Chap 2 Lecture Slides

Chapter 2Chapter 2The Financial The Financial StatementStatement

Auditing EnvironmentAuditing Environment

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“The interest of [businessmen] is always in some respects different from, and even opposite to, that of the public ... The proposal of any new law or regulation of commerce which comes from this order ... ought never to be adopted, till after having been long and carefully examined ... with the most suspicious attention. It comes from an order of men ... who have generally an interest to deceive and even oppress the public” –Adam Smith

Types of AuditorsTypes of Auditors

External Auditors Internal Auditors

Government Auditors

Forensic Auditors

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Types of Audits and Auditors Types of Audits and Auditors Financial (External Auditors/CPAs)Financial (External Auditors/CPAs)

• Ensure that financial statements are reliableEnsure that financial statements are reliable Operational (Internal and Governmental Operational (Internal and Governmental

Auditors/CIAs)Auditors/CIAs)• Improve operational Improve operational economyeconomy• Improve operational Improve operational efficiencyefficiency

Compliance (Internal and Governmental Compliance (Internal and Governmental Auditors)Auditors)• Ensure compliance with company and/or Ensure compliance with company and/or

governmental rules and regulationsgovernmental rules and regulations Forensic (Fraud Auditors/CFEs)Forensic (Fraud Auditors/CFEs)

• Designed to investigate a crime and will often involve Designed to investigate a crime and will often involve gathering evidence designed to convict a fraudstergathering evidence designed to convict a fraudster

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External vs. Internal AuditingExternal vs. Internal Auditing

External auditing is often called External auditing is often called independent auditing because it is done by independent auditing because it is done by certified public accountants who are certified public accountants who are independent of the organization being independent of the organization being audited.audited.

External auditors represent the interests of External auditors represent the interests of third-party stakeholders in the organization, third-party stakeholders in the organization, such as stockholders, creditors, and such as stockholders, creditors, and government agencies.government agencies.

Because the focus of external audit is on Because the focus of external audit is on financial statements, this type of audit is financial statements, this type of audit is called financial auditcalled financial audit

Financial, Internal Control, Financial, Internal Control, Compliance, Operational, ForensicCompliance, Operational, Forensic

a. Evaluate the policies and procedures of the Food a. Evaluate the policies and procedures of the Food and Drug Administration in terms of bringing new and Drug Administration in terms of bringing new drugs to market.drugs to market.

Operational- Government AuditorOperational- Government Auditor

b. Determine the fair presentation of Ajax Chemical’s b. Determine the fair presentation of Ajax Chemical’s balance sheet, income statement, and statement of balance sheet, income statement, and statement of cash flows.cash flows.

Financial- ExternalFinancial- External

c. Review the payment procedures of the accounts c. Review the payment procedures of the accounts payable department for a large manufacturer.payable department for a large manufacturer.

Operational or I/C or Compliance- Internal Operational or I/C or Compliance- Internal or Externalor External


d. Examine the financial records of a division of a d. Examine the financial records of a division of a corporation to determine if any accounting irregularities corporation to determine if any accounting irregularities have occurred.have occurred.

Forensic- Internal, External, or ForensicForensic- Internal, External, or Forensic

e. Evaluate the feasibility of forecasted rental income e. Evaluate the feasibility of forecasted rental income for a planned low income public housing project.for a planned low income public housing project.

Operational- Government, External, or Operational- Government, External, or InternalInternal

f. Evaluate a company’s computer services department f. Evaluate a company’s computer services department in terms of the efficient and effective use of corporate in terms of the efficient and effective use of corporate resources.resources.

Operational- Internal or ExternalOperational- Internal or External


g. Audit the partnership tax return of a real g. Audit the partnership tax return of a real estate development company.estate development company.

Compliance- GovernmentCompliance- Government

h. Investigate the possibility of payroll fraud h. Investigate the possibility of payroll fraud in a labor union pension fund.in a labor union pension fund.

