AUDIT TEST 1

assurance services

-an independent professional service that improves the quality of (or certainty about) information for decision makers

Attest Services

-are a subset of assurance services and are characterized the issuance of a report about a subject matter or assertion that is made by another party

In all matters reating t the assignment an independence in mental attitude is to be maintained by the auditor and auditors

AS 1005

The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.

AS 1010

Due professional care is to be exercised in the performance of the audit and the preparation of the report

AS 1015

clarification project

ASB and IAASB have completed a ______ ______ resulting in a number of "clarified" standards and increased convergence

conflict of interest

Agency costs are costs arising from ________ ___ ______ between company managers and owners

established in 2002 by SOX, A private nonprofit organization with a governmnt mandate, not a government agency, 5 members no current practioners, 2 of 5 must have been cpas, all appointed by SEC

Company counting oversight board PCAOB

investors and the public are generally unaware of the limitation of auditors responsibility, similarly unaware that GAAP is flawed and limited itself, when failures occur investors and the public ask where were the auditors, this is true despite newer standards designed to reduce this gap

Constant 2, the expectations gap

private contract for a public company, llc

Constant 3: organization of audit firms and audit contracts

continuous audit, improved risk assessment, 100% testing of some attributes of FS balances or transactions ,

Data analytic opportunities for auditors for example

process

Determinance of measurement: GAAP, IFRS ETC, care in the measurement ______

method

Determinance of measurement: relevance of measurement _______

display

Determinance of measurement: trustworthiness of the measurement _____, CPC independence standards, PCAOB inspections

directly control the investment

Direct control

high, absolute

Due professional care; reasonable assurance requires a ________ level of assurance, not ______ assurance

partner, professional

Employment relationships including current _______ or _________ is employed by the audit client or sits on the board of directors

companies capture and store vast quantities of data, technological limits to the extraction, transmission, storage and this data has historically prevented its exploitation for the audit purposes, improvements in these areas create

Evolving data analytics

changes in client business and accy processes, audit process, information use (data analytics)

Evolving technology has been impacted auditing in several ways (3)

Reasonable Assurance

Expression of an opinion on FS requires that the auditor obtain ________ ________ •about whether the financial statements are free of material misstatements whether caused by error or fraud.

expression of an opinion

FROM AS 1001 The objective of the ordinary audit of financial statements by the independent auditor is the what?

enhance the degree of confidence of intended users in the financial statements

FROM ISA 200: The purpose of an audit is to what?

SEC

Final standard must be approved by the _____

covered persons did not know circumstances, covered persons lack of indpendence is corrected promptly, firm has an adequate quality control system

Firm independence will not be impaired solely because a covered person is not independent

deregulation, triumph and development of IT

From the 70s to the 2000s, there were three trends in auditing.

measuring performance/behavior an idea or thing used as a measure, norm, or model in comparative evaluations, level of quality or attainment

Generally speaking what is a standard?

research and consultation, transparent debate, exposure for public comment, consideration of comments received on exposure, affirmative approval

IAASB standard setting due process

such conflicts of interest potentially undermine constituent trust and standard setting legitimacy

Identify and explain the legitimacy of standards conflict of interest

18 members appointed by, ifac bodies 10, general public 3, forum of firms through the transactional auditors committee

International Accounting and Assurance Board

HQ in NYC, primary source of revenues are membership dues and contributions from the forum of firms, develops high quality international standards, promotes strong ethical values, encourages quality practice, supports the development of all sectors of the profession around

International Federation of Accountants

unconditional responsibility

Language of auditing standards: _________ __________ words such as "must", "shall", or "is required" indicate a responsibility auditors must fulfill

presumptively mandatory

Language of auditing standards: ___________ _________ words such as should indicate a responsibility that is mandatory unless the auditor demonstrates that alternative actions are sufficient

conflict of interest, COI

Legitimacy of standards just as management faces a ______ ___ ______ in preparing the fs standard setters potentialy face a _______ when creating professional standards

perception, assumption, socially desirable, proper or appropriate

Legitimacy: a generalized ________ or ______ that the actions of an entity are ____________________________ within some socially constructed system of norms, value, beliefs and definitions

Expression of opinion

More from AS 1001; the objective of ordnary audit of financial statements is the ________ ___ ________ on the fairness with which the financial statements are presented

delegate

Owners ________ responsibility to management

Contingent fees for tax services, planning advice for IRS listed or abusive shelters, tax services for fin reporting officers of client

PCAOB RULES PROHIBIT

tax return preparation, tax compliance services, general tax planning, other minor services

