409 Exam 1

auditing

specifically expressing an opinion on financial statements

attestation

expressing an opinion on any type of information or subject matter that is the responsibility of another party (such as sustainability measures)

assurance

even broader set of information, including non-financials that improves the quality of information for decision makers

broadest to narrowest scope of audit

1. assurance
2. attestation


1. audit

financial reporting framework

asset owners put money into business with controllers to receive dividends or capital gains while taking an information risk

controllers deal with creditors by paying them interest/principal payments while creditors gain debt capital in business

simultaneously, controllers deal with independent auditors to ensure audited financial statements will be filed with SEC and made public for investors

information risk

risk that the information being shared by the company will be materially false or misleading; users demand an independent 3rd party assessment of the information called an audit

business risk

risk that an entity will fail to meet its stated business objectives

assurance services

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

EX: information risk assessment, customer satisfaction survey

attestation engagements

practitioner assess and reports on “subject matter” to respond to its credibility / could be any subject matter the person is just ensuring that it is free of material misstatement

EX: agreed upon procedure engagement - verifying inventory quantities

non-financial attestation engagements

effectiveness of internal control systems, compliance with environmental regulations, and sustainability reporting engagements

EX: shareholders pressuring board of directors and upper management regarding issues of social responsibility

financial attestation engagements (other than audits)

financial forecasting and projections, examination of Management’s Discussion and Analysis, pro forma financial information

PCAOB

public company accounting oversight board; oversees audit of public companies

PCAOB

existence or occurrence

rights and obligations

completeness

valuation or allocation

presentation and disclosure

existence or occurence PCAOB

Do assets really exist?

rights and obligations PCAOB

Does company own all assets?

completeness PCAOB

Are financial statements complete?

valuation or allocation PCAOB

Is B/S accounts correctly valued and categorized?

presentation and disclosure PCAOB

Were all transactions recorded in correct amounts? Are disclosures understandable to users?

ASB

auditing standards board; governs non-public company audits

ASB

assertions about events and transactions

assertions about account balances

assertions about presentation and disclosures

assertions about events and transactions ASB

occurrence (events giving rise to transactions are valid and have taken place)

completeness and cutoff (all transactions have been recorded and in appropriate period)

accuracy (recorded at proper amount)

classification (posted to proper account)

assertions about account balances

existence (assets and liabilities exist)

rights and obligations (entity has legal claims on all assets and revenues)

completeness (all items are included within GAAP standards)

accuracy and valuation (reported proper amount within GAAP standards)

assertions about presentation and disclosures

occurrence, rights, and obligations (have occured, are owned, and are responsible for)

completeness (proper disclosures)

classification and understandability (properly classified accounts and disclosures are easy to understand)

accuracy and valuation (proper amount and valuation in accordance with GAAP)

financial attestation engagements

financial forecasts and projects, examination of management discussion and analysis

non-financial attestation engagements

effectiveness of internal control systems, sustainability reporting

professional judgement

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

auditor independence

To be able to make an independent judgement on company for decision makers to rely upon

services CPA firms are prohibited from providing during audit

bookkeeping services (grading your own paper)

design or implementation of financial information systems

appraisal or valuation services

internal auditing outsourcing

\*\*\*can provide tax services limited to 5% of overall audit fees

CPA firm structure

partner - signing off on audit, periodically coming in to check on things but not involved in day to day

manager - working with audit team leading the way

senior staff - in charge of staff, reviewing work of staffers

staff - low man, dirty work

financial auditing is done by ________

external auditors

operational auditing is done by _____

internal auditors

governmental auditing

ensure complaince with government rules and regulations; emphasizes accountability of public officials

forensic auditing is done by _____

fraud auditors, Certified Fraud Examiners

forensic accountants do _____

designed to investigate a crime and will often gather evidence desigend to convict a fraudster

regulatory auditing

mainly work for IRS, audit for fraud and tax evasion

certify an accurate tax return

CPA Requirements

substantial changes on April 1, 2017

16 hours to complete 4 parts (auditing and attestation, financial accounting and reporting, regulation, business environment and concepts)

passing score of 75%

AICPA

american institute of certified public accountants; oversee standard setting for private company audits