Forensic- External or ForensicForensic- External or Forensic

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Institute of Internal Auditors defines Institute of Internal Auditors defines internal auditinginternal auditing as an as an independent appraisal function independent appraisal function established within an organization to established within an organization to examine and evaluate its activitiesexamine and evaluate its activities

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Internal auditors perform a wide range Internal auditors perform a wide range of activities on behalf of the of activities on behalf of the organization, including conducting organization, including conducting financial audits, examining an financial audits, examining an operation’s compliance with operation’s compliance with organizational policies, reviewing the organizational policies, reviewing the organization’s compliance with legal organization’s compliance with legal obligations, evaluating operational obligations, evaluating operational efficiency, detecting and pursuing fraud efficiency, detecting and pursuing fraud within the firm, and conducting IT within the firm, and conducting IT audits.audits.

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While external auditors represent outsiders, While external auditors represent outsiders, internal auditors represent the interests of internal auditors represent the interests of the organization.the organization.

Internal auditors often cooperate with and Internal auditors often cooperate with and assist external auditors in performing assist external auditors in performing financial audits. financial audits.

This is done to achieve audit efficiency and This is done to achieve audit efficiency and reduce audit fees. For example, a team of reduce audit fees. For example, a team of internal auditors can perform tests of internal auditors can perform tests of computer controls under the supervision of a computer controls under the supervision of a single external auditor.single external auditor.

Context of Financial Statement Context of Financial Statement Auditing Auditing

The primary context with which an auditor is concerned is the industry or business of his or her auditee. In other words, the context provided by the entity’s business impacts the auditor and the audit, and is thus a primary

component of the environment in which financial statement auditing is conducted.

LO# 6

Thought Question:

How would your concerns about the inventory account differ for a Computer Hardware Manufacturer versus a Jewelry Store?

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A Model of Business A Model of Business

Board of Directors

Audit Committee

Business organizations exist to create value for their stakeholders. Due to the way resources are invested and

managed in the modern business world, a system of corporate governance is necessary, through which

managers are overseen and supervised.

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A Model of BusinessA Model of Business

Objectives Strategies

Processes (5 broad

categories)

Transactions Reports

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Controls

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A Model of Business Processes: A Model of Business Processes: Five Components Five Components

Financing Process

Purchasing Process

Human Resource

Management Process

Inventory Management

Process

Revenue Process

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Skills and Knowledge Needed Skills and Knowledge Needed for External Auditing Professionfor External Auditing Profession Technical knowledge and expertiseTechnical knowledge and expertise

– Auditors must:Auditors must:Understand accounting and auditing Understand accounting and auditing

authoritative literatureauthoritative literatureDevelop industry and client-specific Develop industry and client-specific

knowledgeknowledgeDevelop and apply computer skillsDevelop and apply computer skillsEvaluate internal controlsEvaluate internal controlsAssess and respond to fraud riskAssess and respond to fraud risk

Skills and Knowledge Needed Skills and Knowledge Needed for External Auditing Professionfor External Auditing Profession Leadership, teamwork, and professional Leadership, teamwork, and professional

skillsskills– Auditors:Auditors:

Make presentations to management and audit committee Make presentations to management and audit committee membersmembers

Exercise logical reasoningExercise logical reasoning Communicate decisions to usersCommunicate decisions to users Manage and supervise by providing meaningful feedbackManage and supervise by providing meaningful feedback Act with integrity and ethics and Interact in a team Act with integrity and ethics and Interact in a team

environmentenvironment Collaborate and maintain a professional personal Collaborate and maintain a professional personal

presencepresence

The Public Accounting The Public Accounting ProfessionProfession

Assurance servicesAssurance services• Financial Statement Audit Financial Statement Audit

engagementsengagements• Assurance engagementsAssurance engagements• Attestation engagementsAttestation engagements• CompilationsCompilations• ReviewsReviews

Tax servicesTax services Consulting and Advisory servicesConsulting and Advisory services

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Public Accounting FirmsPublic Accounting FirmsPublic accounting firms range in size from a single proprietor

to thousands of owners (or “partners”) and thousands of professional and administrative staff employees.

