Auditing Midterm Review

What is the difference between statutory and common law?

Statutory - written law created by state or federal legislative bodies. Common - case law, unwritten law that has developed through court decisions

What is due professional care?

"Internal auditors must apply the care and skill expected of a reasonably prudent and competent person" It means that while no one expects us to be perfect, our stakeholders should be able to rely on us to demonstrate competence and use the most up-to-date knowledge, technology, and techniques in exercising our responsibilities.

List the primary differences between the audit report for non-public and public entities.

- Public includes the words "Registered" and "Independent" in the title. Private includes only independent. - Public references standards of the PCAOB. Private references GAAS. - Public includes less detailed discussions of management and auditor responsibilities. - Public includes an additional paragraph indicating that the auditors have also issued a report on the client's internal control over financial reporting. - For public, the report on internal control may either be presented separately or combined with the report on the financial statements into one overall report - Public report does not include section headings.

What procedures should the auditor undertake regarding subsequent events? How should these be accounted for in the financial statements?

-Review latest available financial statements and minutes of the board and selected committees -Inquire about matters dealt with at meetings for which minutes are not available -Inquiry of management -Obtain lawyer's letter -Obtain representations from management It is generally agreed that subsequent events involving business combinations, sub-stantial casualty losses, and other significant changes in a company's financial position or financial structure should be disclosed in notes. Otherwise, the financial statements might be misleading rather than informative. It is generally agreed that subsequent events involving business combinations, substantial casualty losses, and other significant changes in a company's financial position or financial structure should be disclosed in notes. Otherwise, the financial statements might be misleading rather than informative. Occasionally subsequent events may be so material that supplementary pro forma finan-cial statements should be prepared giving effect to the events as if they had occurred as of the balance sheet date.

List and describe the various parts of a standard audit report for a private company.

-Title includes the word independent -Addressed to client, its shareholders, the audit committee or the board of directors -Signed with name of firm -Dated with end date of fieldwork 1. Introductory paragraph - states financial statements audited and years applicable 2. Managements responsibility paragraph - management is responsible for preparation, fair presentation in accordance with GAAP, maintenance of internal control, and asserts that they are free from material misstatement whether due to fraud or error. 3. Auditors responsibility (3 paragraphs) a. responsibility is to express an opinion, conduct audit in accordance with GAAS b. Audit involves - obtains audit evidence, assessing risks of material misstatements due to fraud or error, considers internal control relevant to financial statements but does not judge effectiveness of internal control, evaluating overall acct policies, evaluating overall presentation of financial statements c. Audit evidence obtained is sufficient and appropriate to provide a basis for audit opinion 4. Opinion paragraph - gives auditors opinion on whether financial statements were prepared in accordance with GAAP

List and describe the various parts of a standard audit report for a public company.

-Title includes the words registered and independent -Addressed to client, its shareholders, the audit committee or the board of directors -Signed with name of firm -Dated with end date of fieldwork 1. States financial statements audited and years applicable. States that financial statements are responsibility of clients management, auditors responsibility is only to express an opinion on them. 2. Audit performed in accordance with PCAOB standards, those standards require that they plan and perform audit to provide reasonable assurance that the financial statements are free of material misstatement, Audit incl. examining evidence, assessing acct principles and estimations used, and evaluating overall financial statement presentation, Audit provides a reasonable basis for opinion 3. opinon paragraph - lists statements, years and if in accordance with GAAP 4. Also audited internal control in accordance with PCAOB standards and incl. opinion

List 5 assertions made by management regarding the financial statements.

1. Assets listed on the balance sheet really exist, the company has right to those assets and that their valuation was established in conformity with GAAP 2. The balance sheet contains all the liabilities of the company 3. Transactions recorded in the income statement really occurred, that sales have been recorded at appropriate amounts, all expenses have been recognized and that the recorded costs and expenses are applicable to the current period 4. Financial statement amounts are accurate, properly classified and summarized 5. Notes to the financial statements are informative and complete

List 5 things that auditors can do to prevent litigation.

