Acct 400 Auditing
What are contingent liabilities? Give examples.
A contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. A contingent liability is recorded in the accounting records if the contingency is probable and the amount of the liability can be reasonably estimated.Examples are lawsuits, about if they guaranteed the indebtedness of someone else. If sold A/R with recourse
What is a "covered member?"
A covered member is an individual, firm, or entity that is capable of influencing an attest engagement. Covered members include: An individual on the attest engagement team. An individual in a position to influence the attest engagement. A partner, partner equivalent in the office in which the partner in charge of attest engagement primarily practices in connection with the attest engagement. Certain partner, partner equivalents or managers who provide nonattest services to the client. The public accounting firm, including its employee benefit plan.
What is a loss contingency? Give an example. What procedures can the auditor use to search for loss contingency?
A loss contingency is incurred by the entity based on the outcome of a future event, such as litigation. Due to conservative accounting principles, loss contingencies are reported on the balance sheet and footnotes on the financial statements, if they are probable and their quantity can be reasonably estimated.
What is a related party? Give an example of a related party transaction.
A transaction between two businesses that have a personal or other relationship. For example, a publicly-traded company may be inclined to hire a large, minority shareholder as a supplier. In small businesses, a company may hire the owner's brother-in-law to repair the driveway. Related-party transactions are legal, but create the potential for conflicts of interest.
Who provides oversight for public companies? Private companies?
AICPA (Auditing Standards Board) for nonpublic companies in US. PCAOB for public companies in US. American Institute of Certified Public Accounting for private(AICPA)
What is the purpose of the auditing report?
An audit report is a written opinion of an auditor regarding a business's financial statements. The typical audit report contains three paragraphs, which covers the responsibilities of the auditors, and management of a business, scope of the audit, and the auditor's opinion of the business's financial statements. Lends Credibility.
What is an operational audit?
An operational audit is a study of a specific unit of an organization for the purpose of measuring its performance. For example, quantifiable criteria often must be developed by the auditors to be used to measure the effectiveness or efficiency of the department. Another would be effectiveness of operations of receiving department of a manufacturing company. Ex: Receiving dept. Of manufacturing company.
What are minutes? Why are they important?
Anything that is discussed. It's important because they maybe something that can bring something up about the audit. Lawsuits. The auditors should review the minutes of meetings of stockholders and directors, including important subcommittees of directors such as the audit committee and the investment committee. This review includes meetings held through the date of the audit report. In completing the audit, the auditors should determine that they have considered all minutes, including those for meetings subsequent to year-end. They will also obtain written representation from management that all minutes have been made available.
What types of services are included in attestation services?
Audits of financial statements, examinations of internal controls, reviews of financial statements, agree-upon procedures.
What financial statements are audited?
Balance sheets for a two-year period and income statements, statements of retained earnings, and statements of cash flows for a three-year period.
What is the duty of the auditor after the end of fieldwork but before the issuance of the financial statements?
Between END OF FIELD AND issuance OF FINANCIAL STATEMENTS AUDITORS dont have to search for anything, but if something is brought to their attention they must follow up with it.
How are most Accounting firms structured?
Big from the bottom, small at the top. .
What is breach of contract?
Breach of contract is failure of one or both parties to a contract to performance in accordance with the contract's provisions. Failure to perform at a specific time.
What is SOX? Why was it enacted? What are its requirements?
By the summer of 2002, Congress had passed penalties for corporate fraud, restricted the types of services consulting CPAs may perform for public company audit clients, and created PCAOB to oversee the accounting profession. The PCAOB(Public Companies Accounting Oversight board) has broad powers to develop and enforce standards for public accounting firms that audit companies that issue securities registered with SEC. Public Companies requires an integrated audit. Restricts services companies can perform. Main audit partner has to be rotated every 5 years.
What responsibility do auditors have to these third parties under the Ultramares Doctrine?
CPAs are held liable for ordinary negligence only to third-party beneficiaries for whose benefit the audit was performed. Other third parties must prove gross negligence on the part of the auditors. Applies to known users.
