ACCT 162

  1. Information Risk
    • –The risk that the information
    • disseminated by a company will be materially false or misleading.

    –Users demand an independent third party assessment of  the information
  2. Business Risk
    • –The risk that an entity will fail to meet
    • its stated business objectives
  3. Conditions creating demand for reliable information
    Todays information is:

    –More complex

    • –Demanded
    • by remote users

    –Demanded in a more timely manner

    –Has far reaching consequences
  4. Assurance Services
    • •independent professional services that
    • improve the quality of information, or its context, for decision makers.


    • •XBRL Reporting
    • •Sustainability and other types of “Green” Reporting
    • •Information risk assessment
    • •Internal audit outsourcing
  5. Assertions about Events and Transactions
    • Occurance
    • Completeness and Cutoff
    • Accuracy
    • Classification
  6. Assertions about Account Balances
    • Existence
    • Rights and obligations
    • Completeness
    • Accuracy and Valuation
  7. Assertions about Presentation and Disclosures
    • Occurrence and rights and obligations
    • Completeness
    • Classification and understandability
    • Accuracy and valuation
  8. Financial Audits
    • Ensure that financial statements are reliable
    • -External auditors/ CPAs
  9. Operational Audits
    • -Improve operational economy and efficiency
    • -Internal and governmental auditors/ CIAs
  10. Compliance Audit
    • Ensure compliance with company and/or governmental rules and regulations
    • -Internal and Govt. Auditors
  11. Forensic Audit
    • -designed to investigate a crime and will ofter involve gathering evidence designed to convict a fraudster
    • -Fraud auditors/CFEs
  12. Occurrence & rights and obligations
    • -Events giving rise to transactions are valid and have taken place
    • -items presented have occured and are either owned by or represent the responsibility of the entity
  13. Completeness
    • -All transactions have been recorded
    • -Balances include all items that should be included in accordance with GAAP
    • -the proper disclosures have all been made by the entity
  14. Cutoff
    All transactions have been reported in the appropriate period
  15. Accuracy and Valuation
    • -Transactions are recorded at the correct amount
    • -Balances are reported at the proper amount in accordance with GAAP
  16. Classification and understandibility
    • -Transactions have been posted to the proper account
    • -accounts in the disclosures have been appropriately grouped and users can comprehend the disclosures
  17. Existence
    Balances include only assets and liabilities that exist
  18. Rights and obligations
    Entity has legal claim on all assets and revenues reported and has a legal responsibility for all liabilities and expenses
  19. Purpose of auditing
    To enhance the degree of confidence that intended users can place in the financial statements
  20. Types of reliability of audit evidence
    (most reliable to least)
    • -Auditor's direct personal knowledge
    • -External documentary evidence
    • -External-internal evidence
    • -Internal documentary evidence
    • -Verbal evidence
  21. Independence in fact
    Auditors are expected to be unbiased and impartial with respect to the financial statements
  22. Independence in appearance
    relates to others' perceptions of auditors independence
  23. Requirements for Independence
    • 1. Limit service for engagement partner and engagement quality partner on a particular client to 5 years
    • 2. A firm cannot conduct an audit if a client employee with financial oversight responsibility was a member of the audit team during the audit year.
    • 3.A one year "cool off period" is required before an auditor is permitted to assume employment for a client in a key engagement
  24. Rule 101: Independence

    Financial relationships
    • -No direct financial interest
    • -No material indirect financial interests
    • -No material joint ventures with client, officers, directors, or shareholders.
  25. Rule 101: Independence

    Managerial relationships
    -Cannot act as a promoter, underwriter, or equivalent to an employee (i.e. no decision making)
  26. Rule 101: Independence

    Family and relatives
    • Immediate family members (Spouse or dependent) cannot have:
    • -A direct financial interest
    • -A material indirect financial interest
    • -Hold a position of influence with an audit client

    • Close Relatives (parents, siblings, or non-dependent child) cannot have:
    • -ownership or control of an audit client
    • -employment with a client in an audit position
  27. Rule 101: Independence