1. Place emphasis within the firm on complying with GAAS and professional ethics 2. Investigate prospective clients thoroughly 3. Obtain a thorough knowledge of the client's business 4. Use engagement letters to prevent misunderstandings with clients 5. Carefully assess the risk of errors and irregularities, including those indicated by weaknesses in internal control 6. Exercise extreme care in audits of clients that have a high degree of business risk, as indicated by such factors as financial difficulties 7. Carefully prepare and review working papers 8. Retain legal counsel that is familiar with CPA's legal liability 9. Maintain adequate professional liability insurance

Identify 3 items often misclassified as misc revenue.

1. Rebates or refunds of insurance premiums - should be offset against the related expense or unexpired insurance. 2. Proceeds from sales of plant assets - should be accounted for in the determination of the gain or loss on the assets sold. 3. Proceeds from sales of scrap - should be applied to reduce costs of goods sold, under by-product cost accounting principles. 4. Collections on previously written off accounts or notes receivable - should be recorded as a reduction of the allowance for uncollectible notes account. 5. Write offs of old outstanding checks or unclaimed wages - unclaimed properties revert to the state after statutory periods, should be credited to a liability account.

List the 4 types of audit opinions. Under what circumstances are they issued?

1. Unmodified (unqualified for PCAOB) - financial statements follow GAAP and auditor does not add additional commentary for any issue. Clean opinion. 2. Unmodified w/ emphasis of matter - Clean, except for.. 3. Qualified - Scope limitation or departure from GAAP 4. Adverse - departure from GAAP so significant that financial statements are misleading 5. Disclaimer - Unable to perform the audit due to significant scope limitation or lack of independence

Explain 3 situations in which the wording of a report with an unmodified opinion might depart for the auditor's standard report.

1. Unmodified opinion—with an emphasis of matter paragraph. To emphasize a matter appropriately presented in the financial statements (e.g., a change in accounting principles). 2. Unmodified opinion—with an other matter paragraph. To emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements). 3. Unmodified opinion on group financial statements. When two or more CPA firms are involved in an audit and the group auditor (firm that does most of the work) does not wish to take responsibility for the work of the component auditors.

Under what circumstances can an additional paragraph be issued in an unqualified opinion?

1. Unqualified opinion—with an emphasis of matter paragraph. To emphasize a matter appropriately presented in the financial statements (e.g., a change in accounting principles). 2. Unqualified opinion—with an other matter paragraph. To emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements).

List and describe the objectives for the audit of revenue and expenses.

1. Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to revenues and expenses. 2. Consider internal controls over revenues and expenses. 3. Assess the risks of material misstatements of R&E and design further audit procedures: a. Establish the occurrence of recorded R&E transactions b. Determine the completeness of recorded R&E transactions c. Establish the accuracy of R&E transactions d. Verify the cutoff of R&E transactions e. Determine that the presentation and disclosure of R&E accounts are appropriate, including the proper classification of amounts and the proper presentation of EPS data

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?

10: Anti-fraud; used for insider trading cases. 18: protects anyone who bought or sold securities under false or misleading financial statements. Auditor must prove that they acted in good faith and did not know the statements were false or misleading.

What is a representation letter? Who signs this letter?

A letter that the auditor obtains from management. Its purpose is to have the clients principal officers acknowledge that they are primarily responsible for the fairness of the financial statements. Should be dated as of the date of the audit report. Signed by client - usually both CEO and CFO.

What is a related party? Give an example of a related party transaction.

A company may do business with a variety of parties with which it has a close association. These parties are known as related parties. Examples of related parties are: Affiliates Other subsidiaries under common control Owners of the business, its managers, and their families The parent entity Trusts for the benefit of employees Ex: There are many types of transactions that can be conducted between related parties, such as sales, asset transfers, leases, lending arrangements, guarantees, allocations of common costs, and the filing of consolidated tax returns.

What is the SEC act of 1933? What types of securities does it apply to? What liability does it place on auditors?

