Audit: Chapter 1 - The Role of the Public Accountant in the American Economy

International Federation of Accountants (IFAC)

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

Operational Audit

An analysis of a department or other unit of a business of governmental organization to measure the effectiveness and efficiency of operations.

Network (of CPA firms)

An association of CPA firms that shares at least one of the following with other firms: (1) common brand name; (2) common control; (3) profits; (4) common business strategy; (5) significant professional resources; (6) common quality control policies and procedures.

Examination

An attest engagement designed to provide the highest the highest level of assurance that CPAs provide on an assertion. An examination of financial statements is referred to as an audit.

Agreed-Upon Procedures and Engagement

An attest engagement in which the CPAs agree to perform procedures for a specified party and issue a report that is restricted to use by that party.

Financial Audit

An audit of the financial accounting information of an organization or segment of the organization. This may involve a complete set of financial statements or a portion of a statement.

Compliance Audit

An audit to measure the compliance of the organization with some established criteria (laws and regulations, or internal control policies and procedures).

Review

An engagement designed to express limited assurance relating to subject matter or an assertion. A discussed in further detail in Chapter 19, the procedures performed are generally limited to inquires and analytical procedures.

Attest Engagement

An engagement in which the CPAs issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g., management).

Audit or Financial Statements

An examination designed to provide an opinion, the CPA's highest level of assurance that the financial statements follow generally accepted accounting principles, or another acceptable basis of accounting.

Integrated Audit

As required by the Sarbanes Oxley Act and the Public Company Accounting Oversight Board, an audit that includes providing assurance on both the financial statements and internal control over financial reporting. Integrated audits are required of publicly traded companies in the United States.

Generally Accepted Accounting Principles (GAAP)

Concepts or standards established by such authoritative bodies as the FASB and the GASB and accepted by the accounting profession as essential to proper financial reporting.

LO 1-6

Contrast the various types of audits and types of auditors.

LO 1-8

Describe how public accounting firms are typically organized and the responsibilities of auditors at the various levels in the organization.

LO 1-5

Describe how the credibility of the accounting profession was affected by the large number of companies reporting accounting irregularities in the beginning of this century.

LO 1-1

Describe the nature of assurance services.

LO 1-3

Describe the nature of financial statement audits.

LO 1-7

Explain the regulatory process for auditors of public companies and auditors of nonpublic companies.

LO 1-4

Explain why audits are demanded by society.

Assurance Services

Professional services that enhance the quality of information, or its context for decision makers. Many assurance services involve some form of attestation.

CPA Examination

A uniform examination administered by the American Institute of Certified Public Accountants for state boards of accountancy to enable them to issue CPA licenses. The examination covers the topics of accounting and reporting, auditing, business environment, regulation, and professional responsibilities.

Financial Reporting Framework

A set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements: For example, accounting principles generally accepted in the United States of America, or International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).

Sarbanes Oxley Act of 2002

A set of reforms that toughened penalties for corporate fraud, restricted the kids of consulting CPAs can perform for audit clients, and created the Public Company Accounting Oversight Board to oversee CPAs and public accounting firms.

Dodd-Frank Act (the Wall Street Reform and Consumer Protection Act)

A U.S. federal law that increases federal government regulation of the financial industry. The legislation enacted in July 2010, aims to prevent a major financial crisis by creating new financial regulatory processes that are aimed at enforcing transparency and accountability while implementing rules for consumer protection. The act also expands the Public Company Accounting Oversight Board's authority to oversee audits or brokers and dealers.

Audit Committee

A committee of a corporation's board of directors that engages, compensates, and oversees the work of the independent auditors, monitors activities or the internal auditing staff, and intervenes in any disputes between management, and the independent auditors. Members of the audit committee must be independent directors, that is, members of the board of directors who do not also serve as corporate officers or have other relationships that might impair independence.

International Ethics Standards Board for Accountants (IESBA)

A committee of the International Federation of Accountants, established to develop ethical standards and guidance for use by professional accountants. It encourages member bodies to adopt high standards of ethics for their members and promotes good ethical practices globally. The IESBA also fosters international debate on ethical issues faced by accountants.

International Accounting Education Standards Board

A committee of the International Federation of Accountants, established to develop guidance to improve the standards of accountancy education around the world. The organization focuses on (1) the essential elements of accreditation, which are education, practical experience, and tests of professional competence, and (2) the nature and extent of continuing professional education needed by accountants.

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 or uniformity of auditing practices and related services throughout the world.

Securities and Exchange Commission

A government agency authorized to regulate companies seeking approval to issue securities for sale to the public.

Certified Public Accountant

A person licensed by the state to practice public accounting as a profession, based on having passed the Uniform CPA Examination and having met certain educational and experience requirements.

Assertion

A representation or declaration made by the responsible party, typically management of the entity.

Association of CPA Firms

A separate legal entity composed of otherwise unrelated CPA firms. Associations allow member firms to enhance their capabilities to provide professional services (to refer work to or receive referrals from, other association members).

Statements on Auditing Standards (SASs)

A series of statements issued by the Auditing Standards Board of the AICPA. Generally accepted auditing standards are developed and issued in the form of SASs in the context of an audit of financial statements performed by an auditor.

LO 1-2

Identify assurance services that involve attestation.

Board of Directors

Individuals elected by a corporation's shareholder to oversee the activities of the corporation. A board of directors ordinarily is composed of executives from the company and non-executive directors.

Fraud

Intentional misstatement of financial statements by management (fraudulent financial reporting) or theft of assets by employees (employee fraud). Fraud also is referred to as irregularities.

Applicable Financial Reporting Framework

The financial reporting framework adopted by management and, where appropriate, those charged with governance in the preparation of the financial statements that is acceptable in view of the nature of the entity and the objectives of the financial statements, or that is required by law or regulations.

Public Company Accounting Oversight Board (PCAOB)

The five-member board established in 2002 to oversee the audit of public (issuer) companies that are subject to the securities laws. The board has authority to establish or adopt, or both, rules for auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports.

American Institute of Certified Public Accountants

The national professional organization of CPAs engaged in promoting high professional standards to ensure that CPAs serve the public interest.

Business Risk (of the client)

The risk assumed by investors or creditors that is associated with the company's survival and profitability.

Information Risk

The risk that the information used by investors, creditors, and others to assess business risk is not accurate.

Corporate Governance

The rules, processes, and laws by which businesses are operated, regulated, and controlled. A primary concern of corporate governance is the nature and extent of accountability of people in the corporation and procedures to try to assure that the organization works in the best interests of its stakeholders.

Suitable Criteria

The standards or benchmarks used to measure and present the subject matter and against which the CPA evaluates the subject matter. Suitable criteria are criteria that are established or developed by groups composed of experts that follow due process procedures, including exposure of the proposed criteria for public comment. Suitable criteria must have each of the following attributes: objectivity, measurability, completeness, and relevance.