CPA Aud- Module 4
Definition of 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 objective of the financial statements, or that is required by law or regulation."
Services that the auditor is prohibited from providing: 9
(1) bookkeeping or other services related to the accounting records; (2) financial information systems design and implementation; (3) appraisal or valuation services; (4) actuarial services; (5) internal audit outsourcing services; (6) management functions or human resources; (7) broker or dealer, investment advisor, or investment banking services; (8) legal services and expert services unrelated to the audit; and (9) any other service that the PCAOB determines is impermissible.
Engagement Quality Review for an Audit or a Review under PCAOB Standards Engagement Quality Review Process —To evaluate the significant judgments and conclusions of the engagement team, the engagement quality reviewer should
(1) hold discussions with the engagement partner and other members of the engagement team; and (2) review documentation.
Engagement Quality Review for an Audit or a Review under PCAOB Standards Evaluation of Engagement Documentation —The engagement quality reviewer should evaluate whether the documentation that was reviewed____ & ____ Concurring Approval of IssuanceThe engagement quality reviewer cannot express such approval if there is any significant engagement deficiency [when (a) the engagement team failed to obtain sufficient appropriate evidence; (b) the engagement team reached an inappropriate overall conclusion; (c) the engagement report is not appropriate; or (d) the firm is not independent of its client].The firm cannot give permission to the client to use the engagement report until the engagement quality reviewer provides concurring approval of issuance.
(1) indicates that the engagement team responded appropriately to significant risks; and (2) supports the conclusions reached by the engagement team.
The seven principles are organized around four primary themes—What are they?
(1) purpose/premise; (2) responsibilities; (3) performance; and (4) reporting (as a memory aid, remember: PR-PR).
____ is A set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements; for example: U.S. generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRSs), issued by the International Accounting Standards Board (IASB), or a special purpose framework."
Financial reporting framework
Financial reporting framework adopted by an entity for its fianncial statement presentation is the US may be __ or ____
IFRS or US GAAP
SSAE- ___ is When the CPA is engaged to provide negative assurance on subject matter or an assertion of a responsible party that involves something other than historical financial statements.
Review
PCAOB Standards Have Several Differences Relative to AICPA's Statements on Quality Control Standards (SQCS) Engagement Quality Review—SQCS do not require an engagement quality review for any type of engagement, whereas the PCAOB ______
establishes such a requirement.
The purpose of an audit is to provide financial statement users with an ________. An auditor's opinion enhances the degree of confidence that intended users can place in the financial statements.
opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework
In regards to the Focus of the system of quality control the nature of scope ______
will vary with the circumstances
—Note
—Note that the term performance principle takes the place of what previously had been called fieldwork standards governing the auditor's evidence-gathering activities
Engagement Quality Review for an Audit or a Review under PCAOB Standards Concurring Approval of IssuanceThe engagement quality reviewer cannot express such approval if there is any significant engagement deficiency [when ____, ____, ____ & _____
(a) the engagement team failed to obtain sufficient appropriate evidence; (b) the engagement team reached an inappropriate overall conclusion; (c) the engagement report is not appropriate; or (d) the firm is not independent of its client].The firm cannot give permission to the client to use the engagement report until the engagement quality reviewer provides concurring approval of issuance.
Associated person of a registered public accounting firm —Should be able to withstand any pressure from the _________(There is no such requirement for a reviewer from outside the firm.)
-engagement partner or others and may be someone from outside the firm; if the reviewer is from within the firm, he/she should be a partner or have an equivalent position.
SOX consist of ___ titles
11
An individual audit engagement is governed by GAAS, whereas a CPA firm's collective portfolio of accounting and auditing services is governed by the ______
AICPA's SQCS
PCAOB is directed to conduct a continuous program of inspections that assess compliance with SOA, PCAOB rules, SEC rules, and applicable professional standards. (A written report is required for each such inspection.) Firms that provide audit reports for more than 100 issuers—PCAOB must inspect _____ Firms that provide audit reports for 100 or fewer issuers—PCAOB must inspec____
Annually Every three years
SQCS are issued by the AICPA's_____
Auditing Standards Board
Interpretive publications are not considered to be ____
Auditing standards
What are the steps to Engagement Planning
Decide whether to accept (or continue) the engagement—Recall the quality control standards regarding client acceptance/continuation issues. Perform risk assessment procedures to address the risks of material misstatement, whether due to error or fraud. Evaluate requirements for staffing and supervision. Prepare the required written audit plan (sometimes called the audit program) that specifies the nature, timing, and extent of auditing procedures for every audit area (which is usually prepared after control risk has been assessed, so that detection risk can be appropriately set in each audit area).