What is due professional care?
Calls for the application of the care and skill expected of a reasonably prudent and competent auditor in similar circumstances. Due professional care is to be exercised in the planning and performance of the audit and the preparation of the report.
What is due diligence?
Due diligence is reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something. Examining the company before auditing them!
What standard of duty does the auditor owe to the client with respect to the work to be done?
Duty to perform the work using professional care. Exercise degree of care of a reasonable person.
What is ethics? What is an ethical dilemma?
Ethics has been defined as the study of moral principles and values that govern the actions and decisions of an individual or group. Ethical dilemmas often involve a mental conflict between differing moral requirements, in which to obey one requirement will result in disobeying another; the AICPA Code of Professional Conduct refers to these as ethical conflicts.-Moral Conflict
List 5 things that auditors can do to prevent litigation?
Follow GAAS, Retain Legal Consult,get rid of high risk client & do your due diligence on them. Get insurance. Check the company's background.
Fraud? Constructive fraud?
Fraud is defined as misrepresentation by a person of a material fact, known by that person to be untrue or make reckless indifference as to whether the fact is true, with the intention of deceiving the other party and with the result that the other party is injured. Also known as constructive fraud(being extremely reckless) Constructive fraud does not involve a misrepresentation with intent to deceive.
What is the difference between GAAP & GAAS?
GAAP are generally accepted accounting principles that are a set of guidelines for the companies to help them in preparing financial statements according to a standard. GAAS are auditing standard that are meant for auditors to help ensure in transparent and unbiased auditing.
Who signs the audit report? Under GAAP? Under IFRS?
GAAP= Audit Firm IFRS= Person auditing the financial statements and/or Audit firm
List and describe the 10 Generally Accepted Auditing Standards (GAAS).
General Standards : (1)Adequate technical training and proficiency (2) Independence in mental attitude is to be maintained, (3)Due professional care is to be exercised. Standard of Fieldwork: (4)Auditor must adequately plan and properly supervise work (5)Auditor must obtain a sufficient understanding of entity, and its environment, including internal control to assess risk of material misstatement and to design further audit procedures (6)Auditor must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion Standards of Reporting: (7)State whether the financial statements are presented in accordance with GAAP (8)Identify circumstances in which such principles have not been consistently applied (9)Informative disclosures are adequate unless otherwise stated in the report (10)Report should clearly state the degree of responsibility being assumed by the auditors by expressing an opinion or stating that one cannot be expressed, and the reason therefor should be stated.
What is materiality? Why is this important in auditing of financial statements?
In accounting, the concept of materiality allows you to violate another accounting principle if the amount is so small that the reader of the financial statements will not be misled. Materiality depends upon both dollar amount and the nature of the item. The term material may be defined as sufficient important to influence decisions made by reasonable users of financial statements.
What is the difference between statutory law & common law?
In the United States, CPAs have both common law liability and statutory laws liability. Common law liability develops through case decisions generally arising due to breach of contract, negligence, and fraud. Statutory law (Sarbanes and Oxley) develops when a government passes laws and regulations that either implicitly or explicitly impose potential liability upon CPAs.
What defences are available to auditors in Common Law Cases?
Knowledge of the plaintiffs of the errors or omissions Due diligence by the auditors You followed GAAS Negligence not proximate cause Contributory negligence Comparative neglience
What is an engagement letter? Must the agreement be written or can it be oral?
Letter gives auditor of all the duties that must be performed. What yours suppose to do and when. An engagement letter is a written agreement to perform services in exchange for compensation. Engagement letters are traditionally used by certain professional service firms, particularly in the fields of finance, accounting, law and consulting, to define the specifics of the business relationship. The letter is usually sent by the service firm to an officer of the engagg company, and once the officer has signed it, the letter serves as a contract. Must always be written.
What steps should an auditor take prior to accepting a new client or continuing with an old client?
Make sure your independent and skill set for the job. Check the risk of the company and make sure it's worth to have another client. Check environment of the company they operate in. Check the background of the company.
What is Negligence? Gross negligence?