PCAOB specifically allow

initially adopted asb standards as interim pcaob, sox does not specify a specific standard setting process, pcaob has chosen a follow a notice and comment, pcaob asks for public comment on concept releases, proposal or re-proposed standards, consults a standing advisory group, pcaob considers the economic impact of proposed standards

PCAOB standard setting process

partly due to specialized purpose, most significantly in standards related to the audience report, structure of standards have changed

PCAOB standards have begun to diverge somewhat

applicable to audits if public companies registered the SEC, including many foreign companies, initially adopted ASB standards as interim PCAOB audit standards

Pronouncements are auditing standards

pre-approve

SEC 202: Audit committee must ____-_____ audit and non-audit services

audit related, tax

SEC 203: Public companies must disclose ______-_______ ______-and other fees

An auditor is not independent if the accountant is not or a reasonable investor with knowledge of all relevant facts and circumstances would include that the accountant is not capable of exercising objective and impartial to the audit

SEC RULES

aicpa code of pro conduct, sec rules, independence standards board, pcaob, sox act, firm policies

Sources of independence rules 6

bookkeeping, fisdi, appriasal, valuation, fairness, contrib, actuarial services, internal audit outsourcing services, management or human resrouces, broker, dealer investment ad, legal services, expert opinions

Sox independence effects bans 9 non-audit services on behalf of the client

mckesson and robbins

The AICPA committe on auditing procedures issued its first standard in 1939 in response to the _____ -____

intervention

The AICPA created the SEC practices to ward off government _______

Auditor

The __________ prepares Audit report which is provided to owners/investors, which provides a basis for trust in the FS

determinants of information value, organization of audit firms and audit contrats, expectations gap

Three things remained constant from the 70s-00s

the corporation has emerged as a primary driver of economy and standard of living world-wide, this creates a problem in terms of control, increased of importance in GAAP

Trend 2 triumph of the corporation

automated business and accounting processes, which impeded audit processes, decreased the cost of information and trading, no need for brokers, no need to wait for wsj, increased stock price responsiveness

Trend 3, information technology

political represent, independent ex-legitimacy

Two basic approaches to standard setting legitimacy

sox, register auditors of public companies, set audit, attest, ethics , and quality control, inspect audit firms, discipline auditors

What act created the PCAOB with authority to:

professional skepticism, reasonable assurance

What are the 2 collaries to due care

Managers have more information, manager have incentives to misstate the fs, investors may not trust FS and be unwilling to invest.

What are the 3 pros and cons of management preparation of the FS?

auditing standards board, international audit and assurance standards board, public company accounting oversight board

What are the three audit standard setters in the US

bribery

What did the Foreign corrupt practices act prevented what?

establish a firm/organization

What do owners/investors do in a sense of accounting and fs auditing?

when one party of a transaction has better information about the quality of the product being bought or sold

What is adverse selection?

declaration or statement intended to give confidence or certainty

What is assurance?

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

What is auditing?

assertions

What is management communicating, in preparing fs management implicitly makes _______ regarding the item amounts in the fin statements

anytime a person is shielded from his/her actions-owners of a firm may be unable to observe the actions of a firms managers opening the door to carless decisions

What is moral hazard?

a high, but not absolute, level of assurance

What is reasonable assurance?

the independent PCAOB regulates auditors of public companies, the auditor's client in the independent audit committee, political economic theory of regulated firm, the government responds to fire alarms, audit committee independent from management

What is the audit environment like today?

-to protect public interest, to set expectations among professionals to constituents, allow for accountability, to increase or maintain quality in practice -

Why would any profession set standards?

self-regulated

____-____ profession with SEC oversight

managers

________ prepare FS to inform owners/investers

responsibility to consider

_________ _ ________ words such as may, might, could indicate action or procedures that an auditor should consider performing. Whether to perform these is a matter of judgement

microeconomic

__________ theory explains need for auditing

close family member

a _______ _____ ______ has an accounting or financial reporting at audit client

adverse selection in which only lower quality goods can be bought or sold

a lemons market is a market outcome under _______ long one

US

applicable to audits of private companies and non-profits in the ____

internal

audit began as more of an __________ needs service

5, NAS

audit partner must be rotated every ______ years and may not receive compensation based on _______

honest, dishonest

auditor does not assume that management is ________ or ___________

standards, tech, regulation

audits continuing evolution across 3 dimensions

good faith, integrity, infallibility, negligence, bad faith, or dishonesty, errors of judgement

but no man whetehr skilled or unskilled undertakes that the task he assumes shall be performed successfully and without fault or error he undertakes ____ ____ and _____ but not for _______ and he is liable to his employer for ________ ____ _____ _ _____ but for losses consequent upon pure ______ ___ ______

yes

can investors sue auditors?