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Big 4

PwC

EY

Deloitte

KPMG

Mid-Tier

Grant Thornton

BDO Seidman

RSM McGladrey

Regional Local

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Organization of the ProfessionOrganization of the Profession

““Big Four” Accounting FirmsBig Four” Accounting Firms– Deloitte, E&Y, KPMG, PwCDeloitte, E&Y, KPMG, PwC

National National – Grant Thornton, BDO SeidmanGrant Thornton, BDO Seidman

Local/Regional (KY)Local/Regional (KY)– Blue and Co.Blue and Co.– Mountjoy, Chilton, and MedleyMountjoy, Chilton, and Medley– Dean Dorton Allen FordDean Dorton Allen Ford

Sole ProprietorSole Proprietor

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Revenues for the Big Four CPA Revenues for the Big Four CPA FirmsFirms

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Public Accounting Firm OrganizationPublic Accounting Firm Organization

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LO# 3

Audit TeamsAudit Teams

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Audit Team Member Selected Duties

Partner Reach agreement with the auditee on the scope of the service to be provided. Ensure that the audit is properly planned and that the audit is conducted in accordance

with applicable auditing standards. Assemble an audit team that has the required skills and experience. Supervise the audit team and review the working papers. Conclude on the adequacy of audit evidence and sign the audit report

Manager Ensure that the audit is properly planned, including scheduling of team members.

Supervise the preparation of and approving the audit program. Review the working papers, financial statements and audit report. Deal with invoicing and ensure collection of payment for services. Inform the partner about any auditing or accounting problems encountered.

Senior/In-Charge Assist in the development of the audit plan.

Prepare budgets. Assign tasks to associates and direct the day-to-day performance of the audit. Supervise and review the work of associates. Inform the manager about any auditing or accounting problems encountered.

Associate/Staff Perform the audit procedures assigned to them.

Prepare adequate and appropriate documentation of completed work. Inform the senior about and auditing or accounting problems encountered.

Organizational hierarchy of Organizational hierarchy of audit firmsaudit firms

Partners/Owners

Managers

• Responsible for overall conduct of each audit

• Responsible for many audit engagements being conducted simultaneously

• Review audit work of seniors and staff• Responsible for fewer audit engagements

being conducted simultaneously

Seniors

• Responsible for overseeing day-to-day activities on a specific audit

• Oversee performance of auditing procedures

A Time of Challenge and Change A Time of Challenge and Change

1990 2000

During the economic boom of the late 1990s and the early 2000s, accounting firms aggressively sought opportunities

to market a variety of high-margin nonaudit services to their auditees.

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An Explosion of ScandalsAn Explosion of Scandals

Brokerage Firms

Corporate Giants

Stock Exchanges

Public Accounting

Firms

Mutual Fund Managers

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2-25http://www.accounting-degree.org/scandals/

http://www.accounting-degree.org/scandals/

Society’s Expectations and the Society’s Expectations and the Auditor’s Responsibilities Auditor’s Responsibilities

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether caused by error or

fraud.

Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain

reasonable, but not absolute, assurance that material misstatements are detected.

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Government Regulation Government Regulation

In 2002, Congress passed the Sarbanes-Oxley Public Company Accounting Reform and Investor

Protection Act.

In 2010, Congress passed the Dodd-Frank Wall Street Reform and

Consumer Protection Act.

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Prohibited Professional ServicesProhibited Professional Services In summary, Sarbanes-Oxley prohibits professional service In summary, Sarbanes-Oxley prohibits professional service

firms from performing any client services for audit clients in firms from performing any client services for audit clients in which the auditors may find themselves making management which the auditors may find themselves making management decisions or auditing their own firm’s work.decisions or auditing their own firm’s work.

