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What service consists of a methodical review and objective examination of an enterprise's financial statements?
Audit
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What is the objective an Auditor's examination?
To express an opinion on the financial statements.
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What form does the Auditor's expression of their opinion of an enterprise's financial statements take?
The form of an audit report.
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Who's responsibility is it to prepare financial statements?
Management
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What is considered the independent auditor's "Audit function?"
The expression of an opinion on management's financial statements.
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An audit report gives what to management's financial statements?
Credibility
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Auditors follow what standards in completing their examination of management's financial statements?
Generally Accepted Auditing Standards (GAAS)
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How many Generally Accepted Auditing Standards exist?
10
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In addition to the 10 Generally Accepted Auditing Standards, what other guidelines do auditors adhere to?
All of the official pronouncements that explain and interpret GAAS.
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What is the auditor's primary assertion regarding management's financial statements?
Whether the statements are "presented fairly" in accourdance with Generally Accepted Accounting Principles. (GAAP)
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How does the AIPCA define "Fair presentation."
The financial statements reflect the underlying transactions of the company in a manner that represents the financial statements within a range of acceptable limits.
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What board was established after the Sarbanes-Oxley Act of 2002 to establish auditing and related professional practice standards?
The Public Company Accounting Oversight Board (PCAOB)
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How are the standards established by the Public Company Accounting Oversight Board (PCAOB) to be used?
The standards are to be used in the preparation and issuance of audit reports for "issuers."
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Who are "issuers?"
'Issuers" are entities subject to the rules of the SEC (primarily public companies).
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Who should public accounting firms register with in order to audit issuers?
Public accounting firms should register with the PCAOB in order to audit issuers.
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If registered with the PCAOB, what may public accounting firms be subject to?
The firm may be subject to Board inspection, disciplinary proceedings, and sanctions by the PCAOB.
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What individuals comprise the PCAOB?
5 financially literate members.
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How many members of the PCAOB may be CPAs?
Two members must be CPAs, but only 2.
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What payments may members of the PCAOB receive from public accounting firms?
Only fixed continuing payments, such as retirement payments. No other compensation is permitted.
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What authority does the PCAOB have regarding ASB Standards?
The PCAOB may modify, repeal, replace, or permanently adopt the Standards as they apply to issuers.
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The ASB retains the authority to set performance and reporting standards for audits of financial statements for what type of enterprises?
Nonissuers. (Not subject to the SEC, not a public company)
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What does "SSAE" stand for?
Statements on Standards for Attestation Engagements
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Who are Statements on Standards for Attestation Engagements (SSAE) issued by?
Senior technical bodies of the AICPA.
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What does "SSARS" stand for?
Statements on Standards for Accounting and Review Services
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What committee issues Statements on Standards for Accounting and Review Services (SSARS)?
The Accounting and Review Services Committee
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Why was the Accounting and Review Services Committee was established by the AICPA?
To regulate standards for privately held companies not seeking audited financial statements
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What type of reports are SSARS applicable to?
Unaudited financial statements or unaudited financial information of a nonpublic entity.
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What does "SSCS" stand for?
Statements on Standards for Consulting Services
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What AICPA committee issues Statements on Standards for Consulting Services? (SSCS)
The Management Advisory Services Executive Committee
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What AICPA Code provides members with a guideline for behavior in the conduct of their professional affairs?
The AICPA Code of Professional Conduct
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What public accounting services does the AICPA Code of Professional Conduct apply to?
All public accounting services
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Which Acts gave the SEC authority to set guidelines for publicly traded companies?
The Securities Acts of 1933 and 1934
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What two places does the SEC publish their regulations?
In the Accounting Series Releases and in Regulation S-K
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When do final standards adopted by the PCAOB become effective?
When and if they are approved by the SEC.
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Under the Sarbanes-Oxley Act, the auditors report to and are overseen by who?
