Chapter 2 - Auditor Oversight

What is the role of the AICPA and the Auditing Standards Board (ASB)?

The AICPA (American Institute of CPAs) sets Statements on Auditing Standards (SAS) through its ASB. ASB standards apply to audits of private companies, non-profit organizations, and governmental entities in the US.

What is the role of the Public Company Accounting Oversight Board (PCAOB)?

Established by the Sarbanes-Oxley Act (SOX) under SEC oversight, the PCAOB establishes auditing, quality control, ethics, and independence standards for audits of public companies (issuers) and broker-dealers.

What is the role of the Securities and Exchange Commission (SEC)?

A federal government agency with legal enforcement power that oversees public securities markets, oversees the PCAOB, and administers federal securities laws including Sarbanes-Oxley (SOX).

What is the role of the International Auditing and Assurance Standards Board (IAASB)?

Sets International Standards on Auditing (ISAs) designed to harmonize auditing practices internationally for financial audits outside the United States.

What are Generally Accepted Auditing Standards (GAAS), and what are its 4 underlying categories?

GAAS are the professional standards governing financial audits. The 4 underlying principles categories are: 1. Purpose of an Audit (express an opinion on F/S) ; 2. Responsibilities (competence, ethics, professional skepticism) ; 3. Performance (reasonable assurance, planning, materiality, risk assessment, evidence) ; 4. Reporting (expressing a written opinion).

What are Quality Control Standards for CPA firms, and how do they differ from GAAS?

Quality control standards govern the policies and procedures established by an entire CPA firm to ensure consistent audit quality across all engagements. GAAS governs individual audit engagements.

What are the 6 required elements of a CPA firm system of Quality Control?

1. Leadership responsibilities for quality ('tone at the top') ; 2. Relevant ethical requirements (annual independence confirmations) ; 3. Acceptance and continuance of client relationships ; 4. Human resources (hires, assignments, CPE) ; 5. Engagement performance (supervision, review, consultation) ; 6. Monitoring (peer review & internal inspections).

What is Peer Review in public accounting?

A periodic review (typically every 3 years) conducted by another independent CPA firm to evaluate whether a CPA firm's system of quality control is appropriately designed and being followed.

What are the 4 main Sarbanes-Oxley (SOX) requirements for public company audit committees?

1. Must be composed solely of independent, non-management board members ; 2. Must disclose whether at least one member is a financial expert ; 3. Must be directly responsible for hiring, paying, and overseeing the external auditor ; 4. Must pre-approve all audit and permitted nonaudit services.

[Source: HW MC 2-13] Which of the following best describes Generally Accepted Auditing Standards (GAAS)?

Measures of the quality of the auditor's performance across engagement planning, execution, and reporting.

[Source: HW MC 2-14] Under the GAAS Responsibilities principle, an auditor must possess?

Appropriate competence and capabilities, comply with relevant ethical requirements, and maintain professional skepticism throughout the audit.

[Source: HW MC 2-15] Which standard setter issues auditing standards applicable to audits of U.S. private commercial companies?

The AICPA Auditing Standards Board (ASB).

[Source: HW MC 2-15b] Which standard setter issues auditing standards applicable to audits of U.S. public companies (issuers)?

The Public Company Accounting Oversight Board (PCAOB).

[Source: HW Problem 2-17] Quality Control Element Mapping: Annual written independence representations from all partners and staff.

Relevant Ethical Requirements (Quality Control Element 2).

[Source: HW Problem 2-17] Quality Control Element Mapping: Contacting predecessor auditors before accepting a new client.

Acceptance and Continuance of Client Relationships (Quality Control Element 3).

[Source: HW Problem 2-17] Quality Control Element Mapping: Concurring partner technical review of financial statements prior to release.

Engagement Performance (Quality Control Element 5).

[Source: HW Problem 2-19] Standard Jurisdiction: Audit of a U.S. public company (e.g., Apple Inc.).

PCAOB Standards (Auditing Standards / AS).

[Source: HW Problem 2-19] Standard Jurisdiction: Audit of a U.S. private commercial manufacturer or local non-profit.

AICPA / ASB Standards (Statements on Auditing Standards / SAS).

[Source: HW Problem 2-19] Standard Jurisdiction: Audit of a foreign subsidiary operating in Germany.

IAASB Standards (International Standards on Auditing / ISA).

[Source: HW Problem 2-20] Ray & Holmes, CPA scenario: A CPA accepts an audit fee based on a percentage of the client's net income. Does this violate professional standards?

Yes! Accepting a contingent fee for an audit engagement violates the AICPA Code of Professional Conduct (Contingent Fee Rule) and impairs independence.