A federal securities statute covering registration statements for securities to be sold to the public. Requires companies intending to offer its securities for sale to the public to file a registration statement. Requires auditors to exercise 'due diligence' and holds both the company and its auditors liable if the registration statement is found to contain material misstatements or omissions.

What are minutes? Why are they important?

A formal record of the issues discussed and actions taken in meetings of stockholders and the board of directors. In completing the audit, the auditors should determine that they have considered all minutes, inc. those for meetings subsequent to year end. They will also obtain written representation from management that all minutes have been made available.

What is reasonable assurance?

A high, but not absolute, level of assurance that the financial statements do not contain material misstatements due to errors or fraud. Implies a low level of audit risk.

What is a third party beneficiary? Give an example.

A person, not the auditors or the client, who is named in a contract (or known by the contracting parties) with the intention that such person should have definite rights and benefits under the contract. Ex: Creditor that the CPAs are aware will be using the reports to make a decision on whether or not to extend credit to the client.

What is an engagement letter? Must the agreement be written or can it be oral?

A written contract summarizing the contractual relationship between the CPAs and the client. Typically specifies the scope of professional services to be rendered, expected completion dates and the basis for determining the CPAs fee.

What is an unasserted claim? Give an example. What procedures can the auditor use regarding unasserted claims?

A possible legal claim of which no potential claimant has exhibited an awareness. against the company. An unasserted claim should be on the list if the legal counsel has devoted substantive attention to it and if it is (1) probable that a claim will be asserted and (2) reasonably possible that a loss will result. The letter of inquiry should request that the legal counsel comment on those matters on which its views concerning the description or evaluation of the matter differ from those stated by management. However, if management fails to list an unasserted claim, legal counsel is not required to describe the claim in the reply to the auditors; the lawyer is, however, generally required to inform the client of the omission and to consider resignation if the client fails to inform the auditors about the claim. For this reason, auditors should always consider carefully the reasons for any legal counsel's resignation.What should the auditors do if the client's legal counsel refuses to respond appropri-ately to the letter of inquiry or management refuses to provide the auditors with permis-sion to communicate with legal counsel? In these situations, the auditors should attempt to obtain evidence by performing alternative procedures. If the auditors are unable to obtain sufficient appropriate audit evidence by performing alternative audit procedures, they should modify their opinion due to the lack of sufficient appropriate audit evidence.

What is a contingent liability? Give an example. What procedures can the auditor use to search for contingent liability? What is the duty of the auditor to search for contingent liabilities?

A possible liability, stemming from past events, that will be resolved as to existence and amount by some future amount. Ex: If a company is sued by a former employee for $500,000 for age discrimination, the company has a contingent liability. If the company is found guilty, it will have a liability. However, if the company is not found guilty, the company will not have an actual liability. Ex 2: A product warranty is often cited as a contingent liability that is both probable and can be estimated. 1. determine the existence of the loss contingencies. Because of the uncertainty factor, most loss contingencies do not appear in the accounting records, and a systematic search is required if the auditors are to have reasonable assurance that no important loss contingencies have been overlooked. 2. appraise the probability that a loss has been incurred and its amount. This is made difficult both by the uncertainty factor and also by the tendency of the client management to maintain at least an outward appearance of optimism.

What is due diligence?

A public accounting firms contention that its audit work was adequate to support its opinion on financial statements included in a registration statement filed with the SEC under Securities Act of 1933

What is professional skepticism?

A questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error & a critical assessment of audit evidence. Be on alert for: Audit evidence that contradicts other audit evidence, information that raises a question about the reliability of documents and responses to inquiries, conditions indicating possible fraud, and circumstances suggesting the need for additional audit procedures beyond those ordinarily required.

What is SOX? Why was it enacted? What are its requirements?

A set of reforms that toughened penalties for corporate fraud, restricted the kinds of consulting CPAs can perform for audit clients, and created the Public Company Accounting Oversight Board to oversee CPAs and public accounting firms. It was created in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards. Sox requires that all auditors of public companies in the U.S. perform an integrated audit. In an integrated audit assurance is provided on the financial statements and the effectiveness of internal control over financial reporting.