    • -Loans are permitted if:
    • -obtained prior to 2/5/01 under old rules
    • -obtained prior to the lender becoming a client
    • -sold to an attest client
    • -obtained before the CPA became a member
    • -Loans on life insurance
    • -fully collateralized by cash deposits, loans, leases, etc.
    • -Credit cards and cash advances are less than $10,000.
  28. Rule 101: Independence

    Write-up Services
    • Are allowed if:
    • -Client understands and accepts the statements as their own
    • -auditor does not assume a role of employee or management
    • -No other relationship that impairs integrity and objectivity

    Are not allowed for public company clients!
  29. Rule 102: Integrity and objectivity
    • -CPA's must remain free of conflicts of interest
    • -Do not knowingly misrepresent facts
    • -Do not subordinate judgments to others
    • -Do not knowingly make false or misleading entries in financial records
  30. Rule 102: Integrity and Objectivity

    Report to a higher level in supervisor's position is not acceptable

    Consider resigning if upper management will not take appropriate action
  31. Rule 201: General Standards
    Rule 202: Compliance with Standards
    Rule 203: Compliance with Accounting Principles
    • -Follow professional standards and interpretations
    • -Perform only those services that can be completed with professional competence
    • -Exercise due care
    • -Adequately plan and supervise all engagements
    • -Obtain sufficient relevant data to afford a reasonable basis for all conclusions and recommendations.
  32. Rule 301: Confidentiality of Client information
    -CPA cannot disclose confidential information without client's consent

    • Exceptions:
    • -to remain in compliance with standards
    • -If work papers and subpoenaed by court
    • -As part of a PCAOB peer or quality review of practice
    • -As part of an ethics violation for a state board of accountancy investigation
  33. Rule 302: Contingent Fees
    • Fees based on a particular finding or outcome
    • -Not permitted for attest engagements
    • -Not contingent if:
    • Fixed by courts
    • Based on hours worked or services provided

    -Allowed for non-attest (tax, consulting, litigation support) engagements
  34. Rule 501: Acts Discreditable
    • -Discrimination
    • -Failure to follow GAGAS on a govt. audit
    • -Making false or misleading journal entries
    • -Failure to meet requirements of a governmental body, commission, or regulatory body
    • -Failure to file personal income tax return
    • -Disclosure of CPA examination questions or answers
  35. Rule 502: Advertising and Solicitation 
    • -Permitted for new clients
    • -Cannot be "false, misleading, or deceptive"
    • -Cannot create false or unjustified expectations or favorable results
    • -Cannot state ability to influence third parties
    • -Cannot underestimate fees (Low balling)
  36. Rule 503: Commissions and Referral Fees
    • Commissions: recommending the products or services of clients or third parties (non-CPA)
    • -Permitted for non-attest, if disclosed
    • -Prohibited for attest engagements

    • Referrals: Recommending the services of CPAs
    • -Permitted for any engagements, if disclosed
  37. Rule 505: Form of Organization and Name
    • -A firm can practice any form permitted by state including: (LLP, LLC)
    • -Firm name should not be misleading
    • -All partners must be CPAs or members of AICPA if included in the firm name
  38. Purpose of System of internal controls
    • To provide the firm reasonable assurance that the firm and its personnel:
    • -comply with professional standards and applicable regulatory and legal requirements
    • -issue reports that are appropriate in the circumstances
  39. Types of Auditor Opinions
    • -Unqualified (F/S are in conformity with GAAP)
    • -Qualified (Except for limited items, F/S are in conformity with GAAP
    • -Adverse (F/S are not in conformity with GAAP)
    • -Disclaimer (Auditors do not express an opinion)
  40. Imperative Principle
    -directs a decision maker to act according to the requirements of an ethical rule
  41. Principle of Utilitarianism
    • -emphasizes examining the consequences of action rather than following rules
    • -Act-utilitarianism: center of attention is the individual act as it is affected by the specific circumstances of a situation.
    • -Rule-utilitarianism: Emphasizes the centrality of rules for ethical behavior while still maintaining the criterion of the greatest universal good.
  42. The Generalization Argument
    -Considers the consequences of a decision made by similar persons acting under similar circumstances.

