Audit Exam 1 (Chapters 1-4)

Compliance audit

(1) a review of an organization's financial records performed to determine whether the organization is following specific procedures, rules, or regulations set by some higher authority Results are typically reported to management rather than outside users, since they will find this information most beneficial.

Activities of CPA Firms

1. Accounting and bookkeeping services 2. Tax services 3. Management consulting services

Cause of information risk

1. Remoteness of information: because it is nearly impossible to have firsthand information on every company, we must rely on info provided by others (with chance it's wrong) 2. Biases and motives of the provider: if info is provided by someone whose goals are inconsistent with those of decision maker, then info may be biased for the provider. 3. Voluminous data: chance of improperly recorded data is in records increases as volume increases (large corporations) 4. Complex exchange transactions: because of complexity of certain transactions, mistakes can and will happen

Reducing information risk

1. User verifies information: User may go to business to physically verify information by looking at records. However, this can be time-consuming and is especially costly. 2. User shares information risk with management: If users rely on inaccurate financial statements and incur financial loss, then there may be basis for lawsuit against mgmt. The issue is that sometimes users may not be able to collect on losses. 3. Audited financial statements are provided: the most common way is for an independent audit.

3 influences on structure of CPA firms

1. the need for independence from clients 2. the importance of a structure to encourage competence 3. the increased litigation faced by auditors

AICPA

American Institute of Certified Public Accountants, a voluntary organization of CPAs that sets professional requirements, conducts research, and publishes materials relevant to accounting, auditing, management consulting services, and taxes.

SEC

An agency of the federal government, assists in providing investors with reliable information upon which to make investment decisions. Companies planning to issue new securities must make a reques with the commission (act of 1933) Act of 1934: provides additional protection by requiring public companies and others to file detailed annual reports with the commission. Auditor related reports: - Form S-1 - Form 8-K - Form 10-K - Form 10-Q - Proxy Statement

Form 10-K

Annual financial information

Other attestation services

CPAs provide numerous other attestation services. Many of these services are natural extensions of the audit of historical financial statements, as users seek independent assurances about other types of information.

CAQ

Center for Audit Quality. An autonomous public policy organization with a mission to foster confidence in the audit process and to make public company audits even more reliable and relevant for investors.

Compilation and review standards

Compilation standards include an accountant helping a client prepare financial statements without providing any assurance. A review service would be an accountant performing an inquiry and analytical procedures that provide a reasonable basis for expressing limited assurance on the financial statements.

Other assurance services

Does not require a report, but is still focused on increasing quality of the information. Does not have to be about another party's assertion of compliance with a specified criteria.

Quality control

Methods used by a CPA firm to ensure that the firm meets its professional responsibilities

PCAOB

Public Company Accounting Oversight Board Appointed and overseen by SEC Conducts inspections of registered accounting firms and assess their compliance with the rules of the PCAOB and the SEC Annual inspections of accounting firms that audit more than 100 issuers and inspections of their registered firms at least once every three years. Any violations could result in disciplinary action by the PCAOB and be reported to the SEC and state accountancy boards.

PCAOB

Public Company Accounting Oversight Board. Board created by the Sarbanes-Oxley Act to oversee auditors of public companies, including establishing auditing and quality control standards and performin inspections of registered accounting firms.

Form 10-Q

Quarterly financial information

SEC

Securities and exchange commission - a federal agency that oversees the orderly conduct of the securities markets; the SEC assists in providing investors in public corporations with reliable information upon which to make investment decisions.

Form 8-K

Significant events

SASs

Statements on auditing standards - pronouncements issued by the AICPA to interpret the principles underlying generally accepted auditing standards

WebTrust

The AICPA and CICA (Canadian Institute of Chartered Accountants) jointly created this service to assure users that a Web site owner has met established criteria related to business practices, transaction integrity, and information processes.

SysTrust

The AICPA and CICA jointly created SysTrust attestation service to evaluate and test system reliability in areas such as security and data integrity.

Non-assurance services

While the primary purpose of an assurance service is to improve the quality of information, the primary purpose of a management consulting engagement is to generate a recommendation to management. Quality of information is still important, but not the primary focus. Examples: 1. Accounting and bookkeeping services 2. Tax services 3. Management consulting services

Sarbanes-Oxley Act

a federal securities law passed in 2002 that provides for additional regulation of public companies and their auditors; the Act established the Public Company Accounting Oversight Board and also requires auditors of large companies to audit the effectiveness of internal control over financial reporting

Audit of historical financial statements

a form of attestation service in which the auditor issues a written report stating whether the financial statements are in material conformity with accounting standards Most common form of attestation service

Certified public accountant

a person who has met state regulatory requirements, including passing the Uniform Examination, and has thus been certified; may have his or her primary responsibility the performance of the audit function on published historical financial statements of commercial and noncommercial financial entities