What is independence? Why is independence necessary of auditors?

A state of mind that permits the CPA to perform an attest service without being affected by influences that might compromise professional judgment, thereby allowing that individual to act with integrity and to exercise objectivity and professional skepticism

What is audit evidence?

All the information used by the auditors in arriving at the conclusions on which the audit opinion is based. It includes the information contained in the accounting records underlying the financial statements and other information.

What is the duty of the auditor after the issuance of the financial statements?

After the financial statements have been issued, the auditor has no obligation to perform any audit procedures regarding such financial statements. However, if, after the financial statements have been issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the auditor's report, may have caused the auditor to amend the auditor's report, the auditor shall: (a) Discuss the matter with management and, where appropriate, those charged with governance; (b) Determine whether the financial statements need amendment; and, if so, (c) Inquire how management intends to address the matter in the financial statements. If management amends the financial statements, the auditor shall: (a) Carry out the audit procedures necessary in the circumstances on the amendment. (b) Review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements together with the auditor's report thereon is informed of the situation

What are subsequent events? List the 2 types. Give examples.

An event occurring after the date of the balance sheet but prior to completion of the audit and issuance of the audit report. 2 types are (1) recognized - those providing additional evidence about facts existing on or before the balance sheet date. Ex: Customers checks inc. in the cash receipts of the last day of the year prove to be uncollectible and are charged back to the clients acct by the bank. If the checks were material in amount, an adj. on the 12/31 cash balance may be necessary to exclude the checks now known to be uncollectible. (2) non recognized - those involving facts coming into existence subsequent to the balance sheet date. Ex: shortly after the balance sheet date a client sustains an uninsured fire loss destroying most of its plant assets. the carrying value of plant assets should not be reduced in the balance sheet because these assets were intact at year end. However, people analyzing the financial statements would be misled if they were not advised that most of the plant assets are no longer in a usable condition.

What is a 'covered member'?

An individual, firm, or entity that is capable of influencing an attest engagement. • An individual on the attest engagement team. • An individual in a position to influence the attest engagement (e.g., a partner who directly supervises the partner who is in charge of the attest engagement). • A partner in the office in which the partner in charge of the attest engagement primar-ily practices in connection with the attest engagement. • Certain partners or managers who provide nonattest services to the client. • The public accounting firm, including its employee benefit plan. • Any entity controlled by one or more of the above. A covered member must comply with the highest level of independence restrictions on financial, business, and other relationships with a client.

What is the duty of the auditor after the end of fieldwork but before the issuance of the financial statements?

Auditor subsequent discovery of facts existing at date of report: 1. Advise client to make appropriate disclosure of the facts to anyone actually or likely to be relying upon the audit report and financial statements 2. If client refuses to make disclosure, CPA should inform each member of board and notify regulatory agencies

What steps should an auditor take prior to accepting a new client or continuing with an old client?

Assess clients integrity and possibility of fraud in financial reporting 1. investigate history of the client, inc. identities and reputations of the directors, officers and major stockholders 2. obtain managements permission to check references, ex: clients banker or legal counsel 3. Speak to previous auditors 4. assess engagement risk due to weak financial position 5. decide if they can complete audit in accordance with GAAP, ex: are the independent? competent? will they require third party experts?

What are working papers? Who do they belong to?

Audit documentation - the record of the audit procedures performed, relevant audit evidence obtained and the conclusions the auditors reached. They are the property of the auditor, not the client. The client does not have the right to demand access to the working papers and after the audit they are retained by the auditor.

What responsibility do auditors have to these third parties under the Ultramares doctrine?

Auditors may be held liable for ordinary negligence to a third party, if they were aware that the financial statements were to be used for a particular purpose by a known party or parties and have taken some action to indicate that knowledge.

What types of services are included in attestation services?

