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AuditingAmerican Accounting Association
Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to stateholders.
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Auditor’s Responsibilities
The fundamental principle of responsibilities relates to the personal integrity and professional qualifications of auditors. This principle addresses the following responsibilities of auditors:
Auditors are responsible for:
Having appropriate competence and capabilities to perform the audit.Complying with relevant ethical requirements; and,Maintaining professional skepticism and exercising professional judgment, throughout the planning and performance of the audit.
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Accounting vs. Auditing
Accountants and auditors ensure that firms are run efficiently by providing them with valuable financial information and accurate record keeping. Accountants on a day-to-day basis are responsible for bookkeeping, preparing balance sheets, profit and loss statements, and other financial reports, and may also analyze trends, costs, revenues, financial commitments, and obligations to predict future revenues and expenses. Accountants are responsible for reporting finance information to managements.
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Accounting vs. Auditing
Auditors examine this accounting and financial data and procedures to ensure accuracy and compliance with government guidelines and laws. They work to identify improper accounting or documentation and research issues in order to make recommendations to improve policies or procedures accordingly. Auditors and accountants need to be critical and detail-oriented thinkers.
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GAASGenerally Accepted Auditing Standards - GAAS'
A set of systematic guidelines used by auditors when conducting audits on companies' finances, ensuring the accuracy, consistency and verifiability of auditors' actions and reports.
By relying on GAAS, auditors can minimize the probability of missing material information. GAAS are divided into these main sections:
1) General standards 2) Standards of fieldwork3) Standards of reporting
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GAAS Ethics
Professional ethics represent a commitment by a professional to ethical principles and rules of conducts. This is the key element that separates recognized professions from other occupations.
Core values are associate with the CPA profession:Integrity Objectivity CompetenceContinue education Attuned to business Issues
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AICPAThe American Institute of Certified Public Accountants (AICPA) is the national professional organization for Certified Public Accountants (CPAs) in the United States.
AICPA designated to issue pronouncements on auditing matters applicable to the preparation and issuance of audit reports.
The AICPA’s mission is to provide members with the resources, information and leadership that enable them to provide valuable services in the highest professional manner to benefit the public, employers and clients.
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AICPA Code of Conduct
Code and rule of professional conduct. Ethical PrinciplesResponsibilitiesThe Public interestIntegrityObjectivity and independence Due careScope and nature of services
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ASB
Statements on Auditing Standards (SASs) are issued by the Auditing Standards Board (ASB),
The AICPA Code of Professional Conduct require an AICPA member who performs an audit to comply with standards promulgated by the ASB.
The role of the Accounting Standards Board (ASB) was to issue accounting standards.
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Rule of Conducts
Rule 101 Independence Rule 102 Integrity and Objectivity201 General Standards202 Compliance with standards203 Accounting Principles301 Confidential Client Information302 Contingent fees501 Acts Discrepancies502 Advertising and solicitation503Commision and referral fees
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Responsibility of Management
Management’s Responsibility for Preparation of the Financial Statements
Management is responsible for the preparation of the financial statements included in the Annual Report. The financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America and include amounts that are based on the best estimates and judgments of management.
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Responsibilities of Auditors
Independent auditor is engaged to render an opinion on whether a company’s financial statements are presented fairly, in all material respects, in accordance with financial reporting framework. An audit conducted in accordance with GAAS and relevant ethical requirements enables the auditor to form that opinion.
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Types of Audits/Reviews
Financial Audits or ReviewsOperational AuditsDepartment ReviewsInformation Systems AuditsIntegrated AuditsInvestigative Audits or ReviewsFollow-up Audits
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Financial Audit
Financial related audits include determining whether;
(a) financial information is presented in accordance with established or stated criteria (b) the entity has adhered to specific financial compliance requirements, or (c) the entity's internal control structure over financial reporting is suitably designed and implemented to achieve control objectives.
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Operational, Compliance, Performance audits
These audits may include any or all of: (a) determining the extent to which the desired results or benefits established or other authorizing body are being achieved, (b) the effectiveness of organizations, programs, activities, or functions, (c) whether a division is acquiring, protecting, and using its resources (such as personnel, property, and space) economically and efficiently, and (d) whether the division has complied with laws and regulations applicable.
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Department Review/Audit
A current period analysis of administrative functions, to evaluate the adequacy of controls, safeguarding of assets, efficient use of resources, compliance with related laws, regulations, policy and integrity of financial information.
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Fraud Audit
Undertakes forensic investigations including suspected fraudulent activities and manages the fraud.
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Bernard Madoff
Bernard Madoff, 2009. a former chairman of the NASDAQ Stock Market and a respected Wall Street adviser and broker for the past 50 years, was arrested after his sons turned him in for running “a giant Ponzi scheme,” bilking investors out of an estimated $50 billion. Many investors, including actors, investment bankers, politicians, and sports personalities, lost their life savings. Some who had already retired, now in their 70s and 80s, were forced to go back to work. Others lost their retirement homes. Charities and pensions that had invested heavily were wiped out.
