ACCT 3222-3, Wiley, LSU, Exam 1

Audit Services

services by an independent CPA that provide financial statement users with (1) an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework and (2) an opinion on the effectiveness of ICFR, which enhance the degree of confidence that intended users can place in the financial statements

Attestation Services

Services performed when an independent practitioner, or CPA, is engaged to issue a report on subject matter that is the responsibility of another party

Relationship of assurance, attestation, and auditing services from most to least improved of quality (i.e., assurance)

Audit - highest quality/reasonable assurance (i.e., historical financial statements)

Attestation - mid quality/limited assurance (i.e., review of historical financial statements, examination of internal controls, review of financial forecast)

Assurance - lowest quality (i.e., compilation of historical financial statements, website security, IT operations, non-financial information)

Assurance Services

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

Applicable financial reporting framework refers to

the set of standards used in preparing the historical financial statements (i.e., GAAP, IFRS, or federal income tax basis of accounting)

Independent implies that the service is performed by

someone who was not involved with the creation of the information and who is objective in the evaluation of the information

Quality refers to

the relevance and realiability of the information

Information refers to

subject matter that can be financial or nonfinancial, historical or prospective, standalone data or entire systems of data, internal or external to a company

CPAs are the only _________ accounting professionals in the US and the ________ are issued at the ____________ level

Licensed accounting professionals in the US.

Licenses are issued at the state level, not federal

A state board of accountancy will only issue

a licence to practice after all three Es have been earned

CPA Es

Education, Exam, and Experience

Public companies, or issuers, in the US are required by federal government to have

an annual financial statement audit and an ICFR audit

Private companies, or non-issuers, are _______ to have an annual audit by federal government, but

Not required by law, other interested users may request audited financial statements (i.e., lenders)

ICFR

Internal Control over Financial Reporting

Integrated Audit

An audit that combines the financial statement audit with an audit of the effectiveness of ICFR

The limitations of an audit are cause by

1. the nature of financial reporting

2. the nature of audit procedures

3. the need for the audit to be conducted within a reasonable period of time at a reasonable cost

The nature of financial reporting refers to

the use of judgment when preparing financial statements due to the subjectivity required when arriving at accounting estimates and judgment required when selecting and applying accounting methods

The nature of audit procedures refers to

Reliance on evidence provided by the client and its managements, as well as the concept of materiality

Materiality

the ability of information to influence decisions that users make on the basis of the financial information of a specific reporting entity

Compliance Audit

an audit to determine whether the entity has conformed with regulations, rules, or processes

Operational (Performance) Audit

An assessment of the economy, efficiency, and effectiveness of an organization's operations

Operational Audit economy, efficiency, and effectiveness refer to

Economy refers to the cost of inputs

Efficiency refers to the relationship between inputs and outputs

Effectiveness refers to the achievement of certain goals or the production of a certain level of outputs

Internal Audit

A function within an entity which generally evaluates and improves risk management, internal control procedures, and elements of the governance process

Those charged with governance

Persons with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity

The external auditor may rely on the work done by

Internal auditors when evaluating the evidence needed to form an opinion on the financial statements or on ICFR

Financial Statement Users include

Investors, suppliers, customers, lenders, employees, governments, and the general public

Sources of demand for audit and assurance services

Remoteness (users do not have access to the company)

Complexity (amounts affected by significant estimates requiring knowledge and experience to evaluate)

Competing incentives (determine biased information)

Reliability

Management is responsible for

1. Ensuring the information included in the financial statements is presented fairly and complies with the applicable financial reporting frameowrk

2. Designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements

3. Providing the auditor with access to all records, documentation, and personnel relevant to the preparation and fair presentation of the financial statements, and any additional information the auditors may consider relevant to complete the audit

Also, mgmt is responsible for making estimates for some f/s items and selecting appropriate accounting policies within the applicable financial reporting framework

Auditors are responsible for

1. Conducting the audit in accordance with the appropriate auditing standards

2. Planning and performing the audit with professional skepticism

3. Planning and performing the audit with professional judgment

Professional Skepticism

An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence

Professional judgment

The application of relevant training, knowledge, and experience in making informed decisions about the courses of action that are appropriate in the circumstances of the audit engagement

PCAOB

Public Company Accounting Oversight Board

Oversees the audits of public companies

PCAOB is a

non-profit corporation established through the SOX legislation in 2002.

