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Welcome Back
Class #2 Agenda
Any Chapter 1 questions?
Chapter 2 Professional Standards
Chapter 3 Ethics
Quiz Individual
Quiz Group Solution
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Public Company Accounting Oversight Board Auditing, Attestation, Quality Control, Independence,
Ethical Standards for audits of public companies
American Institute of Certified PublicAccountants Auditing, Attestation, Quality Control, Independence
Ethical, Accounting and Review Standards forengagements involving nonpublic companies
State Boards of Accountancy License CPAs and CPA firms to practice in jurisdictions
Authority of Organizations
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Principles Underling a GAAS
Audit Purpose of an audit Premise of an audit
Personal responsibilities of the auditorAuditor actions in performing the audit
Reporting results of an audit
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Principles Underling a GAAS
Audit Purpose of an auditProvide an opinion
on financial statements are in accordance
with the applicable financial reporting
framework.
The framework is ordinarily GAAP.
The applicable framework corresponds to the
suitable criteria of an attest engagement.
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Principles Underling a GAAS
Audit Premise of an auditManagement (and
those charged with governance) have
responsibility to:
Prepare financial statements in accordance
with applicable financial reporting framework.
Provide auditor with needed information and
unrestricted access to those in the entity.
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Principles Underling a GAAS
Audit Personal responsibility of the auditor
Appropriate competence and capabilities
to perform audit in accordance with
standards, including maintainingprofessional skepticism and exercising
professional judgment throughout the
audit. Professional skepticismA questioning mind
and a critical assessment of audit evidence.
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Principles Underling a GAAS
AuditAuditor actions in performing the audit
Obtain reasonable assurance about whether
financial statements are free from error or
fraud.
The auditor is unable to obtain absolute
assurance due to:
Nature of financial reporting. Nature of audit procedures.
Need to conduct audit within a reasonable period
of time.
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Principles Underling a GAAS
AuditReporting the results of an audit
Express in a written report an opinion on
findings (or statement that opinion cannot
be expressed).
The opinion is on whether the financial
statements are in accordance, in all material
respects, with the applicable financialreporting framework.
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The 10 Generally Accepted
Auditing StandardsGeneral Standards
Standards of Field Work
Reporting Standards
NOTE: These standards only apply toaudits conducted according to PCAOB
standards. The preceding Principlesreplaced the 10 GAAS standards fornonpublic company audits.
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Generally Accepted Auditing
Standards--General Standards
Adequate technical training and
proficiency
Independence in mental attitude is to be
maintained
Due professional care is to be exercised
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Generally Accepted Auditing
Standards--Standards of Field Work
Auditor must adequately plan andproperly supervise work
Auditor must obtain a sufficientunderstanding of entity, and itsenvironment, including internal controlto assess risk of material misstatementand to design further audit procedures
Auditor must obtain sufficientappropriate audit evidence to afford areasonable basis for the opinion
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Generally Accepted Auditing
Standards--Standards of Reporting
State whether the financial statements are
presented in accordance with GAAP
Identify circumstances in which such principles
have not been consistently applied
Informative disclosures are adequate unless
otherwise stated in the report
Report should clearly state the degree of
responsibility being assumed by the auditors byexpressing an opinion or stating that one cannot
be expressed, and the reason therefor
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Terminology in Auditing Standards
(Figure 2.3)
Responsibility
Level
Meaning Words Used toIndicate Responsibility
Unconditional
Responsibility
Auditor must fulfill responsibilities Must
Shall (PCAOB only)
Is required (PCAOB only)
PresumptivelyMandatory
Auditor must comply with requirements unless
auditor demonstrates and documents that
alternative actions were sufficient to achieve the
objectives of the standards
Should
Responsibility toConsider
Auditor should consider; whether the auditor
complies with the requirements depends on the
exercise of professional judgment in the
circumstances
May
Might
Could
Other phrases indicating a
responsibilities to consider
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The GAAS Hierarchy (Figure 2.3)
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Auditor Responsibility for the
Detection of Errors and Fraud (1 of 2)
Obtain information to assess the inherent risks andfraud risks
Information about the company and itsenvironment
Discussion among audit team members
Inquiries of management and others
Risk assessment analytical procedures, includingthose involving revenue
Assess the risk of errors and fraud that may cause thefinancial statements to contain a materialmisstatement.
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Auditor Responsibility for the
Detection of Errors and Fraud (2 of 2)
Based on that assessment, plan and perform theaudit to obtain reasonable assurance thatmaterial misstatements, whether caused byerrors or fraud, will be detected.
Exercise due care in planning, performing andevaluating the results of audit procedures, andthe proper degree of professional skepticism toachieve reasonable assurance that material
misstatements due to error or fraud will bedetected.
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Auditor Responsibility for Client
Identifying Noncompliance with Laws
Noncompliance with laws that could have a directand material effect on financial statement amountsand disclosures--same as for errors and fraud. Anaudit obtains reasonable assurance of detectingnoncompliance with these laws.
Other Laws (no direct effect on financial statementamounts): Specific procedures:
Inquire of management as to compliance
Inspect correspondence with licensing or regulatory authorities
Be aware of possible occurrence.