The issuer's audit committee. (PCAOB Standard)
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Under the Sarbanes-Oxley Act, which committee must approve all services provided by a public accounting firm, whether audit or non-audit?
The audit committee (PCAOB Standard)
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Under the Sarbanes-Oxley Act, what is now required for every public company audit report?
A second partner review (PCAOB Standard)
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Under the Sarbanes-Oxley Act, severe penalties now apply to who?
Those who destroy records, who willfully fail to maintain records for at least 7 years, commit securities fraud, or fail to report fraud. (PCAOB Standard)
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Under the Sarbanes-Oxley Act, who now has more protection in the event that fraud is discovered?
Whistleblowers (PCAOB Standard)
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Under the Sarbanes-Oxley Act, if associated with a registered public accounting firm, who can be held responsible if their actions contribute to the firm's violation of laws, rules or professional standards?
Anyone can be held responsible if associated with the firm if their actions contributed
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How many levels of auditing guidance are there?
3
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What are the 3 levels of auditing guidance?
Statements on Auditing Standards (SAS), Interpretive Publications, and Other Auditing Publications
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Who is required to comply with SAS?
Auditors who are AICPA members
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Who publishes SAS?
The Auditing Standards Board (ASB)
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Auditors should use what in determining the proper application of SAS to a particular engagement?
Professional judgement
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If the auditor departs from mandatory SAS requirements, they should be prepared to...
Justify any departures
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Other than audits, what do some SAS apply to?
Reviews of interim financial information and letters for underwriters
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In regards to SAS, "must" or "is required" indicates...
The standard must always be followed.
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In regards to SAS, "should" indicates...
Presumptively mandatory requirement, which must always be considered. Rare departures, if justified, are permitted.
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In regards to SAS, "may," "might," "could," indicates...
Explanatory material that does not impose a professional requirement for performance
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What is the second level of auditing guidance? The guidance provides recommendations, not reqiurments, and should be considered and departures should be justified.
Interpretive Publications
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Name 4 interpretive publications.
SAS Interpretations, appendices to the SASs, AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position.
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What is the third level of auditing guidance? It has no authority, but may be helpful to the auditor.
Other Auditing Publications
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Name 4 other auditing publications.
The Journal of Accountancy, auditing articles in the AICPA CPA Letter, continuing professional education materials, textbooks, professional journals, etc.
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What is the group of the first three GAAS standards referred to?
The General Standards
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What are GAAS's the first three General Standards?
Training, Independence, and Professional Care (TIP)
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The auditor must be independent in what and in what?
In fact and in appearance.
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Under the Sarbanes-Oxley Act of 2002, an accounting firm may not audit a company if a top official of that company worked for the accounting firm on the audit last year. What is this referred to as?
Cool-off period
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The auditor must exercise what in the planning and performance of the audit and the preparation of the report?
Due professional care
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Due professional care requires an auditor to maintain an objective attitude. This objective attitude is referred to as what?
Professional skepticism
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The concept that the auditor should conduct the audit as any reasonable auditor would is referred to as what?
Due professional care
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Due professional care implies that the auitor should obtain sufficient appropriate audit evidence to limit risk to what level?
A low level
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What GAAS standard imposes a responsibility upon each auditor to observe the standards of fieldwork and reporting?
Due professional care
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What is the second group of three GAAS standards referred to as?
The Standards of Fieldwork
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What are the three standards of fieldwork?
(1) Planning and Supervision, (2) Internal Control, Entity, and Environment, and (3) Evidence (PIE)
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What provide the auditor with confidence that material misstatements will be prevented or detected on a timely basis?
Adequate internal controls
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Regarding internal control, what is the paragraph that should be memorized?
"The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, extent, and timing of further audit procedures."
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Regarding the third standard of fieldwork, evidence, what is the paragraph that should be memorized?
"The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit."
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What is the third group of four GAAS standards referred to as?
The Standards of Reporting
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What are the four GAAS Standards of Reporting?