Auditing Standards

(AS)

Standards issued by the PCAOB which provide minimum requirements and guidance for auditing services

AICPA is

American Institute of Certified Public Accountants

A private professional membership organization of CPAs representing the accounting profession

Also, responsible for creating and grading the Uniform CPA exam

Auditing Standards Board

(ASB) a standing committee of AICPA

Issues audit standards for the audits of private companies and not-for-profit organizations since 2003 SOX (before SOX included public companies)

Statements on Auditing Standards

(SAS) are standards issued by the ASB (Auditing Standards Board)

GAAS

Generally Accepted Auditing Standards is developed by ASB to make sure company followed GAAP

Purpose of an audit

Provide an opinion by the auditor on whether the F/S are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (GAAP)

Premise Upon Which an Audit Is Conducted

(Mgmt's responsibilities)

Mgmt have responsibility:

a. Prep and fair presentation of the F/S in accordance with applicable financial reporting framework including design, implementation, and maintenance of IC

b. to provide the auditor with access to all docs and client personnel

Responsibilities of the Auditor

Competence and capabilities to perform the audit - technical training, CPA exam, CPE

Ethical requirements - independence

Professional skepticism - maintain questioning attitude

Professional judgment - uncertainty/subjectivity

To obtain reasonable assurance

Auditor must: Plan the work, supervise any assistants

Determine and apply appropriate materiality level, or levels, throughout the audit

Assesses risks including IC

Obtains sufficient appropriate audit evidence

Inherent limitations of an Audit

Nature of financial reporting (complex)

Nature of audit procedures (sampling; audit data analytics (ADA))

Time & Cost constraints

Reporting the results of an audit

Based on an evaluation of audit evidence, auditor expresses in form of a written report an opinion in accordance with findings or states that an opinion cannot be expressed

ASB also issues

Statements on Standards for Attestation Engagements (SSAE)

Statements on Quality Control Standards (SQCS)

AICPA is the _________ Committee

Accounting and Review Services Committee

Tasked with issuing Statements on Standards for Accounting and Review Services (SSARS)

ASB members are

Volunteers on the board from AICPA peers

There are _____ state boards

55

Why audit standards?

1. Uniformity

2. Guidelines to measure quality of audit work

FASB makes

GAAP

State boards of Accountancy

Controls licensing. There are 55 boards

NASBA

Admin of CPA application and grade viewing

ASB makes

SAS

Statements on auditing standards

PCAOB makes

AS (Auditing standards)

IAASB

International Auditing and Assurance Standards Board has authority to issue International Standards on Auditing (ISA)

FASB is a

Privately funded organization whose mission is to establish financial accounting and reporting standards for nongovernmental entities with the goal of providing information that is useful for decision making

FASB maintains the

Accounting Standards Codification (ASC), which represents the authoritative standards of financial reporting recognized by the SEC, the PCAOB, and the AICPA

COSO is

an independent private-sector group that focuses on providing guidance to management and expertise in the areas of internal control, enterprise risk management, and fraud deterrence

The independent auditor's report is

used to communicate the audit firm's opinion aobut a company's FS to interest users

Reasonable Assurance

A high, but not absolute, level of assurance

Audit risk

the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

Audit standards require a ________ be used for all audits

Audit standards require a standard format of the audit report be used for all audits

Standard Unmodified Report

Used when auditors have determined the financial statements are presented fairly in accordance with the applicable financial reporting framework

Also called standard, unmodified/unqualified, or "clean" report

Sections of an unmodified audit report of a private company

1. Independent Auditor's Report

2. To the owner's of company:

3. Report on the Financial Statements (IDs the F/S and what service performed)

4. Management's Responsibility for the Financial Statements (Prep and fair presentation of the F/S; design, implementation, and maintenance of IC; F/S free from material misstatement whether due to fraud or error)

5. Auditor's Responsibility (Express an opinion, used auditing standards (ASB), reasonable assurance F/S free from material misstatement, Obtain audit evidence and Procedures on auditor's judgment, considered IC relevant to design audit procedures, no expressed opinion on IC, evidence obtained sufficient and appropriate to provide opinion)

6. Opinion (present fairly, in all material respects, financial opinion in accordance with accounting principles GAAP)

7. CPA firm signature

8. Date end of field work, evidence gathering complete

What does second paragraph of Auditor's Responsibilities represent?