PCAOB

pubic company audit oversight board; created by SOX 2002; oversees standard setting for private company audits and conducts public company audits

GAAS

generally accepted auditing standards

10 GAAS/PCAOB Standards

1. competence and capabilities
2. independence of fact and appearance
3. due care process
4. professional skepticism and judgement
5. reasonable assurance document is factual
6. planning and supervision of engagement
7. materiality is assessed
8. risk assessment of business (IR, CR, DR)
9. audit evidence for opinion
10. express opinion on financial statements

10 GAAS Standard Categories

responsibilities

performance

reporting

Responsibility category of GAAS

1. competence and capabilities
2. independence of fact and appearance
3. due care process


1. professional skepticism and judgement

Performance Category of GAAS

1. easonable assurance document is factual
2. planning and supervision of engagement
3. materiality is assessed
4. risk assessment of business


1. audit evidence for opinion

Reporting Category of GAAS

1. express opinion on financial statements

quality control standards by CPA firms

layered review of audit workpapers within audit team to ensure quality work is being done

concurring partner reviews

peer CPA review of work

PCAOB inspection

PCAOB inspection

monitors public accounting firms through inspections

If firm audits >100 public firms, annual inspection

If firm audits

4 types of audit opinions

unqualified

qualified

adverse

disclaimer of opinion

unqualified

financial statements are in accordance with GAAP, may include explanation to address going concern issue or events that happened the financial statement users should know about

qualified

unqualified except for a specific materially misstated account, financial statements conform to GAAP

adverse

financial statements are not in accordance with GAAP, financial statement users should not rely upon the financial statements

disclaimer of opinion

auditors do not express an opinion due to lack of information, lack of internal controls, too risky of an assessment, etc

format of unqualified audit report

Gives introduction saying how it is reasonable assurance “in all material respects”

Scope describes how deeply they dug when doing audit

Opinion on financial statements is expressed as well as basis for opinion

purpose of audit’s report pertaining to internal controls over financial reporting

Auditors report gives conclusion regarding effectiveness of internal controls used by company over their financial reporting

issues discussed with former auditor

Basic information regarding issues reflecting on the integrity of management

Disagreements about accounting principles or audit procedures

Any word previous auditor gave former client about fraud or illegal actions

The reason for a change in auditors, why did the company decide to change

audit risk model

Audit risk (set by audit team) = IR (assessed) x CR (assessed) x DR(calculated)

____ inherent risk if material misstatement is likely to enter information system

high

high control risk

material misstatement is not likely to be detected by client’s internal controls

high detection risk

we can afford less effective testing and spending less time recalculating results

purpose of engagement letters

contract between auditor and client

reduces risk of misunderstanding between client and firm

includes: objectives of engagement, management’s responsibilities, limitations of engagement

internal auditor

can give a more day to day explanation of financial events that are occurring; external and internal auditors working simultaneously can increase efficiency of engagement; cannot make decisions on engagement

If internal auditor is competent and objective and client is low risk, you ____ rely on internal auditor work

CAN

specialists

must be brought in from time to time to help explain or confirm an event that is specific to an industry

EX: Waste Management trash hole guy from Stanford

            \*\*should be unrelated to company being audited

IT Auditor

check the accounting information system being used

Evaluate the effect of computerized processing on the audit, to understand flow of transactions and design of audit procedures