    "What would happen if everyone acted in that certain way?"
  43. Responsibilities Principle
    • 1. Competence and capabilities
    • -experience and expertise
    • 2. Independence
    • -in fact and appearance
    • -financial and managerial relationships
    • 3. Due care
    • -Level of performance by reasonable auditor in similar circumstances
    • 4. Professional skepticism and judgment
    • -Skepticism: Appropriate questioning and critical assessment of evidence
    • -Judgment: Application of training, knowledge, and experience in making informed decisions during audit
  44. Performance Principle
    • Goal is to provide reasonable assurance that financial statements do not contain material misstatements
    • 1. Planning and supervision: preparation of audit plan
    • 2. Materiality: influences decisions of F/S users
    • 3. Risk Assessment: Understand entity and environment (Includes internal control)
    • -Determine necessary effectiveness of substantive tests
    • 4. Audit evidence:
    • -sufficient=quanity
    • -Appropriate = quality 
  45. Reporting Principle
    • -Express an opinion on entity's F/S
    • -Assess F/S against financial reporting framework (GAAP, IFRS)
  46. Types of Negligence
    • -Ordinary: an unintentional breach of duty owed to another party because of a lack of reasonable care
    • -Gross: a breach of duty owed to another party because of lack of minimal care
    • -Fraud: A misrepresentation of facts that the individual knows to be false with the intention to deceive.
  47. Primary Party
    Third party known by name to the auditors for whose primary benefit the audit or other accounting service is performed (near privity)
  48. Liability under common law
    • -Breach of contract: a claim that accounting or audit services were not performed in the manner described in the contract (clients vs Auditor)
    • -Tort: actions cover other civil complaints (fraud, deceit, injury) arising from auditors failure to exercise the appropriate level of professional care
  49. Privity of contract
    the relationship of direct involvement between parties to a contract
  50. Common Law: Client Case

    Plaintiff must prove?
    • 1. economic loss
    • 2. breach of contract or failure to exercise appropriate level of professional care
    • 3.Loss caused by breach of contract
  51. Common Law: Client Case

    Possible Defenses?
    • 1. No breach of contract
    • 2. causation- loss is caused by other factors
    • 3. contributory negligence- client was partially responsible
  52. Common Law: Third Parties

    Plaintiff must prove?
    • Tort only!
    • 1. economic loss
    • 2. material misstatement in F/S
    • 3. Loss caused by reliance on F/S
    • 4. Auditors failure to exercise appropriate level of care
  53. Common Law: Third Parties

    Possible Defenses?
    • 1. Causation- loss caused by factors other than F/S 
    • 2. Work performed in accordance with GAAP
    • 3. Lack of appropriate standing (relationship) between 3rd party and auditors
  54. Statutory Law:

    Securities Act of 1933
    • Purchasers of initial registration (tort)
    • -Plaintiff must prove
    • 1. economic loss
    • 2. material misstatements in F/S

    • -Possible defenses
    • 1. Due diligence-followed GAAS
    • 2. Causation- loss caused by other factors
  55. Statutory Law

    Securities Exchange Act of 1934
    • Purchases and sellers of securities through subsequent transactions (tort)
    • -Plaintiff must prove
    • 1. economic loss
    • 2. Material misstatements in F/S
    • 3. Loss caused by reliance on F/S
    • 4. Auditors were aware of material misstatements and acted with intent

    • -Possible defenses
    • 1. auditors had no knowledge of material misstatements 
    • 2. Auditors acted in good faith
  56. Foreseeable party
    The individuals or organizations whose decisions normally rely on audited financial statements and opinions on those F/S
  57. Foreseen Party
    A limited class of individuals or organizations that could be reasonably expected to rely on auditors work
Card Set
ACCT 162
Test #1