How an audit is performed

PCAOB standards use the term ______ report

Unqualified report. Equivalent to unmodified used in private companies and sometimes used interchangeably as unmodified used to be used for private companies too.

Sections of Unqualified audit report of public company

1. Report of Independent Registered Public Accounting Firm (registered w/ PCAOB)

2. To the shareholders and Board of Director of company

3. Opinion on the Financial Statements (note moves to top of report but stmt stays the same as private company)

4. We have also audited IC ... and reference IC report

5. Basis for opinion (F/S responsibility of company's mgmt, auditor responsibility to express an opinion and be independent

6. What is an audit section

7. Signature of audit firm

8. Date (end of fieldwork)

9. Statement about auditor tenure

What is unique to the public company audit report?

1. Title - registered with PCAOB

2. Opinion moves from last paragraph to top of report

3. Paragraph referencing the audit of IC as public companies are required to have an audit of ICFR and auditors issue a separate opinion for that audit

4. Basis for opinion paragraph - less detail than private company and that registered with PCAOB and independence requirements of the SEC and other federal securities laws

5. Scope paragraph - explicit statement that PCAOB audit standards were followed

6. Audit tenure - states the year audit firm began serving consecutively as the company's auditor

Qualified or Adverse opinion

Material departures and client refuses to make corrections

Qualified or Disclaimer of Opinion

Material limitation known as "Scope Limitation" on auditor's ability to gather sufficient appropriate evidence

Disclaimer of Opinion

Auditor is not independent

PCAOB Auditing Standard 2201 states_____

PCAOB Auditing Standard 2201 An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements states that auditors must conduct an integrated audit for public companies

AS 2201 requires

a standard format of the audit report be used for all audits of effectiveness of ICFR

Components of the unqualified report on ICFR

1. Title - independent is also in the title of this report and registered with PCAOB

2. Address - addressed to S/H and Board of Directors of company

3. Opinion paragraph - explains an audit of ICFR was conducted references the COSO IC - Integrated Framework as criteria. Second sentence states auditor's opinion

4. Paragraph referencing the F/S audit and the opinion given

5. Basis for opinion paragraph - states different responsibilities of mgmt and auditors. References registration with PCAOB and independence requirements of SEC and other fed. security laws

6. Scope paragraph - explains auditor's used PCAOB standards. Auditors only required to obtain reasonable assurance and did so as basis for opinion

7. Definition and inherent limitations paragraph - definition of ICFR directly from AS 2201. Final sentence not to use CY opinion to assume future IC will be effective and circumstances may change

8. Signature - audit firm's

9. Date - end of fieldwork date

Material Weakness

A deficiency, or combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement of the F/S will not be prevented or detected on a timely basis

If one or more material weaknesses are discovered auditors issue

Adverse opinion on the effectiveness of ICFR that explicitly states company did not maintain effective ICFR during period under audit

If auditors encounter a material limitation in the scope of their work

May consider disclaiming an opinion

Audit expectation Gap can be reduced by

Auditors performing duties appropriately, complying with standards, and meeting minimum standards of performance

Inspections of audits that standards applied correctly

Auditing standards reviewed and updated on regular basis to enhance work

F/S users being educated as to the responsibilities of preparers and auditors of F/S

Assurance providers reporting accurately level of assurance provided

Principles

Express the basic tenets of ethical conduct and provide the framework for the rules that govern the performance of the member's professional responsibilities

Rules of Conduct

Establish minimum standards of acceptable conduct in the performance of professional services

Interpretations

Provide additional guidance regarding the scope and applicability of the rules of conduct