If information comes to the auditors attention, apply auditprocedures directed at determining whethernoncompliance with a law has occurred. An audit doesnot provide assurance that noncompliance with theselaws will be detected.
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Group Case
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The Standard Auditors Report for
Nonpublic Companies
Title
Addressee
Content Sections (paragraphs) Introductory (We have audited) Managements responsibility
Auditors Responsibility
Opinion Paragraph
Signature (firm name) City and state of office issuing audit report
Date
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We have audited the accompanying consolidated
balance sheets of ABC Company and its
subsidiaries, as of December 31, 20X1 and 20X0,
and the related consolidated statements of income,
retained earnings, and cash flows for the years
then ended.
The AICPA Standard Auditors
Report--Introductory Paragraph
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Management is responsible for the preparation andfair presentation of these consolidated financialstatements in accordance with accounting principlesgenerally accepted in the United States of America;this includes the design, implementation, and
maintenance of internal control relevant to thepreparation and fair presentation of consolidatedfinancial statements that are free from materialmisstatement, whether due to fraud or error.
The AICPA Standard Auditors Report
Managements Responsibility Paragraph
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The AICPA Standard Auditors Report:
Auditors Responsibility Paragraphs
Our responsibility is to express an opinion on these consolidated financial statements
based on our audits. We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the consolidated financial statements. The procedures selected depend on
the auditor's judgment, including the assessment of the risks of material misstatement of
the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity's preparation and
fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity's internal control An audit also includesevaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
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In our opinion, the consolidated financialstatements referred to above present fairly, inall material respects, the financial position of
ABC Company and its subsidiaries as of
December 31, 20X1 and 20X0, and theresults of their operations and their cash flowsfor the years then ended in accordance withaccounting principles generally accepted in
the United States of America.
The AICPA Standard Auditors
Report--Opinion Paragraph
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Other Types of Auditors Reports
Standard unmodified report (unqualified per PCAOB standards)
Financial statements follow GAAP and auditor does not add additionalcommentary for any issue
Other reports
Unmodified with emphasis of matter (or other emphasis)
Example: A lack of consistency in application of accounting
principles
Qualified opinion
Scope limitation or departure from GAAP
Adverse opinion
Departure from GAAP so significant that financial statements as a
whole are misleading
Disclaimer of opinion
Unable to arrive at an opinion due to a very significant scope
limitation
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Public Company Audit Report
Title is Report of Registered Independent
Public Accounting Firm.
Refers to standards of the PCAOB rather
than GAAS.
Includes a paragraph that refers to report
on internal control.
Somewhat more brief than the nonpublic
company report.
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Elements of Quality Control
Leadership responsibilities for quality
within the firm (tone at the top)
Relevant ethical requirements
Acceptance and continuance of clients
and engagements
Human Resources
Engagement performance
Monitoring
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QC Element 1: Leadership responsibilities
for quality within the firm
Firms internal culture recognizes that quality isessential in performing engagements and
recognizes the need to
perform work that complies with professional
standards and regulatory and legal requirements and
issue reports that are appropriate in the
circumstances.
Example: Assign management responsibilitiesso that commercial considerations do not
override the quality of work performed.
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QC Element 2: Relevant ethical
requirements
Firm and its personnel comply with
relevant ethical requirements.
Example: At least annually, the firm should
obtain written confirmation of compliance
with its independence policies and
procedures from all firm personnel who
are required to be independent.
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QC Element 3: Acceptance and
Continuance
Firm will undertake to continue relationships and
engagements only where the firm:1. Has considered client integrity.
2. Is competent to perform the engagement.
3. Can comply with legal and ethical requirements.
Example: Background information is gathered on all
prospective audit clients, including the attitude of
principal owners, key management, and those charged
with governance on matters such as aggressiveaccounting and internal control over financial reporting.
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QC Element 4: Human Resources
Firm has personnel with the capabilities, competence,
and commitment to ethical principles to:
1. Perform engagements in accordance with professional standards
and regulatory and legal requirements.
2. Enable the firm to issue reports that are appropriate in thecircumstances.
Example: Design effective recruitment processes and
procedures to help the firm select individuals meeting
minimum academic requirements established by thefirm, and maturity, integrity and leadership.
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QC Element 5: Engagement
Performance
Firms engagements are consistently performed in
accordance with professional standards and regulatory
and legal requirements, with policies and procedures
addressing:
1. Engagement performance.
2. Supervision responsibilities.
3. Review responsibilities.
Example: Design policies and procedures that address
the tracking of progress of each engagement.
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QC Element 6: Monitoring
Firms policies and procedures established
for each of the elements are suitably
designed and effectively applied.
Example: Working papers, reports, and
client financial statements are reviewed to
assess compliance with the firms quality
control policies and procedures.
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Quality Control Procedures
Depend on size of firm, number of offices
and nature of firms practices.
Every CPA firm should have quality control
procedures applicable to every aspect of
its practice.
Establish controls to provide assurance
that the CPA firm meets its responsibilitiesto clients and public.