Audits of financial statements, Examinations of internal control, Trust services, Reviews of financial statements, Agreed-upon procedures engagements

What financial statements are audited?

Balance sheet, income statement, statement of cash flows, statement of retain earnings

Why is the 1136 Tenants case important to auditors?

Emphasized the legal liability of the CPA when associated with unaudited financial statements. Whenever CPAs encounter evidence that their client may be sustaining a loss through embezzlement or other fraud, they should warn their client immediately.

What is ethics? What is an ethical dilemma?

Ethics are the moral principles and values that govern the behavior of individuals and groups. An ethical dilemma is a situation that involves a decision about appropri-ate behavior. A key aspect of an ethical dilemma is that it generally affects parties that are not involved in the decision. For example, if management of a corporation decides to pollute the environment, it affects all of the members of society.

What are analytical procedures? When are they required to be used? What other times can they be used in an audit?

Evaluations of financial information made by a study of plausible relationships between financial and nonfinancial information. Performed as part of the auditor's' risk assessment as well as near the end of the audit. Those performed near the end of the audit assist the auditors in assessing the validity of the conclusions reached, including the opinion to be issued. This final review may identify areas that need to be examined further as well as provide a consideration of the adequacy of data gathered in response to unusual or unexpected relationships identified during the audit. AICPA AU 240 (PCAOB 316) specifically requires auditors to evaluate whether analytical procedures performed as substantive procedures or in the overall review stage indicate a previously unrecognized risk of material misstatement due to fraud.

What is breach of contract?

Failure of one or both parties to a contract to perform in accordance with the contracts provisions. A public accounting firm might be sued for breach of contract if, for ex, the firm failed to perform the engagement in accordance with the engagement letter. Negligence on the part of the CPAs also constitutes breach of contract.

What are the forms that are required to be filed by companies with the SEC? Under what circumstances must each form be filed?

Forms S-1 through S-11 (registration statements) Forms SB-1 and SB-2 (registration for small businesses) Form 8-K (current report) Form 10-Q (quarterly report) Form 19-K (annual report)

List and describe the 10 Generally Accepted Auditing Standards?

General Standards (3) 1. Have adequate technical training and proficiency 2. Maintain independence in mental attitude 3. Exercise due professional care Standards of Field Work (3) 1. Must adequately plan & properly supervise work 2. Must obtain a sufficient understanding of entity, and its environment, inc. internal control, to assess risk of material misstatement and to design further audit procedures 3. Must obtain sufficient appropriate audit evidence to afford a reasonable basis for the opinion Standards of Reporting (4) 1. State whether the financial statements are presented in accordance with GAAP 2. Identify circumstances in which such principles have not been consistently applied 3. Informative disclosures are adequate unless otherwise stated in the report 4. 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 therefore

What is the purpose of tick marks in an auditors report?

Identify specific steps in the work performed. Provide a very concise means of indicating the audit procedures applied to particular amounts. They should be accompanied by a legend explaining their meaning.

What is joint and several liability? Proportionate liability?

Joint and several: 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. Proportionate: allocates damages to each group that is liable according to that group's pro rata share of any damages recovered by the plaintiff.

What is fraud?

The misrepresentation by a person of a material fact, known by that person to be untrue or made with reckless indifference as to whether the fact is true, with intent to deceive and with the result that another party is injured.

What is scienter?

Intent to deceive, manipulate or defraud. The US Supreme Court held in the Hochfelder case that scienter must be proved for the auditors to be held liable under the SEC Act of 1934.

When there is a group audit with a shared responsibility or when an auditor relies on the work of another auditor, what reference is contained in the audit report and which paragraphs contain the reference?

Introductory paragraph: List which statements were audited elsewhere, the years, the % of total consolidated sales covered by those statements, and indicate that any opinion issued on those statements is based solely on report of other auditors Scope paragraph: We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. Opinion paragraph: In our opinion, based on our audits and the reports of other auditors, ...

What is the difference between known users, foreseen users and foreseeable users?

