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
