Exam 1 Review
auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between information and criteria; must be done by a competent and independent person and give an unbiased opinion
accounting is the recording of information and auditing is the checking over the work to make sure its recorded and presented fairly
auditors can do accounting, but not all accountants have the knowledge to complete auditing tasks
information risk is the risk that the information used to make business decisions is inaccurate or misrepresented
auditing is done to give reasonable assurance that information is accurately represented in order to reduce information risk
what are causes of information risk?
remoteness - information gathered is often relied on others, when it is obtained from others, the likelihood of it being intentionally or unintentionally misstated increases
bias and motives of providers - information by someone whose goals are inconsistent with those of the decision maker can result in inadequate or incomplete disclosures of information
voluminous data - in larger organizations, the volume of exchange transactions is fairly large, Increases the probability that there is improperly recorded data in the record
complex exchange transactions - exchange transactions between organizations have become more and more complex; acquisitions, combining and disclosing results of operations in different industries, and properly valuing and disclosing derivative financial instruments
how can information risk be reduced?
user verifies information - user may go to the business and examine records and obtain information such as a physical count, but is often impractical to due to cost. IRS does this with tax returns. In acquisitions, company may hire an outside audit team to perform these tasks
user shares information risk with management - management is responsible for providing reliable Information to users, legal issues may arise when decisions were made on false information
audited financial statements are provided - most common way to obtain reliable information is to have an independent audit, external users like stockholders and lenders rely on such information to be as accurate as possible, audit assurance is valued because information is complete, accurate, and unbiased
list and describe assurance services
assurance service: Is an independent professional service that improves the quality of information for decision makers
list the types of assurance services
audit of historical financial statemetns
certain management consulting
internal controls over financial statements
reviews
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
List the types of attestations services.
audit of historical financial statements
audit of internal controls over financial reporting
reviews of historical financial statements
other attestation services that may be applied to a broad range of subject matters
audit of historical financial statements: a form of attestation service in which the auditor issues a written report stating whether the financial statements are in material conformity with accounting standards
most common assurance service provided by CPA firms
designed to provide reasonable assurance that statements are free of material misstatements
publicly traded companies are required to have audits under the federal securities act and opinions can be found in their annual financial reports
internal control over financial reporting: an engagement in which the auditor reports in the effectiveness of internal control over financial reporting; such reports are required for accelerated filer public companies under SOX 404
must attest to the effectiveness of internal control over financial reporting
review of historical financial statements: management asserts that the statements are fairly stated in accordance wiht accounting standards, the same as an audit, but a lower level of assurance is needed
requires less evidence to perform
requires less money
but gives a lower assurance level
what are the three main types of audits?
operational audits: evaluates the efficiency and effectiveness of any part of an organization’s operating procedures and methods, gives recommendations for improving operations
compliance audit: conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority
financial statement audits: conducted to determine whether financial statements are stated in accordance with specific criteria
describe the three types of audits.
operational audits - can evaluate the organizational structure, computer operations, production, marketing or any other area auditor is qualified in, effective and efficiency must meet established criteria, more like management consulting rather than auditing
compliance audits - determine whether personnel are following specific procedure set forth by controller, wage rates in compliance with min. wage laws, contractual agreements, mortages in compliance with governmental regulations, results are typically reported to management rather than outsiders
financial statement audits - looking for stated in accordance to accounting standards and regulations, gathers evidence to look for material errors or misstatements, must have extensive knowledge of company
identify the primary types of auditors.
Certified public accountants: a person who has met state regulatory requirements, including passing the Uniform CPA exam, and thus has been certified; a CPA may have their primary responsibility the performance of the audit function on historical financial statements of commercial and noncommercial financial entities
Government accountability office auditors: an auditor working for the US government accountability office (GAO), a nonpartisan agency in the legislative branch of the federal government, reports and is responsible solely to Congress, audits information prepared by federal government agencies before its submitted to congress evaluates the operational efficiency and effectiveness of federal programs
Internal revenue agents: auditors who work for the IRS and conduct examinations of taxpayers returns, responsible for enforcing federal tax laws, solely compliance audits
Internal auditors: auditors employed by a company to audit for the companies board of directors and management, can range from 1-100s, depending on the size of the company, involved in operational auditing or computer systems, reports directly to high executive office to remain independent from rest of business, outsiders don’t rely solely on internal audits because of the lack of independence
what are the requirements to become a CPA?
meet state requirements, pass the uniform CPA exam, keep up with continuing education
what are the 8 distinct parts of a standard unmodified opinion under AICPA standards?