AICPA enforceability

Principles are NOT enforceable

Rules of Conduct are enforceable and members must be prepared to justify departures from the rules of conduct

Interpretations must justify such departure in any disciplinary hearing

4 major sections of AICPA Code of Professional Conduct

1. Preface applicable to all AICPA members

2. Part I which includes ethical rules for members in public practice (CPAs)

3. Part II, which includes ethical rules for members in business (CFOs, etc.)

4. Part III, includes ethical rules for other members (non-CPA members of AICPA)

Conceptual Framework for Members in Public Practice

relate to all work performed by CPAs in public practice, audit engagements, tax engagements, accounting services performed for clients or consulting engagements.

Ultimately CPA should evaluate if relationship or circumstance would lead third party to conclude there is threat to CPA's rules compliance

Conceptual Framework Steps

1. ID threats - if none proceed with engagement

2. Evaluate significance of threats - if threats insignificant proceed, if significant step 3

3. ID and Apply safeguards

4. Evaluate the effectiveness of safeguards - if not acceptable level decline or terminate engagements, if acceptable step 5

5. Document threats and safeguards applied

Seven common threats CPAs should be alert to

1. Adverse interest threat - CPA's interest opposes client's

2. Advocacy threat - CPA promotes client interest to the point that independence is compromised

3. Familiarity threat - long, close relationship w/ client or too accepting of client work/sympathetic

4. Management participation threat - CPA takes on role of management (i.e., bkkp)

5. Self-interest threat - CPA could benefit financially or otherwise from an interest/relationship w/ client

6. self-review threat - put in position to review/audit CPA's own work

7. Undue influence threat - Subordinate CPA's judgement to client or 3rd party due to expertise, aggressive or dominate personality, attempts of coercion or excessive influence

Evaluating significance of threats

CPAs should evaluate and ID threats both individually and in aggregate. CPA's standard of evaluate acceptable level whether a reasonable and informed third party would conclude CPA is in compliance

3 basic types of safeguards

1. Created by the profession (Code of conduct), legislation (SOX), or regulation (SEC/PCAOB)

2. Created by client (i.e., board of directors reassigning key personnel)

3. Implemented within the CPA firm (i.e., reassigning someone off engagement, involving another firm, etc.)

Documenting threats and safeguards

Best practice for CPA to document ID'd threats, safeguards applied, and CPA's evaluation of effectiveness of safeguards.

Rules for Members in Public Practice

- Integrity and Objectivity

- Independence

- General Standards

- Other rules for members in public practice

Integrity and Objectivity

In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgement to others.

independence

A members in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council

applies to all attest engagement

Independent in Fact

Acting with integrity and objectivity, being honest, and not subordinating the public trust to personal gain and advantages

Auditor's state of mind*

independent in appearance

Avoiding potential conflicts of interest that can be observed by others

*what would the public think?

** MORE IMPORTANT**

Covered member

A person in a position to potentially influence attest decisions or the outcome of an attest engagement

Covered members include

*Any member of the engagement team

*Partners and managers with consultation, oversight, or review responsibilities related to the engagement

Direct supervisors of the engagement partner, including successive sr. levels

Accounting firm professionals who perform more than 10 hrs of non-attest services for the client

*Partners who are in the same office as the lead partner on the engagement

The firm, its benefit plans, and entities controlled by covered members

Evaluators of partner's performance and compensations, including compensation committee members

*Accounting firm professionals who consult with the attest team re: tech or industry related issues for the engagement. Includes those who are authorized to advicse the attest team and no hours test

Quality Control individuals of the firm

Prohibited Activities for covered members

*Cannot have direct, or a material indirect, investment in the attest client

*Cannot have a joint, closely held investment with an attest client that is material to the covered member

*Cannot have loans to or from the attest client

*Cannot be a trustee of a trust or executor of an estate who invests directly in an attest client

Immediate family member

A covered member's spouse, spouse equivalent, or dependent

Close relative

A covered member's parents, nondependent children, brothers and sisters, or stepbrothers or stepsisters

Key position

A position with an attest client where an individual can exercise influence over the financial statement