Audit Chapter 2

Sarbanes-Oxley Act passed in

2002

Code of Professional Conduct includes:

Principles Rules of Conduct Interpretations of the Rules

What is not a part of the role of internal auditors?

Providing reports on the reliability of financial statements to investors and creditors

PCAOB serves:

Public companies

Purchasing process example

Raw material or inventory purchases

Types of attest services

Reporting on Internal Control Financial Forecasts and Projections

Types of assurance services

Risk Assessment Performance Measurement Information System Reliability & E-Commerce

TIPSIE WACI

Training Independence Professional Care Supervised Internal Control Evidence Whole Accounting Principles Consistency Informative Disclosures

Reasons for departure from an unqualified audit report

Scope limitation (material) GAAP departure Lack of auditor independence

The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the

Senior management.

Performance - principle underlying an audit

Sufficient appropriate audit evidence supporting reasonable (not absolute) assurance that the financial statements are free of material misstatement

Types of other non-audit services

Tax Services Management Advisory Services Accounting and Review Services

Purpose - Principle underlying an audit

To express an opinion on the financial statements prepared by management, whose responsibility is to prepare the financial statements and to provide the auditor with information necessary to conduct the audit

Qualified audit reports can be issued because of:

material scope limitations departure from GAAP

ASB deals with public or nonpublic company audits?

nonpublic company audits

IAASB serves

over 100 countries

Adverse audit reports can be issued because of:

overall financial statements do not present fairly in conformity with GAAP

Human resource management process example

payroll

What best describes the general character of the three generally accepted auditing standards classified as standards of field work?

criteria for audit planning and evidence gathering

Examples of corporate governance

1. Board of Directors 2. Audit Comittee (independent of management)

5 Components of Business Processes

1. Human resource management process 2. Financing process 3. Purchasing process 4. Revenue process 5. Inventory management process

Principles Underlying and (4 categories)

1. Purpose 2. Responsibilities 3. Performance 4. Reporting

Organizations that affect the public accounting profession

1. Securities and Exchange Commission (SEC) 2. Financial Accounting Standards Board (FASB) 3. International Auditing and Assurance Standards Board (IAASB) 4. Public Company Accounting Oversight Board (PCAOB) 5. American Institute of Certified Public Accountants (AICPA) 6. International Accounting Standards Board (IASB)

An "integrated audit" includes

A financial statement audit and an audit of internal control over financial reporting.

Prior to the Sarbanes-Oxley Act of 2002, the _________was responsible for creating all new auditing standards in the United States. Today, for publicly held companies, that responsibility rests with the _____________.

AICPA Auditing Standards Board [ASB]; Public Company Accounting Oversight Board [PCAOB].

Which of the following best describes the roles of the American Institute of Certified Public Accountants [AICPA] and the Public Company Accounting Oversight Board [PCAOB] in establishing auditing standards? A) Auditing standards issued by the AICPA and the PCAOB are considered minimum standards of performance for auditors. B) The AICPA sets auditing standards for use in audits of nonpublic entities. C) The PCAOB sets auditing standards for use in audits of publicly held companies. D) All of the above.

All of the above.

Which of the following organizations affect the environment that CPAs work in? A) The American Institute of Certified Public Accountants [AICPA]. B) The Securities and Exchange Commission [SEC]. C) The Public Company Accounting Oversight Board [PCAOB]. D) All of the above.

All of the above.

The Public Company Accounting Oversight Board [PCAOB] derives its authority to set and enforce auditing standards for public company audits from

An Act of Congress.

"Mid-tier" firms

Are national in their practices and have international affiliates

Which of the following is NOT a typical responsibility for an associate/staff level auditor? A) Assisting in the development of the audit plan. B) Performing the audit procedures assigned to them. C) Preparing adequate and appropriate documentation of completed work. D) Informing the senior about any auditing or accounting problems encountered.

Assisting in the development of the audit plan.

Connections between PCAOB, Auditing standards board, and IAASB:

Auditing standards board created PCAOB Auditing standards board guided IAASB's creation IAASB help auditing standards board modify standards

Revenue process example

Cash collection / accounts receivable

Scope limitations can be:

Client imposed -- "do not confirm with banks x, y, and z" Condition imposed -- not enough staff to do inventory count

To exercise due professional care, an auditor should

Critically review the work performed and judgment exercised by those assisting in the audit.

Reporting - principle underlying an audit

Express an opinion, in the form of a written report, based on an evaluation of the audit evidence obtained; or state that an opinion cannot be expressed

Types of Auditors

External Auditors Internal Auditors Forensic Auditors Government Auditors

PCAOB uses what standards?

