Audit Unit 1

GAAS Standards Acronym

TIP PIE ACDO

General Standards

training, independence, professional care

Fieldwork Standards

Planning, Internal Controls, Evidence

goal of feildwork standards

provide reasonable assurance that financial statements do not contain material misstatements

Reporting

Accordance with GAAP, Consistency of the financial statements, disclosures are reasonably adequate and stated otherwise in opinion, opinion on the financial statements

Training and proficiency standard

industry and customer competence, education and experience, different tasks for different job levels

Independence in mental attitude standard

Independence in fact and in appearance

Due professional care standard

professional skepticism and profession judgement

professional skepticism

appropriate questioning and critical assessment of evidence

professional judgement

application of training, knowledge, and experience in making informed decisions during audit

Planning and Supervision standard

auditor must adequately plan the work, including risks before we do fieldwork or accept client and must properly supervise any assistants

Understanding of entity and environment to assess risks of material misstatement standard

every client has different risks, a lot of it centers around internal controls in place

- planning materiality

obtain sufficient appropriate evidence standard

correct quantity of evidence that is reliable and addresses the relevant assertion

reliability of evidence from high to low

1) auditor's direct personal knowledge

2) external documentary evidence

3) internal documentary evidence

financial statements in accordance with GAAP standard

assuring the statements are in accordance with GAAP

GAAP applied consistently standard

- ensuring statements are consistent with each other and with previous years

EX: changing constantly from LIFO to FIFO

Adequacy of disclosures standard

- contains all information that would be deemed relevant to stakeholders

- we only report if the disclosures are not adequate

express of disclaim an opinion

disclaiming opinion means you did not get enough evidence to give an opinion (very rare)

business risk

the risk that an entity will fail to meet its objectives

information risk

- the probability that the information circulated by an entity will be false or misleading

- market starts to shut down with high information risk

assurance services

independent professional services that improve the quality of information, or its context, for decision makers

- risk advisory services, website security, data integrity

attestation services

A type of assurance service in which the CPA firm issues a report about a subject matter or assertion that is made by another party

- 10Q, examination of financial forecast, review of historical statements, agreed upon procedures

audit services

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 interested users

- historical financial statements, internal controls

- gives reasonable assurance

which services provide limited assurance?

assurance and attestation

agreed upon procedures

The methods used in an engagement in which users participate in determining the scope of procedures performed by the accountants

- not the same as an audit

five pcaob assertions

existence/occurrence, completeness, valuation/allocation, rights and obligations, presentation and disclosure

existence assertion

assets, liabilities, and equity interests exist for the given cutoff

occurrence assertion

transactions and events that have been recorded have occurred and pertain to the entity in the given period

- mostly for the income statement

completeness assertion

All transactions are recorded in financial statements in the right period

Valuation and Allocation assertion

assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded

Rights and Obligations Assertion

the entity holds or controls the rights to assets, and liabilities are the obligations of the entity

Presentation and Disclosure Assertion

Recorded amounts are properly classified, described, and disclosed according to relevant criteria

- are the disclosures understandable?

ASB - Assertions about Events and Transactions (I.S.)

Occurrence

Completeness

Cutoff

Accuracy

Classification

ASB Assertions about Account Balances (B.S.)

existence, rights and obligations, completeness, accuracy and valuation

ASB Assertions about Presentation and Disclosures

1. Occurrence

2. Completeness

3. Classification and understandability

4. Accuracy and valuation

5. Rights and Obligations

audit committee

- on the board of directors, required for all publicly traded companies

- consists of independent outside directors, can not accept any consulting or advisory fee from company or be affiliated with company or its subsidiaries

- must contain at least one member with financial expertise

who does the sec oversee?

PCAOB and FASB

who does the AICPA oversee?

auditing standards board (ASB)

preparation and grading for CPA exam

PCAOB and its responsibilities

5 board members (no more than 2 CPAs)

- audit standard authority, inspect registered audit firms between 1 and 3 years depending on firm size, discipline firms as needed)

procedures for evaluating a prospective audit client

1) obtain and review available financial information

2) inquire of third parties about integrity of company and management

3) consider if client has special circumstance or may turn a going concern

4) determine firm's independence

5) determine if firm has necessary technical skills for audit

6) determine if acceptance would violate any applicable regulations

do companies disclose auditor changes?

yes, in a 8k

- previous audit firm writes a letter agreeing or disagreeing with the firm's comments

controls approach to an audit plan

more testing to see if the internal controls are good, if they are using more reliance on them

substantive approach for an audit plan

more transaction level testing, more time consuming

characteristics of an overall materiality number

- usually a percentage of a relevant metric

- usually an even number

- can be higher or lower depending on company's perceived risk

qualitative materiality

Information or misstatements that impact a user's decision-making process for a reason other than its magnitude.

tolerable statement or performance materiality

- the amount or amounts that reduce to an appropriately low level the probability that the total of uncorrected and undetected misstatements would result in a material misstatement

- usually between 50 and 75 percent of materiality

- allocate PM by account depending on risk

summary of audit difference (SAD) threshold

-any detected misstatement over this threshold will be accumulated

- 1-5% of materiality

audit documentation

The written record of the basis for the auditor's conclusions that provides the support for the auditor's representations, whether those representations are contained in the auditor's report or otherwise.

objectives of audit documentation

1. Improve audit quality

2. Enhance public confidence - if material misstatement occurs, auditors can show how they came to conclusion

examples of permanent audits files

- corporate by-laws and organization charts

- chart of accounts

- contracts

- leases

- bond issuances

examples of current audit files

- planning, trial balance & reporting

- programs, memos, minutes

- reconciliations, testing, confirmations, correspondence

requirements of audit documentation

- enable an experienced auditor having no previous connection to understand work and who performed and reviewed it when

- provide a clear link to significant findings

8 types of audit procedures

1) inspection of records and documents

2) inspection of tangible assets

3) observation

4) inquiry

5) confirmation

6) recalculation

7) reperformance

8) analytical procedures

vouching

the use of documentation to support recorded transactions or amounts

tracing

the use of documentation to determine if transactions or amounts are included in the accounting records

what assertions does inspection of tangible assets usually confirm

existence and sometimes valuation