Negligence is a violation of a legal duty to exercise a degree of care that an ordinary prudent person would exercise under similar circumstances. Gross negligence is the lack of even slight , indicative of a reckless disregard for one's professional responsibilities.
What is the difference between known users, foreseen users and foreseeable users?
One way to summarize these differences is to consider three general approaches-(a) Ultramares (known user) approach, (b) Restatement (foreseen user) approach, and (c) Rosenblum (foreseeable user) approach. Under the Ultramares (known user) approach, CPAs are held liable for ordinary negligence only to third-party beneficiaries for whose benefit the audit was performed. Other third parties must prove gross negligence on the part of the auditors. Under the Restatement (foreseen user) approach, liability for ordinary negligence to third parties is extended to include any limited class of parties that could be foreseen to rely upon the financial statements. The Rosenblum (foreseeable user) approach extends the auditor's' liability for ordinary negligence even further to include any third party the auditors could reasonably foresee as recipients of the financial statements.
What other services are performed by public accounting firms?
Other non assurances are tax services, management consulting services (fraud investigation, information technology consulting) or bookkeeping.
What is professional skepticism?
Professional skepticism includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence. It requires that throughout the audit the auditors be alert for: Audit evidence that contracts other audit evidence. Information that raises a question about the reliability of documents and responses to inquiries. Conditions indicating possible fraud. Circumstances suggesting the need for additional audit procedures beyond those ordinarily required. Follow the law if something is funny, something might be wrong. Investigate the things people tell you are correct.
What is "joint and several" liability? Proportionate liability?
Proportionate liability is a method of allocating damages to each group that is liable according to that group's pro rata share of any damages recovered by the plaintiff. Joint and several liability is a legal concept that holds a class of defendants jointly responsible for losses attributed to the class as well as liable for any share of losses that cannot be collected from those unable to pay their share. A financially responsible defendant may be required to pay losses attributed to defendants that do not have the ability to pay.
What is reasonable assurance?
Reasonable assurance, but not absolute assurance that implies that there is a low level of risk remaining that the auditors express an opinion that the financial statements are properly stated when they are not.
What is RICO? Why is it also applicable to auditors?
Rico is an acronym for Racketeer Influenced and Corrupt Organizations Act. This act was established as a means of making sure that CPAs who may have been involved with any illegal mob or racketeering activity were brought to justice. The RICO Act allows for triple damages in civil cases that were brought under the act. This later became an issue of liability in Reves v. Ernst & Young.[22] This was a significant court case, in that, the court decided that for accountants to be liable for damages of a company under this act, they must have participated in the operation or management of the organization.
Scienter?
Scienter is the intent to deceive, manipulate or defraud on the part of the auditors.
What is 10 and 18 of the SEC Act of 1934? What type of securities does it apply to? What liability does it place on auditors? fraud
Section 10(Fraud Section), with Rule 10b-5 promulgated by the SEC under Section 10 (b) of the act reads as follows: It shall be unlawful for any person, directly or indirectly, by the use of any means of instrumentality of interstate commerce or of the mails, or of any national securities exchange: (1) to employ any device, scheme, or artifice to defraud. (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make statements, not misleading or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. Section 18 (a) of the 1934 Act, which relates to misstated financial statements, provides liability to (emphasis added): any person not knowing that such statement was false or misleading who, in reliance upon such statement, shall have purchased or sold a security at a price which was affected by such statement, for damages by such reliance, unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading.
What are subsequent events? List the 2 types. Give examples. What procedures should the auditor undertake regarding subsequent events? How should these be accounted for in the financial statements?
Subsequent event refers to an event occurring after the date of the balance sheet but prior to the date of the auditors' report. It divides into two categories: those providing additional evidence about facts existing on or before the balance sheet and those involving facts coming into existence subsequent to the balance sheet date. If the event is Probable and reasonably estimatable than the auditor must make adjustments to the financial statements. However, if it is not estimable than they can choose to disclose it in footnotes.
What is the duty of the auditor after the issuance of the financial statements if he subsequently discovers material facts that existed at the date of the report?