Specifically, Sarbanes-Oxley prohibits professional service firms Specifically, Sarbanes-Oxley prohibits professional service firms from providing any of the following services to an audit client: from providing any of the following services to an audit client:

1) bookkeeping and related services2) design or implementation of financial information

systems3) appraisal or valuation services4) actuarial services5) internal audit outsourcing 6) management or human resources services 7) investment or broker/dealer services 8) legal and expert services (unrelated to the audit)

Professional service firms may provide client tax services (with Professional service firms may provide client tax services (with some restrictions) and other non-prohibited services to audit some restrictions) and other non-prohibited services to audit clients if the company’s audit committee has approved them in clients if the company’s audit committee has approved them in advance.advance.

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Organizations That Affect the Organizations That Affect the Public Accounting ProfessionPublic Accounting Profession

Securities and Exchange Commission (SEC)

American Institute of Certified Public

Accountants (AICPA)

Public Company Accounting Oversight

Board (PCAOB)

Financial Accounting Standards Board (FASB)

LO# 9

International Accounting Standards Board (IASB)

International Auditing and Assurance Standards

Board (IAASB)

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Auditing Standards Auditing Standards Auditing standards serve as

guidelines for and measures of the quality of the auditor’s

performance.

Public Companies

PCAOB

Nonpublic Companies

Auditing Standards

Board

> 100 Countries

IAASB

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CongressCongress Due to various failures in auditing profession

during early 2000s Congress passed the Sarbanes-Oxley Act of 2002

This legislation had an impact on audit firms through:– Increasing auditor independence– Enhancing the role and importance of audit committee– Requiring reporting on internal control over financial

reporting– Providing new oversight of external auditing profession

by Public Company Accounting Oversight Board

Public Company Accounting Public Company Accounting Oversight Board (PCAOB)Oversight Board (PCAOB)

Private sector, nonprofit organization Private sector, nonprofit organization Oversees auditors of public Oversees auditors of public

companiescompanies Goal of the PCAOBGoal of the PCAOB

– To protect the interests of investors and To protect the interests of investors and further the public interest in the further the public interest in the preparation of informative, fair, and preparation of informative, fair, and independent audit reportsindependent audit reports

Formation of the PCAOBFormation of the PCAOB

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

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

The Board’s tasks includeThe Board’s tasks include– registering and monitoring accounting firms that prepare registering and monitoring accounting firms that prepare

audit reports for public companies.audit reports for public companies.– establishing rules to govern auditing, quality control, establishing rules to govern auditing, quality control,

ethics, and independence. ethics, and independence.

Public Company Accounting Public Company Accounting Oversight Board (PCAOB)Oversight Board (PCAOB)

Primary responsibilities related to Primary responsibilities related to auditorsauditors– Registration of audit firms that audit public Registration of audit firms that audit public

companiescompanies– Periodic inspections of registered audit firmsPeriodic inspections of registered audit firms– Establishment of auditing and related Establishment of auditing and related

standards for registered audit firmsstandards for registered audit firms– Investigation and discipline of registered Investigation and discipline of registered

audit firms for violations of relevant laws or audit firms for violations of relevant laws or professional standardsprofessional standards

PCAOB: Standard Setting RolePCAOB: Standard Setting Role

Congress has taken the responsibility for creating Congress has taken the responsibility for creating standards for the audits of standards for the audits of publicly traded publicly traded companiescompanies from the Auditing Standards Board from the Auditing Standards Board (ASB) of the AICPA and turned that responsibility (ASB) of the AICPA and turned that responsibility over to the newly created Public Company over to the newly created Public Company Accounting Oversight Board (PCAOB). Accounting Oversight Board (PCAOB).