______The person in the firm who is responsible for the audit engagement and its performance and for the auditor's report.
Engagement Partner
______A process designed to provide an objective evaluation, before the report is released, of the significant judgments the engagement team made and the conclusions it reached in formulating the auditor's report. (The engagement quality control review process is only for those audit engagements, if any, for which the firm has determined that an engagement quality control review is required, in accordance with its policies and procedures.)
Engagement Quality COntrol Review
_______This is the person in the firm, a suitably qualified external person, or a team made up of such individuals, none of whom is part of the engagement team, with sufficient and appropriate experience and authority to objectively evaluate the significant judgments that the engagement team made and the conclusions it reached in formulating the auditor's report.
Engagement Quality Control Reviewer
What does test of details mean
Evidence gathering procedures consiting of Tests of ending balances or test of transactions
Accounting Standards Setters Associated with U.S. GAAP—The nature of the reporting entity determines which particular accounting standards must be followed under the label of U.S. GAAP. Federal governmental entities follow pronouncements of the ______ State and local governmental entities follow pronouncements of the _____ Other entities (such as corporations) follow pronouncements of the ______
Federal Accounting Standards Advisory Board (FASAB). Governmental Accounting Standards Board (GASB). Financial Accounting Standards Board (FASB).
Levels of Assurance—The level of assurance varies with the type of service involved and should be clearly addressed in the engagement letter between the CPA and the client entity. Audit or examination conveys a ______ of assurance Review coveys a ______ of assurance Compilation coneys ____of assurance
High Lower no
Note:
ICPA's "clarity and convergence" project—The AICPA reissued substantially all of their existing Statements on Auditing Standards (SASs) in a clarified format intended to make the SASs easier to understand. In addition, the AICPA substantially converged their auditing standards to be consistent with the requirements of IFAC's International Standards on Auditing. Although some differences in those respective requirements remain (and will be covered elsewhere in CPAexcel®), those standards are now very, very similar. The recent AICPA pronouncements are referred to as "Clarified Standards." The PCAOB adopted the then-existing AICPA auditing standards in April 2003 as "interim standards, on an initial, transitional basis." Since that time, the PCAOB has been issuing its own Auditing Standards. Much of the existing PCAOB auditing standards remain those of the AICPA existing as of April 16, 2003.
How are conclusions of an audit expressed?
In writing using standardized language to avoid miscommunication
____ are issued by the International Auditing and Assurance Standards Board, an audit-related standard-setting body within the International Federation of Accountants, known as IFAC.
International Standards on Auditing
Note Interpretive Publications
Interpretive publications are not considered to be auditing standards, however. These are issued under the authority of the Auditing Standards Board after all ASB members have had an opportunity to comment on the interpretive publication. Auditors should be aware of (and consider) interpretive publications applicable to their audits. When auditors do not apply such auditing guidance, they should be prepared to explain how they complied with the SAS provisions related to such interpretive publications.
What are the six elements of a quality control system
Leadership Responsibility for Quality Relevant Ethical Requirements Acceptance and COntinuance of client-relationship and engagements Human resources Engagement performance Monitoring
Auditing publications such as the Journal of accountancy and the AICPA's CPA LEtter ______authoritive status
No
What internal controls should be considered when accepting and audit
Obtain an understanding of internal control for planning purposes as required, emphasizing the assessment of the risk of material misstatement in individual audit areas and document the understanding of internal control. If contemplating reliance on certain identified internal control strengths as a basis for reducing substantive testing, the auditor must then perform appropriate tests of control to determine that those specific controls are operating effectively, that is, working as intended.
U.S. and non-U.S. accounting firms that prepare audit reports of any U.S. public company (issuer of securities) must register with the____
PCAOB
PCAOB's budget is funded by____ & ____-
PCAOB's budget is funded by
To obtain reasonable assurance, which is a high, but not absolute, level of assurance, the auditor____, ___, ___ &_____
Plans the work and properly supervises any assistants Determines and applies appropriate materiality level or levels throughout the audit Identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity's internal control Obtains sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks
Public companies (companies registered with the Securities and Exchange Commission, also referred to as "issuers," that is, issuers of securities to the public) —The auditing standards of the Applicable.