Known - audtiors knew the audited financial statements were for use for a particular purpose by a known user (third party beneficiary) Foreseen - knew they were for a particular purpose, but did not know the specific user Foreseeable - Should have realized that it was reasonably foreseeable that the financial statements would be used by this user

What is gross negligence?

Lack of even slight care, indicative for a reckless disregard for one's professional responsibilities. Substantial failures on the part of an auditor to comply with GAAS might be interpreted as gross negligence.

What is a loss contingency? Give an example. What procedures can the auditor use to search for loss contingency?

May be defined as a possible loss, stemming from past events that will be resolved as to existence and amount by some future event. Uncertainty as the both the existence of the amount of a loss will be resolved when some future event occurs or fails to occur. Ex: actual or potential litigation. Auditors can search for loss contingencies by: 1. reviewing minutes of directors meetings 2. inquiring of the clients lawyers 3. reviewing correspondence with financial institutions 4. sending confirmations to financial institutions and regulatory agencies 5. obtaining a representation letter from officers of the company

What is an operational audit? A compliance audit? Give examples.

Operational - studies a specific unit of an organization to measure its performance. Ex: Evaluating a specific dept. (ie. receiving or purchasing) for its effectiveness (success in meeting its stated goals and responsibilities) or efficiency (success in using to its best advantage the resources available to the dept.) Compliance - measures compliance with laws and regulations. Ex: IRS audit evaluates whether tax return is compliance with tax laws and IRS regulations. or FDIC bank examination measures banks compliance banking laws and regulations.

What other services are performed by public accounting firms?

Other assurance services: CPA Primeplus/ElderCare Services and XBRL services. Nonassurance services: tax services, bookkeeping, management consulting services (fraud investigations, IT consulting)

What is constructive fraud?

Performing duties with such recklessness that persons believing the duties to have been completed carefully are being misled. It differs from fraud in that constructive fraud does not involved knowledge of misrepresentations within the financial statements.

What must be proved by the client or third party under the 1934 Act? What defenses are available to the auditor?

Plaintiff must prove that (1) they sustained a loss, (2) the financial statements were misleading and (3) they relied upon those financial statements. And under section 10, they must prove scienter. Defenses: Under section 10, the auditor must only prove that there was no scienter. Under section 18, auditor must prove 'good faith'. Under both sections, they can also defend by proving that the losses experienced by the plaintiff were not caused by the auditor.

What must be proved by the client or third party under the 1933 Act? What defenses are available to the auditor?

Plaintiff must prove that they sustained a loss and that the registration statement was misleading. They need not prove that the auditor was negligent or that they relied upon the misleading statement. Defenses: (1) they conducted the audit with due diligence (2) the plaintiff's losses were not caused by misstated financial statements (3) the plaintiffs knew about the misstated financial statements when the securities were purchased (4) the statute of limitations - 1 year after the discovery of the misstatement, but no more than 3 years after the security was first offered to the public - have expired

What agency is responsible for the registration of the CPA title and license?

State boards of accountancy

What is privity of contract?

Privity is the relationship among contracting parties. A CPA firm is in privity with their client, as well as with any third party beneficiary, such as a creditor named in the engagement letter. Privity affects the auditors if they do not fulfil their obligations to the client under common law. This results in damages for which the client may sue and recover the losses which occurred, by proving the carelessness of the auditors in executing their duties accordingly under the contract.

What are substantive procedures?

Procedures performed by the auditor to detect material mis-statements in account balances, classes of transactions, and disclosures. Inc. analytical procedures and tests of details of account balances, transactions and disclosures.

What is the purpose of the auditing report?

Provide auditors opinion on whether the clients financial statements are accurate, complete and prepared in accordance with GAAP. Provides information to stockholders, creditors, potential investors, employees, and the public to be used in business and investing decisions

Who provides oversight for public companies? Private companies?

Public companies - PCAOB or Public Company Accounting Oversight Board Private companies - AICPA or American Institute of Certified Public Accountants

What is RICO? Why is it also applicable to auditors?

