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to identify and record a transaction
recognition
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to receive funds from a transaction
realization
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the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria
auditing
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Types of Audits (3)
- Financial statemnent audits
- Compliance audits
- Operational audits
-
an audit conducted to determine whether the overall financial statements of an entity are stated in accordance with specified criteria (usually GAAP)
financial statement audit
-
a review of an organization's financial records performed to determine whether the organization is following specific procedures
compliance audit (1)
-
an audit perfomed to determine whether an entitiy that receives financial assistance from federal or provincial governments has complied with regulations
- compliance audit (2)
- eg) CRA
-
a review of any part of an organization's operating procedures and methods for the purpose of evaluating economy, efficiency, and effectiveness
- operational audit
- eg) payroll
-
Types of reports (services) (3)
- Audit
- Review service or engagement
- Compilation
-
a service where a written communication is provided expressing an opinion about the reliability of an assertion made by another party; also called "assurance service"
Assurance engagement
-
a special form of assurance engagemnt, such as financial statement audit, in which the auditor issues a report about the reliability of any information provided by one party to another
Attestation service
-
-
moderate assurance
review engagement
-
-
the risk that information upon which a business decision is made inaccurate
information risk
-
Parts of an auditor's report (8)
- addressee
- introductory statement
- mnagement responsibility
- auditor responsibility
- opinion paragraph
- auditor's signature
- date of the auditor's report
- auditor's address
-
eight auditing standards, developed by the CICA, consisting of the general standard, examination standards, and reporting standards
Generally Accepted Auding Standards (GAAS)
-
Ways the Public Accounting profession can remain professional (8)
- GAAS and CICA handbooks
- Continuing education
- Legal liability
- Practice inspections
- Code of professional conduct
- Provincial securities commissions
- Quality control
- Professinal examinations
-
GAAS general standard
adequate technical training and proficiency in auditing, due care, and objective state of mind
-
GAAS examination standards (3)
- adequate planning and execution to reduce risk to an acceptable level, and proper supervision
- sufficient understanding of business and environment and of internal control; tests of controls required if control risk assesment below maximum
- sufficient appropriate audit evidence
-
GAAS reporting standards (4)
- identify the financial statements and responsibilities of management and the auditor
- refer to scope of examination
- expression of opinion or assertion opinion cannot be expressed
- indicate whether financial statements present fairly in accordance with disclosed basis of accounting (GAAP)
-
auditor's opinions (5)
- unqualified
- qualified - scope & GAAP
- qualified - GAAP
- adverse
- denial
-
methods used by a public accounting firm to make sure that the firm meets its professional responsibilities
quality control
-
Elements of quality control at the firm level (3)
- independence
- client acceptance or continuance
- documentation
-
Levels of materiality
- immaterial
- material, but not pervasive
- material and pervasive
-
Describe introductory paragraph (2)
- states that auditor has done an audit
- lists the financial statements that were audited
-
Describe management responsibility paragraph
mgmt is responsible for preparation and fair presentation of statements in accordance with GAAP
-
Describe auditor responsibility paragraph (3)
- states purpose of the audit is to express an opinion on the financial statements
- conducted audit in accordance with GAAP
- describes audit procedure and scope
-
a misstatement in the financial statements, knowledge of which would affect a decision of a reasonable user of the statements
material misstatement
-
Specific conditions for an unqualifiied opinion (5)
- an audit engagement has been undertaken to express an opinion on financial statements
- GAAS have been followed by the auditor
- suffiicient, appropriate audit evidence has been accumulated; all examination standards have been met
- the financial statements are presented fairly in accordance with GAAP
- there are no circumstances that would require modifying the wording or adding an additional explanatory paragraph
-
rules to prevent and/or detect intentional and/or unintentional error
internal controls
-
General Purpose Financial Statements (5)
- Balance sheet
- Income statement
- Statement of Retained Earnings
- Cash flow statement
- notes
-
Ethical Principles (6)
- Trustworhiness
- Respect
- Responsibility
- Fairness
- Caring
- Citizenship
-
impartiality in performing professional services
independence
-
the auditor's ability to take an unbiased viewpoint in the performance of professional services
independent in fact
-
the auditor's ability to maintain an unbiased viewpoint in the eyes of others
independence in appearance
-
Threats to independence (5)
- Self-interest threat
- Self-review threat
- Advocacy threat
- Familiarity threat