Report Title: requires title, must include the word independent; independent auditors report or opinion; coveys that report was completed by an unbiased opinion
audit report address: addressed to who the report was prepared for; company, stockholders, or board of directors
opinion section: states the auditor’s conclusion based on results of the audit, under heading opinion, indicates firm that completed audit, lists documents audited, wording of financial statements should match the titles used in by management, stated as opinion, not a statement of fact, refers to framework used to complete audit
controversially states present fairly, meaning the auditors do not believe users will be misled by information presented
also means that they are in accordance with any guidelines
basis for opinion: states the audit was completed in accordance with GAAP, and refers to additional responsibilities taken on by firm, affirmation that firm is independent from the company, includes that auditor believes sufficient evidence has been obtained
management responsibility: describes management responsibility of the financial statements, includes selecting the appropriate principles and maintaining internal controls over financial reporting, free of material misstatements due to fraud or error
auditor’s responsibility: three paragraphs
says the auditor is designed to obtain reasonable assurance about whether statements are free from material misstatements (fraud or error), search for material misstatements that could impact decisions, provides high level of assurance but not guarantee
describes the scope of the audit and evidence collected about amounts and disclosures in the statements, includes procedures, assessment of the risk of material misstatements in statements, considers internal controls relevant to the preparation and fair presentation, evaluating appropriateness of accounting policies selected, reasonableness of accounting estimates, the overall statement presentation and ability of the company to continue as a going concern
indicates that auditor communicates to those charged with governance the planned scope and timing of the audit as well as significant findings
signature and address of CPA firm: Identifies the cpa firm or practitioner who performed the audit, city and state included
audit report date: date of which the auditor completed the procedures, indicates the last day of auditors responsibility for the review of significant events that occured after the date of statements
what conditions are required to meet to issue an unmodified opinion?
all statements and disclosures are included in the financial statements
sufficient appropriate evidence has been accumulated, and conducted the engagement in a manner that enables him or her to conclude that the audit was performed in accordance with the applicable auditing standards
statements are presented fairly in all material respects in accordance with GAAP or other framework, disclosures also included
no circumstances requiring an emphasis of matter paragraph or modification of the wording or auditor’s opinion in the report
what are the 5 circumstances where an emphasis of matter is required
lack of consistent application of principles; changes in principles, inventory valuation, mergers or additional companies added to statements, correction of errors
auditor agrees with departure from GAAP; auditor must be satisfied and explain why
substantial doubt about going concern for the company; recurring operating losses or capital deficiencies, inability for company to pay obligations, loss of major customers, catastrophes, legal proceedings
emphasis of other matters; existence of material related party transactions, important events occurring subsequent to balance sheet date, uncertainties disclosed in footnotes, major catastrophe with significant effect on financial positions
reports involving other auditors; makes no reference - other auditor is still liable for all information they audited, makes reference - shared opinion or report, qualify the opinion - states party will not be responsible for any of the information audited by someone else
what kind of opinions can be given if a standard unmodified opinion is not justified?
qualified opinion: report issued when the auditor believes that the overall financial statements are fairly stated, but either the scope of the audit was limited or financial data indicated failure to follow gaap; modifications to the opinion paragraph and the basis for opinion; “except for” term must be used
adverse opinion: used when auditor believes overall financial statements are so materially misstated or misleading they do not present fairly the financial position of the company
disclaimer: Issued when auditor has been unable to satisfy that statements have been fairly presented; lack of knowledge
Examples of Modified Wording
Lack of consistency (changing depreciation methods, changing from LIFO to FIFO, cash to accrual basis) - unmodified opinion with explanatory paragraph
Substantial Doubt About Going Concern (worry of company going bankrupt) - unmodified opinion with explanatory paragraph
Auditor Agrees with Departure from GAAP (smaller private companies, legislation requiring new way of recording something) - unmodified opinion with explanatory paragraph
Emphasis of Matter (contingencies, date of opinions something happened between financial statement date to audit date) - unmodified opinion with explanatory paragraph
Reports Involving Other Auditors (foreign auditor did work that was material) unmodified opinion with a reference to other auditors in opinion and basis for opinion)
materiality: a misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of a user of statements
what are the three levels of materiality?