GAAS SAS their own issued standards, auditing standards (AS)

Minimum standards for performance of auditors

GAAS and SAS

Responsibilities - Principle underlying an audit

Have competence and capability; comply with ethical requirements; maintain professional skepticism; exercise professional judgment

Which of the following would be considered a non-attest assurance service engagement? I. Expressing an opinion about the reliability of an entity's financial statements. II. Reviewing and commenting on an entity-prepared business plan

II only

What is the chronological order of the following events? Sarbanes-Oxley Act Increased consulting services to auditees Enron and other scandals prohibition of most consulting work for auditees establishment of the PCAOB

Increased consulting services to auditees Enron and other scandals Sarbanes-Oxley Act Prohibition of most consulting work for auditees Establishment of PCAOB

Which of the following is generally not considered one of the five business processes or cycles? A) Information technology. B) Revenue [or sales]. C) Financing. D) Inventory management.

Information technology.

Internal control audits

Integrated audits combine internal control and financial statement audits for public companies. Not required for private companies

Types of audit services

Internal control audits Operational audits Compliance audits Forensic audits

Which of the following primarily shapes the context in which auditing takes place?

Legislation passed by Congress.

Account Balances assertions

Management asserts that the entity owns the inventory or service represented in the inventory or service account

Presentation and Disclosure

Management asserts that the financial statements properly classify and present the inventory or service

What best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements?

Management has the primary responsibility to ensure that the company's financial statements are prepared in accordance with GAAP, and the auditor provides reasonable assurance that the statements are free of material misstatement

Which of the following best describes the relationship between management and the board of directors? A) Management reports to the board of directors. B) The board of directors reports to management. C) Neither group is accountable to the other. D) Both groups report directly to the shareholders.

Management reports to the board of directors.

Auditing standards board serves:

Nonpublic companies

Transaction assertions

management asserts that transactions related to inventory or service actually occurred

What is the essential meaning of the generally accepted auditing standard that requires the auditor to be independent?

The auditor must be without bias with respect to the auditee

The principles underlying an audit conducted in accordance with GAAS as developed by the ASB and the IAASB include all of the following except

The auditor should have appropriate competence and capability to perform the audit.

Which of the following is considered an example of a compliance audit? A) The examination a company's claims that its product is superior to that of a competitor on specific dimensions. B) The examination of a school district networked computer system. C) The examination of a company's adherence to government-mandated safety provisions. D) The examination of a company's financial statements.

The examination of a company's adherence to government-mandated safety provisions.

Auditor's Standard Unqualified Audit Report includes:

Title Addressee Introductory Paragraph Scope Paragraph Opinion Paragraph Explanatory Paragraph Auditor Name Report Date

Ethics refers to

a system or code of conduct based on moral duties and obligations that indicates how we should behave

Referencing standards -- SAS

listed in number order; chronological SAS No. 39

Inventory management process example

depends on type of company; companies that sell products are heavier on inventory management

Forensic audits

detect or deter fraudulent activities

Compliance audits

determines the extent to which rules, policies, laws, covenants, or government regulations are followed by the entity being audited

Operational auditing is oriented primarily toward

efficiency and future improvements to accomplish the goals of management

Financial statements issued by management contain:

explicit and implicit assertions

Auditing standards serve as:

guidelines for and measures of the quality of the auditor's performance

The primary context in which the auditor is concerned is the:

industry or business of the audit client

The public company accounting oversight board...

is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies

Disclaimer audit reports can be issued because of:

lack of sufficient evidence to form an opinion lack of auditor independence

Associate's duties

performing audit procedures assigned to them informing senior about any auditing or accounting problems encountered

Senior's duties

preparing budgets assigning audit tasks to associates directing day to day performance supervising associates

Partner's duties

proper planning of audit signing audit report supervising audit team and reviewing work papers

Manager's duties

proper planning of audit, including scheduling team members supervising preparation of and approving audit program reviewing work papers, financial statements, and audit report

PCAOB deals with public or nonpublic company audits?

public company audits

Operational audits

systematic review of part or all of an organization's activities to evaluate whether resources are being used effectively and efficiently

Professionalism refers to

the conduct, aims, or qualities that characterize or mark a profession or professional person. All professions operate under some type of code of ethics or code of conduct.

Corporate governance

the way in which managers are overseen and supervised

What best describes the relationship between business objectives, strategies, processes, controls, and transactions?

to achieve its objectives, a business formulates strategies and implements processes, which are carried out through businesses transactions. The entity's information and internal controls systems must be designed to ensure that the transactions are properly executed, captured, and processed

Referencing standards -- AU

topical AU 300s relate to standards of fieldwork or evidence collection and evaluation