- Intimidation threat
-
a threat to independence where the member has a financial interest in the client or in the financial results of the client
self-interest threat
-
a threat to independence where the PA is placed in the position of having to audit his or her own work or systems during the audit
self-review threat
-
a threat to independence where the firm or member is perceived to promote (or actually does promote) the client's position, that is, the client's judgement is perceived to direct the actions of the PA
advocacy threat
-
a threat to independence that occurs when it is dificult to behave with professional skepticism during the engagement due to a belief that one knows the client well
familiarity threat
-
a threat to independence that occurs when the client pesonnel intimidate the firm or its staff with respect to the content of the financial statements or with respect to the conduct of the audit, preventing objective completion of field work
intimidation threat
-
selected members of a client's board of directors, who provide a forum for the auditors to remain independence of management
audit committee
-
assessment of independence threats for a particular engagement
independence threat analysis
-
Code of Ethics (6)
- confidentiality
- maintenance of tthe reputation of the profession
- integrity and due care
- commpetence
- adherance to GAAP and GAAS
- advertising and solicitation
-
Ways to maintain independence (7)
- legal liability
- rules of professional conduct
- GAAS
- public accounting firm quality control processes
- audit committee
- shopping for accounting principles
- approval of auditors by shareholders
-
auditor believes that management is not lying, until lying is proven
management good faith
-
substantiate what management tells auditor
professional skepticism
-
the professional's obligation under the law to provide a reasonable level of care while performing work for those he or she serves
legal liability
-
laws developed through court decisions
common law
-
failure to exercise reasonable care in the performance of one's obligations to another
negligence
-
a party (such as an accountant) has an obligation to act for the benefit of another, and that obligation includes discretionary power
fiduciary duty
-
Sources of Auditor's Legal Liability (2)
-
the situation when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions
business failure
-
a situation in which the auditor issues an erroneous audit opinion as the result of an underlying failure to comply with the requirements of GAAS
audit failure
-
the risk that the auditor will conclude that the financial statements are fairly stated and an unqualified opinion can therefore be issued when, in fact, they are materially misstated
audit risk
-
a false assertion that has been made knowingly, without belief in its truth, or recklessly without caring whether it is true or not
fraud
-
completing the audit with care, diligence, and skill
due care
-
theft of assets
defalcation
-
a legal defence under which the professional claims that the client failed to perform certain obligations and that it is the client's failure to perform those obligations that brought about the claimed damages
contributory negligence
-
a legal defence under which the professional claims that no contract existed with the plaintiff; therefore no duty existed to perform the disputed service
lack of duty to perform
-
the financial statements appropriately portray the financial situation of the organization
absence of misstatement
-
Auditors' defences to negligence (6)
- lack of duty
- absence of misstatement
- no damages
- absence of negligence
- absence of causal connection
- contributory negligence
-
a legal defence under which the professional claims that the disputed service was properly performed; an auditor would claim that the audit was performed according to GAAS
absence of negligence
-
a legal defence under which the professional contends that the damages claimed by the client were not brought about by any act of the professional
absence of causal connection
-
liability to non-clients
a PA firm may be liable to third parties if a loss was incurred by the claimant due to reliance on misleading financial statements
-
liability to clients examples (3)
- failure to complete an audit egagement on the agreed-upon date
- failure to discover a defalcation
- breach of the confidentiality requirements of public accountants
-
Auditors' defences to third-party suits (6)
- lack of duty to perform (duty of care)
- absence of misstatement
- no damages
- absence of negligent performance
- absence of causal connection
- contributory negligence
-
The Profession's Response to Legal Liability (8)
- Conduct research in auditing
- Set standards and rules
- Set requirements to protect auditors
- Establish practice inspection requirements
- Defend unjustified lawsuits
- Educate users
- Sanction members for improper conduct and performance
- Lobby for changes in laws
-
Individual Professional Accountant's Response (11)
- Deal only with clients possessing integrity
- Hire qualified personnel and train and supervise them properly
- Follow the standards of the profession
- Maintain independence
- Understand the client's business
- Perform quality audits
- Document the work properly
- Obtain an engagement letter and a management representation letter
- Maintain confidential relations
- Carry adequate insurance
- Seek legal counsel
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