Public Company Accounting Oversight Board (PCAOB) are
THe public company accounting oversight board has five primary responsibilities
Registration of public accounting firms Inspection of registered public accounting firms standard setting Enforcement Funding
SSARSs_____ is When the CPA is engaged to provide a lower level of assurance (relative to that of an audit) on financial statements of a private company by performing limited procedures, including performing analytical procedures, and making appropriate inquiries of client personnel. The conclusion is known as "negative assurance" that the practitioner is unaware of a need for material modification.
Review
In regards to the Focus of the system of quality control the Inherent limitations _______
Similar to any internal control system, a quality control system provides reasonable (a high, but not absolute) assurance, reflecting implicit cost-benefit trade-offs.
The ______constitute GAAS and must be followed by auditors when AICPA auditing standards are applicable. (Specifically, the Rule of Conduct, Compliance With Standards, of the AICPA Code of Professional Conduct requires that auditors adhere to the standards promulgated by the Auditing Standards Board.) Under the clarified auditing standards, any reference to GAAS now specifically means this authoritative body of professional standards (SASs) issued by the Auditing Standards Board.
Statements on Auditing Standards SASs
Historically, the AICPA identified 10 standards comprising GAAS that used to serve as a framework for U.S. auditing standards. The AICPA replaced these 10 standards with seven principles in connection with its Clarified Auditing Standards. The AICPA no longer uses the term GAAS to refer to these 10 standards representing criteria to measure the quality of the auditor's performance. Instead the AICPA now uses the term GAAS to refer to the body of authoritative professional standards issued in the form of______
Statements on Auditing Standards.
The Main Difference Between the Clarified SAS and the Corresponding International Standard on Auditing
The SAS requires that the quality control review must be completed before the engagement partner releases the auditor's report, whereas the ISA requires that the quality control review be completed before the engagement partner dates the auditor's report.
The auditor is unable to obtain absolute assurance that the financial statements are free from material misstatement because of inherent limitations, which arise from
The nature of financial reporting The nature of audit procedures The need for the audit to be conducted within a reasonable period of time and so as to achieve a balance between benefit and cost
An audit in accordance with generally accepted auditing standards is conducted on the premise that management and, where appropriate, those charged with governance, have responsibility for_________
The preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error Providing the auditor with all information, such as records, documentation, and other matters that are relevant to the preparation and fair presentation of the financial statements; any additional information that the auditor may request from management and, where appropriate, those charged with governance; and unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence
Note:
The purpose of AU 220, Quality Control for an Engagement Conducted in Accordance with [GAAS], is to assist the auditor in implementing the firm's quality control procedures specifically at the engagement level. This pronouncement states that the auditor's objective is to implement quality control procedures at the engagement level that provide reasonable assurance that (a) the audit complies with professional standards and applicable legal and regulatory requirements and (b) the auditor issues an appropriate report.
What are the substantive (verify) Audit Procedures
These are evidence-gathering procedures designed to verify the financial statement elements and to detect any material misstatements.
What are the analytical procedures
Those evidence-gathering procedures that suggest reasonableness (or unreasonableness) based upon a comparison to appropriate expectations or benchmarks, such as prior year's financial statements, comparability to industry data (including ratios) or other interrelationships involving financial and/or nonfinancial data.
Purpose of legislation for the SOX
To address a series of perceived corporate misconduct and alleged audit failures (including Enron, Tyco, and WorldCom, among others) and to strengthen investor confidence in the integrity of the U.S. capital markets.
Governmental entities—When required by law, regulation, or agreement, Generally Accepted Government Auditing Standards (GAGAS), issued by the________ are applicable.
US Government Accountability Office (GAO
The various AICPA standards (i.e., Statements on Auditing Standards, Statements on Standards for Attestation Engagements, Statements on Standards for Accounting and Review Services, and Statements on Quality Control Standards) distinguish between two types of professional requirements:
Unconditional Requirements Presumptively mandatory requirements
SSARSsWhat is a preparation engagement
When the CPA is engaged to prepare the financial statements of a private company without issuing any report on those financial statements or expressing any form of assurance.
What is the Examination on SSAEs
When the CPA is engaged to provide an opinion (that is positive assurance) on subject matter or an assertion of a responsible party that involves something other than historical financial statements.
What is tests of transactions
Where the final balance is assessed by examining those debits and credits that caused the balance to change from last year's audited balance to the current year's balance.