Operational audit

a review of any part of an organization's operating procedures and methods for the purpose of evaluating efficiency and effectiveness

Attestation service

a type of assurance service in which the CPA firm issues a report about a subject matter or assertion that is the responsibility of another party

Financial statement audit

an audit conducted to determine whether the overall financial statements of an entity are stated in accordance with specified criteria (usually U.S. or international accounting standards)

GAO Auditor

an auditor working for the U.S. Government Accountability Office (GAO); the GAO reports to and is responsible solely to congress

Assurance service

an independent professional service that improves the quality of information for decision makers

Evidence

any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria

Attestation of internal control over financial reporting

attestation service where management asserts that internal controls have been developed and implemented following well established criteria. Section 404 of the Sarbanes-Oxley Act

Internal auditors

auditors employed by a company to audit for the company's board of directors and management The lack of independence is the major difference between these and those from CPA firms.

Internal revenue agents

auditors who work for the IRS and conduct examinations of taxpayers' returns

Independent auditors

certified public accountants or accounting firms that perform audits of commercial and non-commercial financial entities

Review of historical financial statements

management asserts that the statements are fairly stated in material conformity with accounting standards, the same as for audits. The CPA provides a lower level of assurance for reviews of financial statements compared to a high level for audits, therefore less evidence is needed. Much cheaper than an audit, as well. Many nonpublic companies use this without incurring cost of audit.

Attestation services on information technology

management makes various assertions about the reliability and security of electronic information. Acronym- Electronic data interchange (EDI) AICPA and CICA have developed five principles related to online privacy, security, processing integrity, availability, and confidentiality to be used in performing services such as SysTrust and WebTrust

Auditing

the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria

Audit report

the communication of audit findings to users

Accounting

the recording, classifying, and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making

Information risk

the risk that information upon which a business decision is made is incorrect

5 Types of Attestation Services

1. Audit of historical financial statements. 2. Audit of internal control over financial reporting. 3. Review of historical financial statements. 4. Attestation services on information technology. 5. Other attestation services that may be applied to a broad range of subject matter.

CPA Exam Sections

1. Auditing and attestation 2. Financial accounting and reporting 3. Regulation 4. Business environment and concepts

AICPA - Establishing Standards and Rules

1. Auditing standards 2. Compilation and review standards 3. Other attestation standards 4. Consulting standards 5. Code of professional conduct 6. Writes and grades the CPA examination

Size variations of CPA firms

1. Big Four 2. National firms 3. Regional and large local firms 4. Small local firms

Generally Accepted Auditing Standards

1. General Qualifications and conduct a. Adequate training and proficiency b. Independence in mental attitude c. Due professional care 2. Field work performance of the audit e. Proper planning and supervision f. Sufficient understanding of the entity, its environment, and its internal control. g. Sufficient appropriate evidence 3. Reporting results h. Whether statements were prepared in accordance with GAAP i. Circumstances when GAAP not consistently followed j. Adequacy of informative disclosures k. Expression of opinion of financial statements

Relation of U.S. and International Auditing Standards

1. International Standards on Auditing - Applicable to entities outside the US 2. AICPA Auditing Standards - Applicable to private entities in the US 3. PCAOB Auditing Standards - Applicable to US Public Companies and other SEC registrants

Quality Control Elements

1. Leadership responsibilities ("tone at the top") 2. Relevant ethical requirements 3. Acceptance and continuation of clients and engagements 4. Human resources 5. Engagement performance 6. Monitoring

5 Principles developed by AICPA and CICA

1. Online privacy 2. Security 3. Processing integrity 4. Availability 5. Confidentiality

Organizational structures

1. Proprietorship 2. General partnership 3. General corporation 4. Professional corporation 5. Limited liability company 6. Limited liability partnership

Principles in AICPA Auditing Standards

1. Purpose of an audit 2. Responsibilities 3. Performance 4. Reporting

Principles

Framework helpful in understanding and explaining an audit; provide a structure for the Codification of Statements on Auditing Standards 1. Obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in all material aspects, in accordance with an applicable financial reporting framework; and, 2. report on the financial statements, and communicate as required by GAAS, in accordance with the auditor's findings

GAAS

Generally Accepted Auditing Standards. Developed and issued in the form of Statements on Auditing Standards (SASs) and codified in AU-C sections in the Codification of Auditing Standards; often called auditing standards.

Proxy Statement

Include information on fees a company pays to CPA firms, such as audit fees. This information can be found on the SEC website.

ISAs

International Standards on Auditing (ISAs). Statements issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants to promote international acceptance of auditing standards.

Form S-1

Issuance of new securities

Peer review

The review by CPAs of a CPA firm's compliance with its quality control system