(1) Accounting = GAAP, (2) Consistency, (3) Disclosure, (4) Express Opinion (ACDO)
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Which standards of reporting are implicit and which are explicit?
The implicit standards are Consistency and Disclosure. The explicit standards are Accounting = GAAP and Express Opinion.
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When should the auditor clearly indicate the character of the auditor's work and their degree of responsibility in the audit report?
In all cases where the auditor's name is associated with the report.
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When would the auditor disclaim an opinion on the audit report?
When either enough audit work was not performed or when the auditor was not independent.
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The auditor's standard report expresses what kind of opinion?
An unqualified opinon.
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What does an unqualified opinion express?
That the financial statements are presented fairly in all material respects.
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What are the 7 necessary components of the standard auditor's report?
Title, Addressee, Introductory Paragraph, Scope Paragraph, Opinion Paragraph, FIrm Name, and Report Date
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What must be included in the title portion of the standard audit report?
Independent. The "Independent" Audit Report.
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Who is the audit report typically addressed to?
The company, stockholders, and/or board of directors.
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Who is the audit report typically not addressed to?
Management
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What two statements should the introductory paragraph of the standard audit report contain?
That the financial statements identified in the report were audited and that they were the responsibility of management and that the auditor's responsibility was to express an opinion on them.
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The scope paragraph of a standard audit report has 4 components. The first must state that the audit was conducted in accordance with what?
US GAAS
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The scope paragraph of a standard audit report has 4 components. The second must state that the audit was planned and performed to obtain what that the financial statements were free from what?
reasonable assurance that they were free from material misstatement.
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The scope paragraph of a standard audit report has 4 components. The third must state that the audit included examining what on a test basis, assessing the what used and significant estimates made by management, and evaluating the overall presentation
examining evidence and assessing the accounting principles used
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The scope paragraph of a standard audit report has 4 components. The fourth must state that the audit provides a reasonable basis for a what?
An opinion.
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The opinion paragraph of a standard audit report has 3 components. The first must refer back to what stated in the introductory paragraph?
Must refer back to the financial statements specifically identified in the introductory paragraph
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The opinion paragraph of a standard audit report has 3 components. The second must express an opinion as to the ...?
Fair presentation of the financial statements
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The opinion paragraph of a standard audit report has 3 components. The third must contain a statement regarding conformity with ...?
US GAAP
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When should the standard audit report be dated?
On or before the date on which appropriate audit evidence, sufficient to support the opinion, was obtained.
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What is considered sufficient appropriate audit evidence?
Audit documentation that has been reviewed, financial statements have been prepared, management has taken responsibility.
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On the standard audit report, the report date shows the final date of the auditor's what?
Responsibility
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For comparative statements, the date appropriate for the most recent or the first audit should be used?
Recent
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For audits of issuers, the first statement of the standard scope paragraph must be modified to say what?
The the audit was conducted in accordance with the standards of the PCAOB (US).
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On audits of issuers, identification of the city and state should be included where on the audit report?
Generally with the signature and date.
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On audits of non-issuers, can an audit report state in the scope paragraph that the audit was conducted in accordance with PCAOB (US) and US GAAS?
Yes.
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What 4 types of audit opinions are there?
Unqualified, Qualified, Adverse, and Disclaimer
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If an unqualified opinion includes explanatory language, it is called ...?
A modified unqualified opinion.
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When would an adverse opinion be issued?
When there is a very material GAAP issue.
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When would a disclaimer of opinion be issued?
When there is a very material GAAS issue.
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When would a qualified opinion related to GAAP be issued?
Non-GAAP change in accounting methods, inadequate disclosure, unjustified departure from GAAP, and an unreasonable accounting estimate
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When would a qualified opinion related to GAAS be issued?
Material uncertainty or scope limitation.
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When would the auditors withdrawal from the audit?
When management is false, fraudulent, deceptive or misleading
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When should an uncertainty be recorded?
When it is probable and reasonably estimable.
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When should an qualified opinion related to an uncertainty be expressed?