What is tests of ending balances
Where the final balance is assessed by testing the composition of the year-end balance (e.g., testing a sample of individual customers' account balances that make up the general ledger accounts receivable control account balance).
Six Elements of a Quality Control System Monitoring—Policies and procedures should provide an ongoing assessment of the______________ Controls that are effective at one point in time, may deteriorate over time owing to neglect or changed circumstances. It is important that the controls are properly monitored so that timely adjustments can be made as necessary to keep the quality control policies and procedures working effectively over time.
adequacy of the design and the operating effectiveness of the system of quality control.
The issuer's audit committee is required to ______ any non-audit services
approve
Private companies (referred to as "nonissuers") and other entities —The auditing standards of the AICPA's Auditing Standards Board are applicable; these pronouncements collectively are referred to by the AICPA ____-
as generally accepted auditing standards (GAAS).
Qualifications of an Engagement Quality Reviewer —(1) Must be an______, must have_____
associated person of a registered public accounting firm; and (2) must have competence, independence, integrity, and objectivity:
The engagement quality reviewer (and any assisting personnel) should not make engagement team decisions or _______
assume any responsibilities of the engagement team.
AICPA's Statements on Standards for Attestation Engagements (SSAEs)—These are applicable when the CPA provides _________(e.g., management may make representations about its superior product performance that may be made more reliable by the CPA's independent verification and report).
assurance about written representations or subject matter other than historical financial statements
Interpretive Publications—Consist of the appendices to the SASs, _____, _____ and ____
auditing interpretations of the SASs, auditing guidance included in AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position.
Explanatory material is descriptive guidance within the
body of the standards that does not impose a requirement (indicated by may, might, or could in applicable standards)
In connection with its _____ the AICPA has replaced its Statements on Auditing Standards to be similar to the International Standards on Auditing (ISAs) issued by the International Federation of Accountants (specifically IFAC's International Auditing & Assurance Standards Board—IAASB). As part of that effort, the AICPA has also replaced its use of 10 criteria formerly known as "Generally Accepted Auditing Standards" with seven principles to provide a framework for understanding and explaining an audit.
clarity and convergence project
SSARSs-When the CPA is engaged simply to assemble into financial statement format the financial records of a private company and issue a _____- without expressing any degree of assurance on the reliability of those financial statements.
compilation report,
Title I—Established the PCAOB, gave standard-setting authority to the PCAOB (regarding auditing, quality control, and independence standards), and _____
created its role in overseeing the accounting firms required to register with the PCAOB.
PCAOB has broad authority to investigate registered public accounting firms and persons associated with such firms. PCAOB rules require cooperation by registered public accounting firms and associated persons—must produce -____
documents and provide testimony as directed. (PCAOB may also seek information from others, including clients of registered firms.)
Six Elements of a Quality Control System Acceptance and Continuance of Client-Relationships and Engagements—Policies and procedures should carefully assess the risks associated with ______ and ____
each engagement (including issues related to management integrity) and the firm should only undertake engagements that can be completed with professional competence.
PCAOB Standards Have Several Differences Relative to AICPA's Statements on Quality Control Standards (SQCS) Concurring Approval of Issuance —SQCS require any engagement quality review performed be completed before the______ Documentation Retention and Changes—SQCS do not specifically require that engagement quality review documentation must be retained with other _____
engagement report is released without requiring a concurring approval of issuance. engagement documentation and be subject to specific policies regarding retention and changes.
Competence—Must be qualified to serve as the engagement partner on the __
engagement under review
Title III—Established requirements related to corporate re sponsibility to make
executives take responsibility for the accuracy of financial reporting (including a requirement for certification by the entity's principal officers ) and to make it illegal for management to improperly influence the conduct of an audit.
Title II—Established independence requirements for __________(including CEO, CFO, controller, or chief accounting officer) during the one-year period preceding the audit engagement).
external auditors, which addressed perceived conflicts of interest (limiting non-audit services, establishing a five-year rotation for the audit partner and review partner, and restricting members of the audit firm from taking key management positions
Applicability of Standard —Requires an engagement quality review (and concurring approval of issuance) for engagements conducted under PCAOB standards for a ___ ___ ____
for an audit; (2) for a review of interim financial information; and (3) for an attestation engagement regarding compliance reports of brokers and dealers (or a review engagement regarding exemption reports of brokers and dealers).