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Assurance
Potential conflict of interest between information providers and users, along with financial statement frauds such as those of Enron and WorldCom, leads to a natural skepticism on the part of users. Thus, they depend on information professionals to serve as independent and objective intermediaries who will lend credibility to the information. This lending of credibility to information is known as providing assurance. When the assurance is provided for specific assertions made by management, we refer to the assurance provided asattestation. And, when the assertions are embodied in a company's financial statements, we refer to the attestation as auditing.
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Attestation
While auditing refers specifically to expressing an opinion on financial statements and attestation refers to expressing an opinion on an expanded set of financial information beyond financial statements or a specified element of financial statement information, assurance services include many areas of information, including nonfinancial information.
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Attestation Engagements
Agreed Upon Procedures Engagements (AT 201), such as verifying inventory quantities and locations.
Financial Forecasts and Projections (AT 301), such as analysis of prospective or hypothetical “what-if” financial statements for some time period in the future.
Reporting on Pro Forma Financial Information (AT 401), such as retroactively analyzing the effect of a proposed or consummated transaction on the historical financial statements “as if” that transaction had already occurred.
An Examination of an Entity's Internal Control Over Financial Reporting that Is Integrated with an Audit of Its Financial Statements (AT 501), focused on the design and operating effectiveness of an entity's internal control over financial reporting.
Compliance Attestation (AT 601), such as ascertaining a client's compliance with debt covenants. Examination of Management's Discussion and Analysis (AT 701), prepared pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Reporting on Controls at a Service Organization (AT 801), such as organizations that provide
outsourced processes that are likely to be relevant to the user entities' internal control over financial reporting.
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Assurance Services
While they are subsets of assurance services, attestation and audit services are highly structured and intended to be useful for large groups of decision makers (e.g., investors, lenders). On the other hand, assurance services other than audit and attestation services tend to be more customized for use by smaller, targeted groups of decision makers.
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Examples of Assurance Services
Public accounting firms must pick and choose the services that they wish to provide to the market, based on the expertise that lies within the firm.
Enterprise risk management assessment.Information risk assessment and assurance.Third-party reimbursement maximization.Rental property operations review.Customer satisfaction surveys.Evaluation of investment management policies.Fraud and illegal acts prevention and deterrence.Accounts receivable review and cash enhancement.Internal audit outsourcing.
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Attestation and Audit Services
Attestation and audit services are special types of assurance services, but consulting services are not. In providing consulting services, CPAs use their professional skills and experiences to provide recommendations to a client.
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Audit Opinion
Unqualified Opinion
Often called a clean opinion, an unqualified opinion is an audit report that is issued when an auditor determines that each of the financial records provided by the small business is free of any misrepresentations. In addition, an unqualified opinion indicates that the financial records have been maintained in accordance with the standards known as Generally Accepted Accounting Principles (GAAP). This is the best type of report a business can receive.
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Audit Opinion
Qualified Opinion
In situations when a company’s financial records have not been maintained in accordance with GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion. The writing of a qualified opinion is extremely similar to that of an unqualified opinion. A qualified opinion, however, will include an additional paragraph that highlights the reason why the audit report is not unqualified.
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Audit Opinion
Adverse Opinion
The worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm’s financial records do not conform to GAAP. The financial records provided by the business have been grossly misrepresented. Although this may occur by error, it is often an indication of fraud. When this type of report is issued, a company must correct its financial statement and have it re-audited, as investors, lenders and other requesting parties will generally not accept it.
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Audit Opinion
Disclaimer of Opinion
On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm’s financial status could not be determined.
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What is the need for Audited Financial Statements
Financial audits exist to add credibility to the implied assertion by an organization's management that its financial statements fairly represent the organization's position and performance to the firm's stakeholders. Audited financial statements provides enhanced degree of confidence to stakeholders of a company are typically its shareholders, but other parties such as tax authorities, banks, regulators, suppliers, customers and employees may also have an interest in knowing that the financial statements are presented fairly, in all material aspects.
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The Audit Committee
The Audit Committee assists the Board in fulfilling its oversight responsibilities. The Audit Committee shall consist of no less than three members of the Board of Directors, This member most be independent in accordance with applicable Securities and Exchange Commission (“SEC”) rules. Each member of the Audit Committee shall in the judgment of the Board of Directors be financially literate, as such qualification is interpreted by the Company’s Board in its business judgment, have a basic understanding of finance and accounting and be able to read and understand the Company’s fundamental financial statements.
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Audit Purpose
The purpose of an audit is to enhance the degree of confidence that intended users can place in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects. An audit conducted in accordance with generally accepted auditing standards and relevant ethical requirements enables the auditor to form that opinion.
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Audit Planning
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