Rather than starting from scratch, the PCAOB has Rather than starting from scratch, the PCAOB has declared that, for the time being, the previously declared that, for the time being, the previously created practice standards (e.g., ASB’s created practice standards (e.g., ASB’s SASsSASs) will ) will function as the PCAOB’s function as the PCAOB’s Interim Professional Interim Professional Auditing StandardsAuditing Standards for audits of public for audits of public companies. companies.

PCAOB: Monitoring RolePCAOB: Monitoring Role

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

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

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

Securities and Exchange Securities and Exchange Commission (SEC)Commission (SEC)

Governmental body established by Governmental body established by Congress in 1934Congress in 1934

Regulates the capital market systemRegulates the capital market system Has authority to establish GAAP for Has authority to establish GAAP for

companies whose stock is publicly companies whose stock is publicly tradedtraded

Responsible to prosecute public Responsible to prosecute public companies and their auditors for companies and their auditors for violating SEC lawsviolating SEC laws

American Institute of Certified American Institute of Certified Public Accountants (AICPA)Public Accountants (AICPA)

Primary governing organization of the Primary governing organization of the public accounting professionpublic accounting profession

Develops standards for audits of nonpublic Develops standards for audits of nonpublic companiescompanies

Responsible for a peer review program Responsible for a peer review program Provides continuing education programsProvides continuing education programs Prepares and administers the Uniform CPA Prepares and administers the Uniform CPA

Examination - through its Board of Examination - through its Board of Examiners Examiners

International Auditing and Assurance International Auditing and Assurance Standards Board (IAASB)Standards Board (IAASB)

Part of the International Federation Part of the International Federation of Accountants (IFAC)of Accountants (IFAC)– A global organization for the accounting A global organization for the accounting

professionprofession Sets International Standards on Sets International Standards on

Auditing (ISAs)Auditing (ISAs) Facilitates convergence of national Facilitates convergence of national

and international auditing standardsand international auditing standards

Committee of Sponsoring Organizations of Committee of Sponsoring Organizations of the Treadway Commission (COSO)the Treadway Commission (COSO)

Provider of thought leadership and Provider of thought leadership and guidance on:guidance on:– Internal controlInternal control– Enterprise risk managementEnterprise risk management– Fraudulent deterrenceFraudulent deterrence

Provides the internal control Provides the internal control frameworkframework– Serves as benchmark for auditorsServes as benchmark for auditors

Committee of Sponsoring Organizations of Committee of Sponsoring Organizations of the Treadway Commission (COSO)the Treadway Commission (COSO)

Sponsored by the following Sponsored by the following organizations:organizations:– Financial Executives InternationalFinancial Executives International– The American Institute of Certified The American Institute of Certified

Public AccountantsPublic Accountants– The American Accounting Association The American Accounting Association – The Institute of Internal AuditorsThe Institute of Internal Auditors– The Association of Accountants and The Association of Accountants and

Financial Professionals in Business (IMA)Financial Professionals in Business (IMA)

Accounting Standard SettersAccounting Standard Setters

Generally accepted accounting Generally accepted accounting principles principles (GAAP)(GAAP)– Has general acceptance and provides Has general acceptance and provides

criteria by which to assess the fairness criteria by which to assess the fairness of a financial statement presentationof a financial statement presentation

– GAAP traditionally been set by FASB, GAAP traditionally been set by FASB, with approval by the SEC in the United with approval by the SEC in the United StatesStates

Accounting Standard SettersAccounting Standard Setters

International accounting standards International accounting standards (IFRS -International Financial (IFRS -International Financial Reporting Standards)Reporting Standards)– Set by the IFRS Foundation of IASBSet by the IFRS Foundation of IASB– Their goal is to develop a single set of Their goal is to develop a single set of

international financial reporting standards international financial reporting standards that is:that is:UnderstandableUnderstandableEnforceableEnforceableGlobally acceptedGlobally accepted

Types of Practice StandardsTypes of Practice Standards

ClientPublic

CompaniesPrivate

CompaniesGovernmental

EntitiesForeign

Companies

Rule-making body

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)