spouse, spousal equivalent, parent, dependent

close family

person who could reasonable influence the conduct of the audit, engagement team , chain of command, partners from the lead engagement, managerial employees who provide 10 or more hours of non audit services to the client

covered person

client confidentiality: might refuse to give data bc they don't trust auditors, lack of audit data analytics standards to keep secure, judgement required to select appropriate procedures and evaluate results

data analytic problems for auditors

reasonable care, diligence

every man who offers his services to another and is employed assumes the. duty to exercise in the employment such skill as possesses with ______ ____ and ______

has no influence on firm, has no capital balances in the firm, has no financial requirements with the firm other than fully funded retirement plan, has not been on the clients audit team within the last year

former partners or professionals in an accounting or financial reporting roles unless

making assignments and in providing supervision

further auditors in authority should consider the proficiency of each team member in what?

responsibilities an auditor might be proficient at some tasks but not others

how does he know whether he or she fulfills this standard.

exercised in the performance of the audit and the preparation of the report

how is due professional care exercised?

A spouse, spousal equivalent, or dependent

immediate family

inappropriate relationships with management, may not want to disappoint client personnel, may be overly trusting of people with which one is familiar, never accept less that persuasive evidence because you believe management is honest

impediments to skepticism 2nd point

pressures and incentives, maintain clients, meet deadlines, keep costs low

impediments to skepticism most important point

community possessed by others

in all these employments where peculiar skill is requisite if one offers his services he is understood as holding himself out to the public as possessing the degree of skill ________ _____ __ _____

regulatory burden, ncluded regulation of banking an inestment activities, included accounting and auditing advertising, private securities litigation reform act, trend to deregulation sox act of 2002

in the 70s and 80s the government significantly reduced _______ ____

being without bias, impartial, not a prosecutor not: trying to prove they are committing fraud, objective

independence

legitimacy comes from, expertise of standard-setters and financial independence, open process a conceptual framework

independent ex-legitimacy

beneficiary of an investment/trust mutual fund, most often not material for mutual funds

indirect control

deep

investors believe that auditors have _____ pockets

public trust, actual, public perceptions

maintaining ________ _______ is paramount so we arent just concerned about _______ independence byt also the _______ ________ about our independence

legitimacy is enhanced by including representatives from each interested consistency on standard setting board, cost approach is expertise as well as efficiency constituents, etc,

political represent legitimacy

anticompetitive

pressure from the DOJ and FTC forced the elimination of certain ___________ audit profession

attitude, questioning mind, critical assessment of audit evidence

professional skepticism is an _______ that includes what two sentences

where adopted applicable to audits of historical financial information, subordinate to local advertising regulations, basis of international accounting firms and methodologies, overseen by the public interest oversight board

pronouncements are international standards on auditing

au's

pronouncements are statements on auditing standards and are codified as _______

insurance

some posit that instead of or in addition to the provision of assurance, auditing provides _______

appropriateness, suffuciency

that is the auditor should consider the ___________ + __________ of evidence

make sure directives were being carried out

the "kings ears" in persia did what?

19, 5 from local regional and other non big 4 firms, 5 from NASBA, 4 from big 4 firms, 5 from users and public members

the asb has _____ members, what is the breakdown of the group

industrial revolution

the audit profession began to take shape during what time period?

reasonable assurance, material misstatement, error, fraud

the auditor has the responsibility to plan and perform the audit to obtain _______ _______, about whether the fin statements are free from _________ _______, whether caused by ________ or ________

make suggestions, management

the auditor may ________ ________ to management about form or content of fs prepare fs based on info from ______

management

the auditors client was _____ in the 80s

accounting policies, internal control

the fin stmts are managements responsibility. management is responsible for adopting sound _______ _____ establishing and maintinging ________ ______

intellectually honest, be recognized

to be independent, the auditor must be ___________ _________: to be _________ as independent he must be free from any obligation to or interest in the client, its management, or its owners

circumstances, believe

we want to avoid _________ that might lead others to _________ we are not independent regardless of whether we really are or not

existence or occurence, completeness, valuation or allocation, rights and obligations, pres and disclosure

what are the primary financial statement assertions

to put forth as true

what does it mean to make an assertion

market failure, when the more informed party cannot credibly his or her info to the other

what is a market for lemons

the quality of having great facility competence

what is proficiency?

don't question mgmt trust them, diminish audit quality

what might happen without professional skepticism

financial statements

what should an auditor be independent of

1934

when was the sec formed

formal education, continuing education, experience under other professionals

where does training and proficiency come from

Materiality

whether an item is large enough to likely influence the decision of an investor or creditor

if not trusted, don't have value, audit quality could go down

why is independence important