immaterial: unlikely to have an affect on decisions - unmodified opinion
amounts are material but do not overshadow statements as a whole: would affect decisions, but statements are overall stated fairly, uses except for wording
amounts are so material or pervasive that overall fairness of the statements is in question: could cause decision makers to make the wrong decision if relying solely on information, not accurate or reliable, the more pervasive, the chances of issuing an adverse or disclaimer instead of a qualified opinion increases
US public companies are required to prepare financial statements that are filed with SEC compliance
Foreign companies listed on US exchanges are allowed to report under IFRS
Auditor’s basis for opinion must state what standards were used to conduct the audit
ethics: set of moral principles or values
unethical behavior: differs than from what they believe is appropriate given the circumstances
Ethical Framework (RIAACA)
obtain relevant facts
identify the ethical issues from the facts
determine who is affected by the outcome of the dilemma and how each person or group is affected
identify the alternatives available to the person who must resolve the dilemma
identify the likely consequence of each alternative
decide the appropriate action
professionals - expected to conduct themselves at a higher level than most members of society, responsibility for conduct that extends beyond satisfying individual responsibilities and beyond requirements of society laws and regulations
public confidence - reassurance to the public that work is being done right, trust
Accountants work is used to make important business decisions and it is expected that they provide accurate and complete information
What is the purpose and the content layout of the code of conduct?
The code consists of principles and rules, in addition to interpretations, provide the framework for the rules that govern the CPA’s performance of professional responsibilities, interpretations address circumstances that members may face that are threats to compliance with rules of conduct
what are the parts of the code?
preface - all members, principles of professional conduct
part I - members in public practice, conceptual framework, rules and interpretations
part II - members in business, conceptual framework, rules and interpretation
part III - other members, rules and interpretations
what are the principles of the code?
responsibilities: in carrying out thier responsibilities as professional , members should exercise sensitive professional and moral judgements in all their activities
public interest: members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism
integrity: to maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity
objectivity and independence: a member should maintain objectivity and to be free of conflicts of interest in discharging professional responsibilities. a member in public practice should be independent in FACT AND APPEARANCE when providing auditing and other attestation services
due care: a member should observe the professions technical and ethical standards, strive continually to improve competence and quality of services, and discharge professional responsibility to the best of the members ability
scope and nature of services: a member in public practice should observe the principles of the code of conduct in determining the scope and nature of services to be provided
adverse interest: the threat that a member will not act with objectivity because the members’ interests are opposed to the attest client’s interests
an officer, director, or significant shareholder participates in litigation against the firm
advocacy: the threat that a member will promote an attest client’s interest or position to the point that his or her objectivity or independence is compromised
a member endorses an attest client’s services or products
familiarity: the threat that, due to a long or close relationship with an attest client, a member will become too sympathetic to the clients interests or too accepting of the clients work or product
a members close friend is employed by the company, working for the company for many years, fall Into a routine and not diligent
management participation: the threat that a member will take on the role of an attest client management or otherwise assume management responsibilities, such as may occur during an engagement to provide nonattest services
due to a loss of client personnel, the attest client asks a member firm to assist with accounting activities, including authorization of transactions, actively participation within the company and still completing the audit
self interest: the threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, an attest client or persons associated with the client
the member has a financial interest in an attest client, and the outcome of a professional services engagement may affect the fair value of the financial interest
self-review: the threat that a member will not appropriately evaluate the results of a previous judgement or service performed or supervised by the member or an individual in the member’s firm and that the member will rely on that service in forming a judgement as part of another service
the members performs bookkeeping services for the attest client and then performs an audit on those financial statements
undue influences: the threat that a member will subordinate his or her judgement to an individual associated with a client or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the members
the client indicates that it will not award additional engagements to the firm if the firm continues to disagree with the client on an accounting or tax matter
integrity and objectivity: free of conflicts of interest, not knowingly misrepresent facts or subordinate his or her judgement to others
independence: independent in the performance of professional services as required by standards promulgated by bodies of teh council
general standards: undertake only assignments they can complete with professional competency and accuracy and completion, exercise due professional care, plan and supervise all engagements, obtain sufficient and relevant data to afford a reasonable basis for all conclusions or recommendations
compliance with standards: a member who performs any accounting services shall comply with standards designated by the council
