Auditing & Assurance Services - Chapter 2: Professional Standards

Vocabulary flashcards covering professional auditing standards, regulatory history, fundamental audit principles (Responsibilities, Performance, Reporting), audit reports, and firm quality control mechanisms.

McKesson & Robbins Case (1938)

A landmark auditing case in 1938 where PriceWaterhouse auditors accepted management false assertions about inventory and accounts receivable without verification, leading to increased regulation.

Auditing Standards Board (ASB)

A committee of the AICPA that issued Statements on Auditing Procedure (1939–1972) and continues to issue Statements on Auditing Standards (SAS) for nonpublic entities.

Public Company Accounting Oversight Board (PCAOB)

The regulatory body created following financial reporting scandals in the early 2000s that issues Auditing Standards (AS) for public companies (issuers).

Public Entities (Issuers)

Companies that issue stocks to the general public and are subject to PCAOB auditing standards.

Nonpublic Entities (Non-issuers)

Companies that do not issue stocks to the general public and are audited under AICPA Auditing Standards Board (ASB) standards.

Generally Accepted Auditing Standards (GAAS)

The collection of fundamental principles, PCAOB/ASB standards, and interpretive publications that identify auditor qualifications and guide audit conduct.

Responsibilities Principle

The fundamental principle requiring auditors to have appropriate competence and capabilities, comply with ethical requirements (independence and due care), and maintain professional skepticism and judgment.

Independence in Fact

An auditor's actual mental state of objectivity and unbiased state of mind during an audit engagement.

Independence in Appearance

The perception by knowledgeable third parties that an auditor has no financial or managerial conflicts of interest that would compromise objectivity.

Due Care

The level of diligence and performance expected of a prudent and reasonable auditor in similar circumstances.

Professional Skepticism

A mindset that includes a questioning mind and critical assessment of evidence, assuming management is neither dishonest nor perfectly honest and corroborating statements with objective evidence.

Professional Judgment

The application of relevant training, knowledge, and experience in making informed decisions during the audit engagement.

Performance Principle

The fundamental principle requiring the auditor to plan work, apply appropriate materiality, assess risks of material misstatement, and obtain sufficient appropriate audit evidence to achieve reasonable assurance.

Appropriateness of Audit Evidence

The quality of audit evidence, measured by its relevance to financial statement assertions and its reliability (trustworthiness).

Sufficiency of Audit Evidence

The quantity of audit evidence evaluated, which is directly influenced by the effectiveness of an entity's internal controls and assessed control risk.

Detection Risk

The risk that the audit procedures executed by the auditor fail to detect an existing material misstatement.

Reporting Principle

The fundamental principle requiring auditors to express an opinion (or state that an opinion cannot be expressed) regarding whether financial statements conform to an applicable financial reporting framework.

Financial Reporting Framework

The set of criteria used to determine measurement, recognition, presentation, and disclosure of material items in financial statements, such as GAAP or IFRS.

Critical Audit Matters (CAMs)

Matters arising from the financial statement audit that were communicated or required to be communicated to the audit committee, relating to material accounts/disclosures and involving especially challenging, subjective, or complex auditor judgment.

Unmodified (Unqualified) Opinion

An opinion stating that financial statements are presented fairly in conformity with GAAP (unmodified for nonpublic entities, unqualified for public issuers).

Qualified Opinion

An audit opinion stating that except for limited items, the financial statements are presented fairly in conformity with GAAP.

Adverse Opinion

An audit opinion issued when the financial statements as a whole are not presented fairly in conformity with GAAP.

Disclaimer of Opinion

A report issued when auditors do not express an opinion on the financial statements, typically due to a severe limitation in scope or lack of independence.

System of Quality Control

A firm-level framework designed to provide reasonable assurance that accounting firm personnel comply with professional standards and issue appropriate reports.

BF Borgers CPA PC

A public accounting firm permanently shut down by federal regulators in May 2024 for acting as a sham audit mill, fabricating documentation, and copying workpapers across over 1,500 SEC filings.

PCAOB Inspection Part I Report

A publicly available section of a PCAOB inspection report detailing specific audit deficiencies where the firm failed to obtain sufficient appropriate evidence to support its opinion.

PCAOB Inspection Part II Report

A section of a PCAOB inspection report addressing quality control deficiencies, made public only if the firm fails to remedy the identified deficiencies within one year.