Web site www.pcaobus.org www.aicpa.org www.gao.gov www.ifac.org

State Boards of AccountancyState Boards of Accountancy

Certified Public Accountants (CPAs)Certified Public Accountants (CPAs)– Licensed by state boards of accountancy Licensed by state boards of accountancy

which are charged with regulating the which are charged with regulating the profession at the state levelprofession at the state level

– Required by all state boards for passage Required by all state boards for passage of Uniform CPA Examination as one of Uniform CPA Examination as one criterion for licensurecriterion for licensure

Become Certified!Become Certified!

EducationEducation ExaminationExamination ExperienceExperience State Certificate and LicenseState Certificate and License

– KY State Board of Accountancy Skills sets and your educationSkills sets and your education

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http://cpa.ky.gov/Pages/default.aspx

The CPA ExamThe CPA Exam Four parts: Four parts:

– Auditing and Attestation (AUD)- Auditing and Attestation (AUD)- the entire audit process, other services including compilations, reviews and attestation engagements, and the AICPA Code of Professional Conduct

– Financial Accounting and Reporting (FAR)- Financial Accounting and Reporting (FAR)- financial accounting, differences btwn GAAP and IFRS, fund accounting

– Regulation (REG)- Regulation (REG)- federal taxation and business law

– Business Environment and Concepts (BEC)- Business Environment and Concepts (BEC)- operations and strategic management, economics, financial management and information technology

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CPA ExamCPA Exam

Multiple Choice Questions and Task-Based Multiple Choice Questions and Task-Based SimulationsSimulations

AICPA released Exposure DraftAICPA released Exposure Draft– Changes Proposed for 2017

Other important information:Other important information:– Parts expire after 18 monthsParts expire after 18 months– ExpensiveExpensive– Review course necessaryReview course necessary– Testing windowsTesting windows

https://www.rogercpareview.com/cpa-exam/changes?utm_campaign=Branding&utm_source=hs_email&utm_medium=email&utm_content=21749157&_hsenc=p2ANqtz--QlwgGuKzExi434g93NA4GsMIsqUysB1B8LvDmBr3sxm0hVgOHTmLqNTkHh3h1T0NcY_qDFgAPz9MU9yhyiullK1uhlQ&_hsmi=21749157

The CPA ExamThe CPA Exam

CostCost– AUD- 4.5 HoursAUD- 4.5 Hours $192.03$192.03– BEC- 2.5 HoursBEC- 2.5 Hours $172.51$172.51– FAR- 4 HoursFAR- 4 Hours $192.03$192.03– REG- 3 HoursREG- 3 Hours $172.51$172.51– KY State Board FeesKY State Board Fees $150.00$150.00

$879.08$879.08 Review CourseReview Course $1,200-$3,400$1,200-$3,400

The Court SystemThe Court System

Acts as a quality-control mechanism Acts as a quality-control mechanism for the auditing professionfor the auditing profession

Third parties may sue CPAs under Third parties may sue CPAs under federal securities laws, various state federal securities laws, various state statutes, and common law for statutes, and common law for substandard audit worksubstandard audit work

The 10 Generally Accepted The 10 Generally Accepted Auditing Standards (PCAOB)Auditing Standards (PCAOB)

GAAS

General Field Work Reporting

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Engagement Overview and GAASEngagement Overview and GAAS

OBTAIN (OR RETAIN)

CLIENT

INTERNALCONTROL

EVALUATION

EVIDENCEGATHERING

REPORTINGENGAGEMENT

PLANNING

General Standards

Standards of Fieldwork

ReportingStandards

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.