To express an opinion, the auditor obtains reasonable assurance about whether the financial statements as a whole are ______
free from material misstatement, whether due to fraud or error.
AICPA's Statements on Standards for Accounting and Review Services (SSARSs)—These are applicable when the CPA is associated with the financial statements of a private company, but that association is something less than a ______-
full scope audit engagement
The auditor is expected to ________ of the SASs to identify those applicable to the audit. The auditor should be prepared to_____ from the SASs. Materiality and audit risk also underlie the application of the SASs, particularly those related to performing the audit (evidence gathering) and reporting.
have sufficient knowledge justify any departures
Six Elements of a Quality Control System Engagement Performance—Policies and procedures should focus on compliance with all applicable firm and professional standards and applicable regulatory requirements, and encourage personnel to consult as necessary with professional (or other) literature or other _____
human resources within or outside of the firm for appropriate guidance.
Six Elements of a Quality Control System Human Resources—Policies and procedures should address_____
important personnel issues (including initial hiring, assignments to engagements, professional development and continuing professional education, and promotion decisions).
Objective of the Engagement Quality Reviewer—To perform an evaluation of the significant judgments made by the engagement team and the related conclusions reached and_____-
in preparing any engagement report(s).
Title IV—Addressed a variety of enhanced financial disclosures, the most well-known of which deals with required____
internal control reporting (Section 404), among other matters.
Auditors are responsible for having appropriate competence and capabilities to perform the audit; complying with relevant ethical requirements; and _______ throughout the planning and performance of the audit.
maintaining professional skepticism and exercising professional judgment,
Six Elements of a Quality Control System Leadership Responsibilities for Quality—Policies and procedures should promote an internal culture that emphasizes a commitment to quality (sometimes called the "tone at the top"). For an individual audit engagement, the engagement partner should take responsibility for ___________
overall audit quality, although performance of certain procedures may, of course, be delegated to other members of the engagement team.
The firm should establish ______ for dealing with and resolving differences of opinion within the engagement team, with those consulted, and between the engagement partner and the engagement quality control reviewer (including that the conclusions reached are documented and implemented and that the report is not released until the matter is resolved).
policies and procedures
The firm should establish ______requiring appropriate documentation of the operation of each element of the system of quality control.
policies and procedures
PCAOB is directed to establish auditing and related attestation, quality control, ethics and independence standards and rules to be used by registered public accounting firms in the _____
preparation of audit reports for issuers.
Based on an evaluation of the audit evidence obtained, the auditor expresses, in the form of a written report, an opinion in accordance with the auditor's findings, or states that an opinion cannot be expressed. The opinion states whether the financial statements are ______
presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
A CPA firm is required to have a "system of quality control" for its accounting and auditing services to provide _______, and that the issuance of reports are appropriate in the circumstances.
reasonable assurance that engagements are performed in accordance with professional standards and applicable regulatory and legal requirements
In rare circumstances, the practitioner may depart from such a _______, but must document the justification for the departure and how the alternate procedures performed were adequate to meet the objective of the requirement (indicated by "should" in applicable standards).
requirement
PCAOB Standards Have Several Differences Relative to AICPA's Statements on Quality Control Standards (SQCS)Cooling-off Restriction—SQCS do not impose a "cooling-off" restriction or a r____________
requirement that the reviewer must be an associated person of a registered public accounting firm.
The seven principles are not____ and___. However, they are intended to be helpful as a framework for audit standard setting.
requirements and have no authoritative status
Documentation of an engagement quality review should be included in the engagement documentation .Documentation of an engagement quality review -(______
should be included in the engagement documentation
Documentation should contain ______- having no prior association with the engagement, to understand the procedures performed and conclusions reached by the engagement quality reviewer.
sufficient information to permit an experienced auditor,
Note
that the term responsibilities principle takes the place of what previously had been called general standards describing characteristics the auditor brings to the engagement.
Six Elements of a Quality Control System Relevant Ethical Requirements—Policies and procedures should address _____
the independence of personnel as necessary (should obtain written confirmation of compliance with independence requirements from all appropriate personnel at least
What is the auditors primary role
to provide an impartial report on the reliability of managemnets financial statements
Cooling-off" restriction —The person serving as engagement partner during either of the -______ audits preceding the audit subject to engagement quality review is not permitted to serve as engagement quality reviewer (unless the registered firm qualifies for a specific exemption to this requirement).
two