Talk to management and ask them to send information to everyone about it. If necessary,go back and do something about it.
What is the purpose of the AICPA Code of Professional Conduct? Describe the 2 parts of the Code?
The AICPA Code of Professional Conduct provides guidance and rules to CPAs in the performance of their professional responsibilities. It consists of principles, rules, interpretations, and other guidance. The principles are goal-oriented, positively stated statements on the profession's responsibilities to the public, clients, and fellow practitioners. The principles provide the framework for the rules which are the requirements that are enforceable under the AICPA bylaws. Interpretations are issued by the AICPA Division of Professional Ethics to provide guidelines for the scope and application of the rules. Rules of conduct are enforceable
What are the requirements of the PCAOB for auditors?
The PCAOB has the responsibility to: register public accounting firms that audit public companies, perform inspections of the practices of registered firms, conduct investigations and disciplinary proceedings of registered firms, and sanction registered firms. Main audit partner have to be rotated every 5 years and can not do certain services for the company they audit. Issue their own standards for. Auditors have to register with PCAOB. An auditor cannot work on the audit of the particular company, If any auditor or his/her family members owns stocks of a particular public company. The auditors are required to report their stock holdings in public company's every 6 months.
What requirement is made by SOX regarding internal controls of public companies?
The Sarbanes-Oxley Act requires that auditors of publicly traded companies in the United States perform an integrated audit that includes providing assurance on both the financial statements and the effectiveness of internal control over financial reporting.
Why is the 1136 Tenants Corporation case important to auditors?
The case illustrates the importance of an engagement letter to define the services to be performed. 1136 is important because it was only a review of financial statements. Even if you are only doing a review, and not doing a full audit, and if you find something of material you must follow up with it & you have to look at internal controls.
What is privity of contract?
The doctrine of privity in the common law of contract provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it. The premise is that only parties to contracts should be able to sue to enforce their rights or claim damages as such.
What are the forms that are required to be filed by companies with the SEC? Under what circumstances must each form be filed?
The forms that are required to be filed by companies with SEC our registration statements, a registration statements contains audited financial statements including balance sheets for a two-year period and income statements, statement of retained earnings, and statements of cash flows for a three-year period. 10K has to be filed in about march for end of the year & 10 q filed quarterly.
What is a compliance audit? Give examples.
The performance of a compliance audit is dependent upon the existence of verifiable data and of recognized criteria or standards, such as established laws and regulations or an organization's policies and procedure. A familiar example is the audit of an income tax return by an auditor of the IRS.
What is a representation letter? Who signs this letter?
The primary use of the representation letter is to have the client's principal officers acknowledge that they are primarily responsible for the fairness of the financial statements. It is signed by senior company management.
What is independence? Why is independence necessary of auditors?
The public accounting profession acknowledges the critical importance of independence of accountants who perform attestation services, both independence of mind and appearance. Independence of mind is a state of mind that permits the CPA to perform an attest service without being affected by influences that might compromise professional judgement, thereby allowing that individual to act with integrity and to exercise objectivity and professional skepticism. Independence in appearance requires the avoidance of circumstances that might cause a reasonable and informed third party, aware of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of an audit firm or member of the attest engagement team has been compromised.
What agency is responsible for the registration of the CPA title and license?
The state board of which you get your license in. If NJ you go to NJ state of accountancy.
What are subsequent events? What procedures can be used to find out about these events?
The subsequent events can be divided into two types of events. Type 1 events are those that occur between the dates when the current year's audit began and the Balance sheet date. Type 2 events are those that occur between the balance sheet date and the date of the audit report. Probable and reasonably estimable. Read the minutes to find out about events, ask management about the meetings for which the minutes are not available. Get a letter from management called management representation letter. Also, get a letter from their lawyer.
What information is the auditor required to communicate to those charged with corporate governance?
They have to inform of your opinion, misstatements,fraud. Any issues with the audit itself. Any disagreements between them and managment.
What is a third party beneficiary? Give an example.