General StandardsGeneral Standards

Adequate Technical Training

& Proficiency

IndependenceDue Professional

Care

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General StandardsGeneral Standards

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

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

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

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

Standards of Field Work Standards of Field Work

Adequate Planning & Supervised

Assistants

Obtain Sufficient Appropriate

Evidential Matter

Obtain Sufficient Understanding of Internal Controls

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Standards of FieldworkStandards of Fieldwork

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

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

2.2. The auditor must obtain a sufficient understanding of the The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, entity and its environment, including its internal control, to assess the risk of material misstatement of the to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit design the nature, timing, and extent of further audit procedures. procedures.

3.3. The auditor must obtain sufficient appropriate audit The auditor must obtain sufficient appropriate audit evidence through audit procedures performed to afford a evidence through audit procedures performed to afford a reasonable basis for an opinion regarding the financial reasonable basis for an opinion regarding the financial statements under audit.statements under audit.

Evidence ConsiderationsEvidence Considerations

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

Characteristics of Appropriate EvidenceCharacteristics 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 v. Subjective Evidence

Standards of ReportingStandards of Reporting

GAAP Consistency

Disclosures Opinion

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Reporting StandardsReporting Standards

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

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

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

3.3. Informative disclosures in the financial statements are to Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise be regarded as reasonably adequate unless otherwise stated in the report. stated in the report.

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

Principles Underlying an Audit - Principles Underlying an Audit - ASBASB

Purpose:

Responsibilities:

Performance:

Reporting:

To express an opinion on the financial statements prepared by management, whose responsibility is to prepare the financial statements and to provide the auditor with information necessary to conduct the audit.

Have competence and capability; comply with ethical requirements; maintain professional skepticism; exercise professional judgment.

Sufficient appropriate audit evidence supporting reasonable (not absolute) assurance that the financial statements are free of material misstatement.

Express an opinion, in the form of a written report, based on an evaluation of the audit evidence obtained; or state that an opinion cannot be expressed.

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Statements on Auditing Standards Statements on Auditing Standards (SAS)—Interpretations of GAAS(SAS)—Interpretations of GAAS

GAAS and SAS are considered to be minimum standards of performance for

auditors.

PCAOB adopted, on an interim basis, GAAS and

SAS existing in 2003. Standards issued by

PCAOB are called Auditing Standards (AS).

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SAS are classified by two numbering categories: SAS and AU numbers. The SAS number applies to the order in which the standards are issued and are thus chronological. The AU codification organizes

the SAS according to topical content.

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For example, SAS No. 39, “Audit Sampling,” is found under AU 350 because the AU 300s relate

to the standards of fieldwork on evidence collection and evaluation.

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Ethics, Independence, and the Ethics, Independence, and the Code of Professional ConductCode of Professional Conduct

Ethics refers to a system or code of conduct based on moral duties and obligations that

indicate how we should behave.

Professionalism refers to the conduct, aims, or qualities that characterize a profession or

professional person. All professions operate under some type of code of ethics or code of

conduct.

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IndependenceIndependence

Auditors are required to Auditors are required to independent independent in fact in fact as well as as well as in in

appearance.appearance.

Ethics, Independence, and the Ethics, Independence, and the Code of Professional ConductCode of Professional Conduct

Code of Professional Conduct

Principles

Rules of Conduct

Interpretations of the Rules

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End of Chapter 2End of Chapter 2

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Discussion AssignmentDiscussion Assignment

Articles:Articles:– FraudFraud– Future of AuditingFuture of Auditing– New Hire SkillsNew Hire Skills

Videos:Videos:– Observation and Problem SolvingObservation and Problem Solving

70 minutes to read/watch all70 minutes to read/watch all Written ComponentWritten Component Class DiscussionClass Discussion

What to Think AboutWhat to Think About

Articles:Articles:– Author’s PurposeAuthor’s Purpose– ToneTone– EvidenceEvidence– Your ReactionYour Reaction

Videos:Videos:– How pertains to auditingHow pertains to auditing– How pertains to career How pertains to career

aspirations/life/schoolaspirations/life/school

Chap 2 Lecture Slides

Documents

Transcript of Chap 2 Lecture Slides