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Financial statement misstatements arise due to
- Accidental Errors
- Lack of Knowledge of accounting principles
- Unintentional Bias
- Deliberate Falsification
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Internal Auditors
- Employed by a company as an employee
- They often:
- - perform operational and compliance audits
- - address internal control
- - report to the audit comittee of the board of directors and to the president
- the institute of internal auditors is the international organization of internal auditors
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Government Accountability Office Auditors (GAO)
- Headed bu the comptroller general
- Responsibility of supporting congress
- Perform:
- - compliance, Operation and financial audits of government agencies
- - Examinations of corporations holding government contracts to verify contract payments have been proper
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Tax Auditors
- Responsible for enforcement of tax laws of various sorts
- internal revenue agents generally perform compliance of income tax returns
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PCAOB Role
Public Company Accounting Oversight Board
- Adopt Auditing, Attestation, quality control, ethics and independence standards relating to the preparation of audit reports for SEC registrants
- Oversee and discipline CPAs and CPA firms that audit public companies
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SEC
Securities and Exchange Commission
- Agency of the US government
- Oversight responsibility for the PCAOB
- Objectives:
- - protect investors and pubilc by requiring full disclosure of financial information by companies offering securities for sale to the public
- - prevent misrepresentation, deceit, or other fraud in the sale of securities
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Purpose of an Audit
Provide and opinion on financial statements are in accordance with applicable financial reporting framework
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Premise of an Audit
- Management ( and those charged with governance) gave responsibility to:
- - prepare financial statements in accordance with applicable financial reporting framework
- - Provide auditor with needed information and unrestricted access to those in the entity
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Personal responsibity of the auditor
appropriate competence and capabilities to perform audit in accordance with standards, including maintaining professional skepticism and exercising professional judgement throughout the audit
Professional skepticism - a questioning mind and a critical assessment of audit evidence
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Auditor actions in perforning the audit
- obtain reasonable assurance about whether financial statements are free from eror or fraud
- the auditor in unable to obtain absolute assurance due to:
- - nature of Financial reporting
- - nature of audit procedures
- - need to conduct audit within a reasonable period of time
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Reporting the results of an audit
- Express in a written report an opinion on findings (or statement that opinion cannot be expressed)
- the opinion is in whether the financial statements are in accordance, in all material respects, with the applicable financial reporting framework
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GAAS - General Standards
- Adequate technical training and proficiency
- independence in mental attitude is to be maintained
- due professional care is to be exercised
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GAAS - Standards of field work
- Auditor must adequately plan and properly supervise work
- Auditor must obtain a sufficient understanding of entity, and its environment, including internal control to assess risk of material misstatement and to design further audit procedures
- auditor must obtain suffucient appropriate audit evidence to afford a reasonable basis for the opinion
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GAAS - Standards of reporting
- state whether the financial statements are presented in accordance with GAAP
- identify circumstances in which such principles have not been consistently applied
- informative disclosures are adequate unless otherwise stated in the report
- 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 therefor
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The standard Auditors' report for nonpublic companies
- Title
- Adddressee
- Content sections
- - Introductory "We have audited"
- - Mangement's resopsibility
- - Opinion Paragraph
- Signature (firm name)
- City and State of office issuing the report
- Date
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Standard Unmodified report
Financial statements follow GAAP and Auditor does not add additional commentary for any issue
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Unmodified with emphasis of matter
Example: A lack of consistency in application of accounting principles
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Qualified opinion
scope limitation or departure from GAAP
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Adverse Opinion
Departure from GAAP so significant that financial statements as a whole are misleading
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Disclaimer of opionion
Unable to arrive at an opinion duue to a very significant scope limitation
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Elements of Quality Control
- Leadership responsibilities for quality within the firm
- Relevant ethical requirements
- acceptance and continuance of clients and engagements
- human resources
- engagement performance
- monitoring
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PCAOB
Public Company Accounting oversight board
- registration of public accounting firms that audit public companies
- conduct inspections of public company practice of registered public accounting firms
- Composed of 5 members - only two many be CPA's
- Members appointed by SEC and may serve no more that two five-year terms
- All accounting firms that audit SEC registrants must register with PCAOB
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