Audit end Chap 1-beg Chap 2 1.28

Recall of Management Assertions and CEBOC Knowledge

Assertions Overview

  • Recall of management assertions and their categorization under CEBOC: Completeness, Existence, Accuracy, Valuation, Obligations and Rights, Presentation and Disclosure.

Category Definitions

  • C: Completeness

    • Refers to whether financial information includes all necessary accounts and liabilities as dictated by accounting principles.

  • A: Accuracy

    • Represents the mathematical correctness of financial statements and data.

  • B: Valuation

    • Incorporates estimates from accounts that are not definitive: goodwill impairments, warranty liabilities, allowance for doubtful accounts.

  • O: Obligations and Rights

    • Obligations: Who owes it?

    • Rights: Who owns it?

  • P: Presentation and Disclosure

    • Examines whether information is communicated clearly in financial statements.

Application Exercise

  • Practical exercise to map management concerns to CEBOC assertions.

    • Example: Management states, "I can see it, I can touch it," indicating existence of accounts receivable.

    • Confusion can arise regarding terms like "valid" which implies accuracy but can be misinterpreted.

Risk and Valuation in Accounting

  • Valuation vs. Accuracy:

    • When assessing accounts receivable, the valuation risk stems from estimates such as the allowance for doubtful accounts, where (AR - Allowance) denotes net realizable value.

    • Discusses estimation risk when receivables age: e.g., 90 days past due might predict a 30% uncollectible amount.

    • Ultimate assertion classification in such cases is valuation risk rather than merely accuracy.

Professional Judgment and Skepticism in Auditing

  • Professional Skepticism:

    • Defined as the auditor's questioning mindset and critical assessment of evidence. Auditors must verify management’s assertions and documentation to avoid misrepresentation ("trust but verify").

    • A metaphorical scenario is provided comparing auditing to assessing online dating profiles where apparent wealth might signal financial statements exaggeration.

  • Application of Professional Skepticism:

    • Steps include clarifying audit objectives, considering alternatives such as physical inspection vs. document review, and evaluating quality of evidence collected.

    • Part of the auditor's task is to investigate potential inconsistencies or anomalies in financial records.

Practical Exercises and Discussion

  • Group discussions about independence challenges in auditing.

  • Key considerations include management influence over audit quality, independence dichotomy, and conflicts resulting from financial ties between auditors and clients.

Public Accounting Services Overview

  • Assurance Services: Recap of services that fall under public accounting, including audits, reviews, compilations, and attestation agreements, focusing on improving quality of financial information.

  • Tax Services: Preparation and planning of tax filings, critically examined under scrutiny due to corporate loopholes.

  • Consulting Services: Specific to management advocacy, the balance between auditing and consulting can create ethical dilemmas whereby auditors could lose independence.

Sarbanes-Oxley Constraints

  • Public Accounting Act introduced constraints on nonaudit services under Sarbanes-Oxley:

    • Client advocacy threats and self-review threats outlined as central independence risks.

Structure and Roles within Public Accounting Firms

  • Overview of a typical hierarchy within accounting firms from junior staff accountants to partners.

  • Explanation of role responsibilities and overview of audit engagements.

  • Differentiation between external and internal audits, with special focus on internal controls and operational efficiency improvement.

CPA Examination Requirements

  • Discusses steps to achieve CPA licensure, educational criteria, and exam structures mandated in both pathways.

  • Pathway A: Involves completing 150 credit hours including master's requirements.

  • Pathway B: 120 credit hours, passing CPA exams followed by 2 years of audit experience.

Exam Structure and Pass Rates

  • Details program structure (3 core sections: Auditing, Financial Accounting, Regulation, with additional disciplines).

  • Emphasizes the significance of pass rates influenced greatly by timing of attempts relative to education and work obligations.

Audit Quality and Standards

  • Overview of General Accepted Auditing Standards (GAS): history and framework that guides auditing practices.

  • Discusses PCAOB vs. AICPA responsibilities in regulating audits, including distinctions between public companies (issuers) and private entities (non-issuers).