Audit Plan

List of audit procedures that audit team performs to gather sufficient evidence on which to base its opinions

budgeted hours

maintain control of audit by identifying problems areas early in engagement to ensure the engagement is completed in a timely manner; each audit team member reports time taken for each procedure of audit process

materiality threshold

matter of professional judgement when deciding what level/amount of materiality would influence the decision of users

common audit procedures

inspection of tangible assets

observation

inquiry

confirmation

recalculation

reperformance

analytical procedures

audit procedures are used for ______

risk assessment procedures, test of controls, and substantive procedures

audit procedure - inspection of tangible assets

verifying existence of assets in petty cash, inventory, and fixed asset accounts

audit procedure - observation

see who performs internal controls and business processes to help determine quality of evidence

audit procedure - inquiry

asking questions to management about related business processes, internal control design, and explanation of variances in procedures

audit procedure - confirmation

auditor solicits help of a third party source to verify and confirm evidential integrity

using cash, A/R, and A/P accounts

audit procedure - recalculation

verifies accuracy of client’s quanative disclosures or reasonableness tests are determined

using depreciation expense, interest expense, or interest revenue

audit procedure - reperformance

usually performed for internal control testing but also used in reperforming client’s analysis

using Allowance for Doubtful Accounts, depreciation expense, etc

audit procedure - analytical procedures

analyze audit findings with financials to determine best way to categorize the audit (unqualified, qualifed, etc)

vouching

goes forward from source to final location of transaction

vouching

checking shipping documents to see if all sales recorded on sales journal actually occurred

If a transaction is recorded on the sales journal but there is no evidence the transaction took place this would result in an ______ of revenue through vouching

overstatement

Tracing

goes forward from source to final place of transaction

tracing

were all shipments made to customers actually recorded as sales? were all sales recorded in the proper category of sales and final summary journals?

If you are looking at evidence of more sales than documented in the sales journal than your income is ________ according to tracing

understated

types of analytical procedures

comparison of current year account balances to past years

comparison of current year account balances to anticipated results outlined in budgets and forecasts

evaluate year over year patterns on account balances

compare current year account balances to other companies in similar industries

compare relationship between current year account balances and relevant nonfinancial information

audit documentation

documentation providing auditor’s record of compliance with GAAS

integral part of audit quality

documents nature, timing, and extent of work performed

facilitates planning, performance, and supervision

provides basis for review

permanent file

information of continuing audit significance

EX: key contracts, bylaws, royalty, and bond agreements

current file

includes all documentation that supports the conclusion for the year under audit

documentation retention

documentation must be retained for 7 years from report release date

major stages of audit

1. planning
2. preliminary fieldwork
3. substantive year end testing


1. reporting

planning stage of audit

client acceptance of engagement letter and staff is determined, begin to understand client business and industry through brainstorming; assess inherent and preliminary control risk; identify shady-looking account balances

preliminary fieldwork stage of audit

test internal control operating effectiveness through sample transactions, revise control risk accordingly with findings

substantive year end testing stage of audit

perform year end testing of account balances and transactions following audit program; determine any material misstatements and propose adjusting journal entries

reporting stage of audit

document management representations in work papers, issue audit report ensuring that GAAS standards have been addressed, communicate management recommendations to the client to implement in future years

steps taken to access inherent risk

look at dollar size of the account, liquidity, volume of transactions, complexity of transactions, subjective estimates

understanding the client’s business is important

looking at information sources can attest to the company as a whole

inherent risk

that a material misstatement will occur due to nature of industry, business, transactions, etc

control risk

that a material misstatement would not be prevented or detected by client internal controls

detection risk

that a material misstatement is not detected by auditor’s own procedures

real earnings management

abnormally high production of inventory to spread overhead among additional units to lower COGS

deferring discretionary expenses like waiting to run a big advertising campaign until the following year to enhance the current year

delay investment projects to future period

sell profitable assets prematurely to gain from sale of asset instead of using them for future profits

is real earnings management fraudulent?

no

role of audit committee in monitoring R.E.M.

monitor through the audit committee’s enterprise risk assessment activities

fraud

intentional false representation about material point that is relied upon by the victim and causes measurable damage

financial statement fraud

\`intentional, material misrepresentation made by management in financial statement line items and disclosures for the purpose of misleading investors and creditors into making investment or loan decision they otherwise wouldn’t if the disclosures were transparent