Rackateer 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 vs. 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.

What requirements are made by SOX regarding internal controls of public companies?

Section 404: A requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls. Section 404 had very costly implications for publicly traded companies as it is expensive to establish and maintain the required internal controls.

What defenses are available to auditors in common law cases?

The defendant is assumed to be innocent until proven guilty by a court of law and therefore bears no burden of proof. The CPAs will, however, present proof countering the plaintiff's accusation - either proving that they were not in breach of their duty to the plaintiff or that this breach was not the cause of the plaintiffs losses.

What is the difference between GAAP and GAAS?

The difference between generally accepted accounting principles and AICPA generally accepted auditing standards is that GAAP governs the preparation of company financial statements, while GAAS govern the auditing of financial statements in order to ensure a transparent and unbiased audit.

Working papers are confidential but not privileged - what does this mean?

The difference is that disclosure of legally privileged communications cannot be required by a subpeona or court order. Thus, CPAs may be compelled to disclose their communications with clients in certain types of court proceedings.

Who signs the audit report?

The firm's name is signed. An individual CPA's name is only signed if they are a sole practitioner.

What is the purpose of the AICPA Code of Professional Conduct? Describe the 2 parts of the code.

The purpose of the Code is to provide a framework for expanding professional services and responding to other changes in the profession, such as the increasingly competitive environment. The 2 part = Principles and Rules. Principles provide the framework for the Rules. They discuss the profession's responsibility to the public, clients and fellow practitioners in a way that is positively stated and goal-oriented. The Rules define acceptable behavior and identify sources of authority for performance standards. They are enforceable applications of the Principles.

What is materiality? Why is this important in auditing of financial statements?

The term material is defined as "sufficiently important to influence decisions made by reasonable users of financial statements." Materiality is greatly influenced by the size of the organization. The amount that would be considered material in the audit of a small client is much larger than the amount that would be considered material in the audit of a large client. Materiality also depends on the nature of the item. An amount that would be considered material in an error in the balance of a bank account may not be considered material in an error in the balance of an accumulated depreciation account.

What are the requirements of the PCAOB for auditors?

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.

What standard of duty does the auditor owe to the client with respect to the work to be done?

To perform audit in accordance with GAAS, to exercise due professional care, to notify client of any evidence of fraud, embezzlement or material misstatements due to error, and to maintain independence of mind and appearance

How are most accounting firms structured? Which form of organization results in the greatest limitation of liability?

Types of organizations: -Sole proprietorship -Partnerships -Professional Corporation (greatest limitation of liability) -Limited Liability Partnership (LLP) -Limited Liability Company (LLC) Most firms are structured: Partner—Overall responsibility is to assure that that audit is performed in accordance with professional standards. Manager—Supervise overall engagement. Seniors—"In charge" auditor on a daily basis. Staff assistants—Work under the immediate supervision of the senior. Categories of CPA firms: -Local -Regional -National -Big 4 -Alternative Practice Structures

What is negligence?

Violation of a legal duty to exercise a degree of care that an ordinarily prudent person would exercise under similar circumstances. Also referred to as ordinary or simple negligence.

Is it possible for the auditor to issue two different opinions in the same year on the same financial statements? If yes, give an example.

Yes - Auditors retained after client has taken its beginning inventory. A disclaimer may be issue on the income statement (the auditor doesn't know if income is reasonably stated), but an unqualified opinion may be issued on the year-end balance sheet.

What duty does the auditor have to the client with respect to divulging confidential or privileged information?

a member in public practice shall not disclose any confidential client information without the specific consent of the client. It also extends the obligation to maintain the confidentiality of information to other CPAs not directly involved with the client who obtain such information through practice reviews or sanctioned disciplinary hearings. The duty to maintain information confidentiality is a legal as well as a professional obligation. With some exceptions, the accountant-client relationship is one of confidentiality, and the failure to maintain a client's confidence could lead to a malpractice action against the accountant.