When it was not recorded and is material.
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When should an adverse opinion related to an uncertainty be expressed?
When it represents a very material departure from GAAP.
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When should a disclaimer of an opinion related to an uncertainty be expressed?
When it represents a very material situation and the auditors cannot obtain sufficient evidence.
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A modified unqualified opinion should be given in what two situations?
To explain or emphasize a matter.
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Modified wording of an unqualified opinion is justified when there is a division of responsibility. When the auditor's opinion is based in part on the report of another ?
Another auditor.
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List 7 situations where an explanatory paragraph is appropriate.
Necessary and justified departure from GAAP, Going concern, to emphasize a matter, a justified lack of consistency, required SEC regulation is unavailable, supplementary information required by GAAP is unavailable, other information containing audited financial statements is materially inconsistent with the report.
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Generally, an explanatory paragraph in an unqualified report, would be placed where?
Follows the opinion paragraph
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In a qualified, adverse, or disclaimer of opinion, an explanatory paragraph would be placed where?
Before opinion paragraph
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What are the exceptions where an explanatory paragraph can be placed either before or after the explanatory paragraph?
Justified departure of GAAP and emphasis of a matter
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When there is division of responsibility, the other auditors remain responsible for ...?
Their work and report
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When there is division of responsibility, the principal auditor must always be satisfied regarding the what and what of the other auditor?
Reputation and independence
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Which paragraphs of the audit report will the division of responsibility be mentioned?
All three paragraphs, intro, scope, and opinion
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With division of responsibility in an audit report, when will the name of the other auditors be mentioned?
When permission has been given and the other audit report is presented.
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With division of responsibility in an audit report, when the other auditors are mentioned in the report, a quantitative expression of their involvement is disclosed in which paragraph?
Introductory
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When will the work of another auditor not be disclosed in the audit report?
When the principal auditor accepts responsibility for their work and reports.
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Regarding division of responsibility, what must the principal auditor do if they chose not to mention the other auditors in the audit report?
Visit with the auditors, discuss their audit procedures, review their audit programs, documentation, evidence, etc.
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Regarding division of responsibility, if the other auditor's report is qualified, when should the principal auditors make mention of the qualification?
Only if it is material to the statements as a whole.
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An explanatory paragraph related to a justified departure from GAAP, what 3 things should the paragraph address?
A description of the departure, the approximate effects, and a reason why adherence to GAAP would be misleading.
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If there is substantial doubt that the entity is able to continue as a going concern for a reasonable amount of time, what type of opinion and paragraph should be issued in the audit report?
An explanatory paragraph after the opinion paragraph of a unqualified report.
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When is the going concern period?
No longer than a year from the date of the financial statements being audited.
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Regarding assessing a going concern, what 6 procedures should the auditor perform? (ADMITS)
Analytical procedures, Debt compliance, Minutes, Inquiry of client's legal counsel, Third parties, and Subsequent events review
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Regarding assessing a going concern, when the auditor performs the 6 procedures (ADMITS), what conditions and events will the auditor be looking for that indicates substantial doubt? (FINE)
Financial difficulties, Internal matters, Negative trends, External matters
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Regarding assessing a going concern, list some financial difficulties that could be indicative of substantial doubt.
Loan defaults, dividend arrearages, denial of usual trade credit, debt restructuring, non compliance with capital requirements, disposal of substantial assets
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Regarding assessing a going concern, list some internal matters that could be indicative of substantial doubt.
Work stoppages, labor difficulties, substantial dependence on a particular project, uneconomic long-term commitments, significant revision of operations
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Regarding assessing a going concern, list some negative trends that could be indicative of substantial doubt.
Recurrent losses, working capital deficiencies, negative cash flows, adverse financial ratios
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Regarding assessing a going concern, list some external matters that could be indicative of substantial doubt.
Legal proceedings, new legislation, loss of a key franchise, license, or patent, loss of a principal customer or supplier, natural disasters.
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