Third party beneficiary is a person, not the auditors or their client, who is named in a contract with the intention that such person should have definite rights and benefits under the contract. For an example, the New York Court of Appeals upheld and interpreted the Ultramares precedent in the case of Credit Alliance v. Arthur Andersen & Co. The court stated that before auditors may be held liable for ordinary negligence to a third party, they must have been aware that the financial statements were to be used for a particular purpose by a known party or parties, and must have taken some action to indicate that knowledge. Example--Somebody names in your life insurance.
What is an unasserted claim? Give an example. What procedures can the auditor use regarding unasserted claims?
Unasserted claim is a possible legal claim of which no potential claimant has exhibited an awareness. An unasserted claim should be on the list if the legal counsel has devoted substantive attention to it and if it is probable that a claim will be asserted and reasonably possible that a loss will result. The letter of inquiry should request that the legal counsel comment on those matters on which its view concerning the description or evaluation of the matter differ from those stated by management. If auditors are unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures, they should modify their opinion due to lack of sufficient appropriate audit evidence.
What must be proved by the client or third party under 1933 Act? 1934 Act?
Under 1933 Act, The third party has to prove that they suffered a loss, and the financials were misleading. Under 1934 Act, They have to prove that they suffered a loss, the financials were misleading, and that they relied on it.
What defences are available to the auditor under the 1933 Act? 1934 Act?
Under 1933 the auditor must prove that he/she Followed Due Diligence, Under 1934, the other party has to prove the existence of scienter. They must prove that the auditor had an intent to deceive, manipulate or defraud.
Working papers are confidential but not privileged. What does this mean?
Under normal circumstances, auditors think of confidential information as being information that must not be divulged outside the client organization. But the confidential nature of information in the auditor's' working papers has another dimension: often it must not divulged within the client organization. If for example, the client does not want certain employees to know the levels of salaries, the auditors should not defeat this policy by exposing their working papers to unauthorized personnel.
List the 4 types of audit opinions? Under what circumstances are they issued?
Unmodified opinion(unqualified) is a lack of consistency in application of accounting principles. Qualified opinion is when there is a limitation in the scope of the audit or when the financial statements depart from GAAP significantly enough to require mention in the auditor's report, but not so significantly as to necessitate disclaiming in an opinion or expressing an adverse opinion. Adverse opinion is an opinion issued by the auditors that the financial statements they have audited do not present fairly the financial position, results of operations, or cash flows in conformity with accounting principles generally accepted in Trump's land. Disclaimer of opinion is a form of report in which the auditors state that they do not express an opinion on the financial statements.
What is the SEC Act of 1933? IPO What type of securities does it apply to? What liability does it place on auditors?
Was established as a result of the stock market crash of 1929. Two main goals : ensure more transparency in financial statements so investors can make informed decisions about investments. In addition, it helps to establish laws against misrepresentation and fraudulent activities in the securities markets. It impacts stocks, treasury stock, bonds, debentures, and notes. It holds auditors to a higher standard of performance and it provides protection to more third parties. Auditors must prove Due Diligence.
What duty does the auditor have with respect to a pending lawsuit discovered prior to the end of fieldwork?
When an auditor discovers any potential liabilities during the fieldwork, they should make sure that the liabilities are properly accrued for to properly represent the financial statements.
What are working papers? Who do they belong to?
Working papers is the record of the audit procedures performed, relevant audit evidence obtained, and the conclusions the auditors reach. Audit documentation may be recorded on paper or an electronic or other media. Audit working papers are the property of the auditors, not of the client. All the work that was done are documented in these papers. Any confirmations or documentations they have received, they belong to the auditors. Their confidential and not priviliged. Can be shared in a law suit if your subpoena. Can also share with the bank, on request of the client
What duty does the auditor have to the client with respect to divulging confidential or privileged information?.
the auditors responsibility is to express an opinion on the financial statements based on having conducted an audit following generally accepted auditing standards of the United States of America. Working papers they get from managament,, then form a audit report Can be divulge it if there is a law suit or to sec. Subpoena