accounting principles: follow standards by council in issuing reports about entities compliance with GAAP
acts discreditable: a member shall not commit an act discreditable to the profession
contingent fees: shall not perform for a contingent fee any professional service of the member also performs for the client an audit, review or certain compilations of financial statements or an examination of prospective financial statements, also shall not prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client
commissions and referral fees: member shall not receive or pay a commission or referral fee for any client an audit, review or certain compilations of financial statements or an examination of prospective financial statements, non prohibited commissions or ref fees must be disclosed of such fees to the client
advertising and solicitation: shall not seek to obtain clients by advertising false, deceptive, or misleading information, solicitation by the use of coercion overreaching or harassment is prohibited
confidential client informations: shall not disclose confidential client information without specific consent of the client
form of organization and name: shall not practice under a nape that is misleading, all partners must be cpas to have cpa in the firm names
independence of mind: state of mind that permits the audit to be performed with an unbiased attitude (independent in fact, independence in appearance)
independence rule: a member in public practice shall be independent in the performance of profession services as required by standards promulgated by bodies designated by the council
Non audit services - SOX and SEC restrict but don’t eliminate all non-audit services
bookkeeping and other accounting services
financial information systems design and implementation
appraisal and valuation services
actuarial services
internal audit outsourcing
management or HR functions
broker, dealer, investment advisor, or investment banker services
legal and expert services unrelated to the audit
any other service that the PCAOB determined by regulation is impermissible
CPA firms are not prohibited from performing services for private companies and public companies as long as the public company is not their audit client
Other regulations to be followed:
must have audit committees involved
designated cooling off period before auditor can take a job with a client company
partner rotation - must change partners every 5 years
fees must be paid before audits can take place
auditors cannot have any ownership of client companies
AICPA professional ethics division is responsible for investigating violations of the code and deciding disciplinary action
unintentional violations result in a remedial or corrective actions
second level of disciplinary action is action before the Joint Trial Board
Joint Trial Board has authority to suspend or expel members from the AICPA for violations of professional ethics
what are the three primary objections of effective internal control?
reliability of reporting
efficiency and effectiveness of operations
compliance with laws and regulations
reliability of reporting - management has a legal and professional responsibility to be sure the information they provide is correct and fairly presented; to fulfill these financial reporting responsibilities
efficiency and effectiveness of operations - controls encourage efficient and effective use of its resources to optimize the company’s goals; accurate financial and nonfinancial information about companies operation for decision making
compliance with laws and regulations - sox 404 requires all public companies to issue a report over their internal controls; as well as many other laws and regulation regarding all aspects of the business
What do management responsibilities consist of?
establishing and maintaining the entiti’s internal control
preparation of financial statements
design and implementation must have reasonable assurance and inherent limitations
required by SOX 404, must issue an internal control report including a statement and assessment of effectiveness
what is the auditors responsibilities relating to internal controls?
must identify and asses risks of material misstatements
obtain an understanding of internal controls relveant to the audit and engagement
ensure controls over reliability of financial reporting and controls over classes of transactions
what does the CRIME acronym stand for?
Control Environment
Risk Assessment
Information and Communication
monitoring
existing control activities
Control environment: actions, policies, procedures reflecting overall attitudes of top management, directors, and owners
Risk Assessment: identifying and analysing risks that may prevent
Information and Communication: initiate, record, process, and report entities transactions and to maintain accountability for related assets
Monitoring: ongoing or periodic assessment of quality of internal control by management to determine controls are operating as they should be
Existing Control Activities: policies and procedures to ensure necessary actions are taken to address risks to achieve objectives
general controls: apply to all aspects of the IT functions, including IT administration; separation of IT duties; system development; physical and online security over access to hardware, software, and related data; apply to entire entity and affect many different software applications
application controls: typically operate at the business process level and apply to processing transactions, such as controls over the processing of sales or cash receipts; only effective when general controls are effective
what are some examples of general controls?
administration of IT function - CIO or IT manager reports to senior management and board
separation of IT duties - responsibilities for programming, operations, and data control are separated
system development - teams of users, system analysts, and programmers develop and test software
physical and online security - access to hardware is restricted, passwords and users IDs limit access to software and data files, and encryption and firewalls protect data and programs from external parties
backup and contingency planning - written backup plans are prepared and tested regularly throughout a year
hardware controls - memory failure or hard-drive failure causes error messages on the monitor
what are some examples of application controls?
