are any services in which the CPA firm issues a report that expresses a conclusion about the reliability of an assertion that is the _______________________.

attestation services; responsibility of another party

The purpose of the SEC is to assist in providing investors _____________.

with reliable information upon which to make investment decisions

Tax services include preparation of ____________________ as well as tax planning assistance.

corporate, individual, and estate returns

Which of the following best describes what is meant by U.S. auditing​ standards?

measures of the quality of the auditors performance

What is the main objective of the audit of an entity's FS?

obtain reasonable assurance about whether the FS as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion in a written report on whether the FS are presented fairly, in all material respects, in accordance with an applicable financial reporting framework

The Responsibilities principle underlying AICPA auditing standards includes a requirement that

professional judgment be exercised by the auditor

By helping firms meet _________, the profession gains if reviews result in practitioners doing higher quality audits

quality control standards

Auditing standards

represent the combination of the four principles and all the Statements on Auditing Standards (SASs) that are codified in the AU-C sections

A firm having a peer review can also gain if it improves the firm's practices and therbey enhances its _______________.

reputation and effectiveness

GAAP principles are

specific rules for accounting for transactions occurring in a business enterprise established by FASB

The nature and extent of a CPA firm's quality control policies and procedures depend on

the CPA firm's size, nature of the CPA firm's practice, and cost-benefit considerations

What is the general character of the responsibilities characterized by the performance principles?

the criteria of audit planning and evidence gathering

Audit and assurance services are __________________ improve the quality of information for decision makers.

independent professional services that

Prior to the creation of the PCAOB, the _________ had responsibility for establishing auditing standards for both public and private companies.

ASB

The _________ establishes auditing standards for US private companies

ASB of the AICPA

All potential new clients are reviewed before acceptance. The review includes consultation with predecessor auditors, and background checks. All new clients are approved by the firm management committee, including assessing whether the firm has the technical competence to complete the engagement.

Acceptance and Continuation of clients and engagements

4 major types of services CPAs perform

Audit and assurance services, accounting and bookkeeping services,

_________________ include the preparation of the client's journals and ledgers as well as the financial statements.

Bookkeeping services

Individual partners submit the nominations of those persons whom they wish to be considered for partner. To become a partner, an individual must have exhibited a high degree of technical competence; must possess integrity, motivation, and judgment; and must have a desire to help the firm progress through the efficient dispatch of the job responsibilities to which he or she is assigned.

Human Resources

Through our continuing employee evaluation and counseling program and through the quality control review procedures as established by the firm, educational needs are reviewed and formal staff training programs modified to accommodate changing needs. At the conclusion of practice office reviews, apparent accounting and auditing deficiencies are summarized and reported to the firm's director of personnel.

Human Resources

Which element of a CPA firms quality control should be considered in establishing quality control policies and procedures?

Human resources, monitoring, engagement performance

The audit represents the CPA firms guarantee about the accuracy of the FS right?

No, In an audit of the FS the auditor performs audit procedures to obtain reasonable assurance about whether the FS contain material misstatements; auditor provides a high level of assurance. Reasonable assurance is less than a guarantee, which implies absolute (100% ) assurance; auditor issues an opinion on whether the FS are presented fairly, but the auditor is not guaranteeing that the FS are accurate with certainty

Currently, the _______ has responsibility for establishing auditing standards for US public companies.

PCAOB

An audit of a UK public company that is listed in the US and whose FS will be filed with the SEC

PCAOB auditing standards

An audit of a US broker-dealer registered with the SEC

PCAOB auditing standards

An audit of a US public company

PCAOB auditing standards

What is meant by the term quality control as it relates to a CPA firm?

Quality controls are the procedures used by a CPA firm that help it meet its professional responsibilities to clients. Quality controls are therefore established for the entire CPA firm as opposed to individual engagements

What is the role of the PCAOB?

The PCAOB provides oversight for auditors of public companies, including establishing auditing and quality control standards for public company audits, and performing inspections of the quality controls at audit firms performing those audits

Peer review can be _______ to the profession and to individual firms.

beneficial and costly