Chapter

Transcript Chapter

Chapter 2 Professional Standards

Presentation Outline

II.

Types of Practice Standards Generally Accepted Auditing Standards (GAAS) III. Attestation Standards IV. Quality Control Standards for CPA Firms V.

The Public Company Accounting Oversight Board (PCAOB)

I. Types of Practice Standards

Client Rule making body Public Companies Private Companies Governmental Entities Foreign Companies Public Company Accounting Oversight Board (PCAOB) AICPA Auditing Standards Board (ASB) U.S. Government Accountability Office (GAO) IFAC International Auditing and Assurance Standards Board (IAASB) Standards

Auditing Standards (ASs) Statements on Auditing Standards (SASs) Government Auditing Standards

(The “Yellow Book”)

International Standards on Auditing (ISAs)

www.gao.gov

www.ifac.org

Web site www.pcaobus.org

www.aicpa.org

II. Generally Accepted Auditing Standards (GAAS)

A. Engagement Overview and GAAS B. General Standards C. Standards of Fieldwork D. Evidence Considerations E. Characteristics of Appropriate Evidence F. Reporting Standards G. Independent Auditor’s Report (

AS 1

AS 2

) H. Types of Audit Report Opinions

A. Engagement Overview and GAAS 

GAAS is used to measure the quality of the auditor’s performance. They are the same from audit to audit.



Audit procedures are the particular and specialized actions that auditors take to obtain evidence in a specific audit engagement.

OBTAIN (OR RETAIN) CLIENT ENGAGEMENT PLANNING INTERNAL CONTROL EVALUATION EVIDENCE GATHERING REPORTING General Standards Standards of Fieldwork Reporting Standards

B. General Standards

The General Standards affect all phases of the audit, including client acceptance or retention.

The audit

must

be performed by a person or persons having adequate technical training and proficiency as an auditor.

In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.

Due professional care is to be exercised in the performance of the audit and the preparation of the report.

C. Standards of Fieldwork

The Fieldwork Standards guide the planning, internal control evaluation, and the evidence gathering phases of the engagement.

The auditor must adequately plan the work and must properly supervise any assistants.

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, timing, and extent of further audit procedures. The auditor must obtain sufficient appropriate audit evidence through audit procedures performed to afford a reasonable basis for an opinion regarding the financial statements under audit.

D. Evidence Considerations

The auditor must "obtain sufficient, appropriate audit evidence” to support opinion. –

Sufficient

Evidence • Enough to support opinion • Persuasive enough to convince another person (judge, jury?) • Essentially a matter of professional judgment –

Appropriate

Evidence • Competent, valid, relevant, reliable

E. Characteristics of Appropriate Evidence • • •

Relevance

• Testing what you want to test (e.g., direction of testing)

Evidence Source

• Generally an externally generated piece of evidence more reliable than an internal (client-generated) piece of evidence •

Evidence Hierarchy

• Direct personal knowledge • External evidence • External-internal evidence • Internal Evidence • Verbal and written

Objective

Subjective Evidence

F. Reporting Standards

The Reporting Standards guide the reporting phase of the audit engagement.

The report shall state whether the financial statements are presented in accordance with GAAP.

The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.

Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor's name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor's work, if any, and the degree of responsibility the auditor is taking.

G. Independent Auditor’s Report ( AS 1 , AS 2 )

Report Title

Report of Independent Registered Public Accounting Firm

Report Address

To the Board of Directors and Stockholders Apollo Shoes, Inc.

Introductory Paragraph:

•

Notice of audit,

•

F/S Examined

•

Auditor, Management responsibilities Scope Paragraph: Description of an audit

We have audited the accompanying balance sheets of Apollo Shoes, Inc. as of December 31,2006 and 2005, and the related statements of operations, stockholders’ equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the company's management . Our responsibility is to express an opinion on these financial statements based on our audits .

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of financial statement presentation. material misstatement accounting principles used and significant estimates . An audit includes examining, on a We believe that our audit provides a reasonable basis for our opinion .

test basis made by management, as well as evaluating the overall , evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the

Opinion Paragraph

In our opinion, the financial statements referred to above present fairly , in all material respects , the financial position of Apollo Shoes, Inc. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

Extra Internal Control Paragraph (AS 2) Signature Report Date

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Apollo Shoes Inc.’s' internal control over financial reporting as of December 31, 2006, based on criteria established in control over financial reporting.

Internal Control-Integrated Framework

issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2007 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal Smith & Smith, CPAs February 22, 2007

H. Types of Audit Report Opinions

• • • •

Unqualified

: The financial statements

present fairly

the financial condition and operations of the company in conformity with U.S. GAAP.

Qualified

Except for

one (limited) item, the financial statements present fairly ….

Adverse

: The financial statements

do not present fairly

….

Disclaimer

: The auditors

do not express an opinion….

III. Attestation Standards

• Provides guidance on

attest engagements

other than audits: • “An engagement in which a practitioner is engaged to issue or does issue a report on subject matter or an assertion about the subject matter that is the responsibility of another party.” • Same basic set of rules as GAAS, except more general.

• “Attest function” vs. “audit” • “Practitioner” vs. “auditor” • “Engagement” vs. “audit” • Differences between Attestation and Audit Engagements (Exhibit 2.4)

IV. Quality Control Standards for CPA Firms

•

Quality Control Standards

guide the performance of firm-wide audit and attestation practice – Independence, integrity, objectivity – Personnel management – Acceptance and continuance of clients – Engagement performance – Monitoring

V. The Public Company Accounting Oversight Board (PCAOB)

A. Formation of the PCAOB B. PCAOB: Standard Setting Role C. PCAOB Monitoring Role

A. Formation of the PCAOB

• The PCAOB was formed to ensure that audit quality is not compromised and that auditor performance continues to meet public expectations.

• The membership of the board consists of five SEC appointed public members (business executives, investment analysts) and is supported by fees paid by publicly traded companies.

• The Board’s tasks include – registering and monitoring accounting firms that prepare audit reports for public companies.

– establishing rules to govern auditing, quality control, ethics, and independence.

B. PCAOB: Standard Setting Role

• Congress has taken the responsibility for creating standards for the audits of

publicly traded companies

from the Auditing Standards Board (ASB) of the AICPA and turned that responsibility over to the newly created Public Company Accounting Oversight Board (PCAOB).

• Rather than starting from scratch, the PCAOB has declared that, for the time being, the previously created practice standards (e.g., ASB’s

SASs

) will function as the PCAOB’s

Interim Professional Auditing Standards

public companies.

for audits of

C. PCAOB: Monitoring Role

• The Board’s goal is to ensure that audit quality is not compromised and that auditor performance continues to meet public expectations.

• Soon after it began operations in early 2003, the PCAOB began registering professional services firms providing auditing services to public entities. Firms not registered are not allowed to conduct audits of public companies.

• Other Board monitoring activities include inspections of registered auditing firms (similar to peer reviews), special investigations, and disciplinary proceedings.

Summary

• Standards for public, private, governmental, and foreign companies.

• Generally accepted auditing standards • Audit evidence and reporting • Attestation standards • Quality control standards and peer review • Public Company Accounting Oversight Board (PCAOB)