input controls - preformatted screens prompt data input personnel for information to be entered
processing controls - reasonableness tests review unit-selling prices used to process a sale
output controls - the sales department does post processing review of sale transactions
what are the types of IT systems and what do they do for internal controls
local area networks (LANs)
wide area networks (WANs)
database management systems
enterprise resource planning systems (ERPs)
LANS: networks that connect computer equipment, data files, software within a local area such as a building
WANS: networks that connect computer equipment, files, software across different geographical locations, businesses with offices around the world
database management systems: hardware and software systems that allow clients to establish and maintain databases shared by multiple applications
ERPS: systems that integrate numerous aspects of an organization’s activities into one accounting information systems
auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between information and criteria; must be done by a competent and independent person and give an unbiased opinion
accounting is the recording of information and auditing is the checking over the work to make sure its recorded and presented fairly
auditors can do accounting, but not all accountants have the knowledge to complete auditing tasks
information risk is the risk that the information used to make business decisions is inaccurate or misrepresented
auditing is done to give reasonable assurance that information is accurately represented in order to reduce information risk
what are causes of information risk?
remoteness - information gathered is often relied on others, when it is obtained from others, the likelihood of it being intentionally or unintentionally misstated increases
bias and motives of providers - information by someone whose goals are inconsistent with those of the decision maker can result in inadequate or incomplete disclosures of information
voluminous data - in larger organizations, the volume of exchange transactions is fairly large, Increases the probability that there is improperly recorded data in the record
complex exchange transactions - exchange transactions between organizations have become more and more complex; acquisitions, combining and disclosing results of operations in different industries, and properly valuing and disclosing derivative financial instruments
how can information risk be reduced?
user verifies information - user may go to the business and examine records and obtain information such as a physical count, but is often impractical to due to cost. IRS does this with tax returns. In acquisitions, company may hire an outside audit team to perform these tasks
user shares information risk with management - management is responsible for providing reliable Information to users, legal issues may arise when decisions were made on false information
audited financial statements are provided - most common way to obtain reliable information is to have an independent audit, external users like stockholders and lenders rely on such information to be as accurate as possible, audit assurance is valued because information is complete, accurate, and unbiased
list and describe assurance services
assurance service: Is an independent professional service that improves the quality of information for decision makers
list the types of assurance services
audit of historical financial statemetns
certain management consulting
internal controls over financial statements
reviews
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
List the types of attestations services.
audit of historical financial statements
audit of internal controls over financial reporting
reviews of historical financial statements
other attestation services that may be applied to a broad range of subject matters
audit of historical financial statements: a form of attestation service in which the auditor issues a written report stating whether the financial statements are in material conformity with accounting standards
most common assurance service provided by CPA firms
designed to provide reasonable assurance that statements are free of material misstatements
publicly traded companies are required to have audits under the federal securities act and opinions can be found in their annual financial reports
internal control over financial reporting: an engagement in which the auditor reports in the effectiveness of internal control over financial reporting; such reports are required for accelerated filer public companies under SOX 404
must attest to the effectiveness of internal control over financial reporting
review of historical financial statements: management asserts that the statements are fairly stated in accordance wiht accounting standards, the same as an audit, but a lower level of assurance is needed
requires less evidence to perform
requires less money
but gives a lower assurance level
what are the three main types of audits?
operational audits: evaluates the efficiency and effectiveness of any part of an organization’s operating procedures and methods, gives recommendations for improving operations
compliance audit: conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority
financial statement audits: conducted to determine whether financial statements are stated in accordance with specific criteria
describe the three types of audits.
operational audits - can evaluate the organizational structure, computer operations, production, marketing or any other area auditor is qualified in, effective and efficiency must meet established criteria, more like management consulting rather than auditing
compliance audits - determine whether personnel are following specific procedure set forth by controller, wage rates in compliance with min. wage laws, contractual agreements, mortages in compliance with governmental regulations, results are typically reported to management rather than outsiders
financial statement audits - looking for stated in accordance to accounting standards and regulations, gathers evidence to look for material errors or misstatements, must have extensive knowledge of company
identify the primary types of auditors.
Certified public accountants: a person who has met state regulatory requirements, including passing the Uniform CPA exam, and thus has been certified; a CPA may have their primary responsibility the performance of the audit function on historical financial statements of commercial and noncommercial financial entities
Government accountability office auditors: an auditor working for the US government accountability office (GAO), a nonpartisan agency in the legislative branch of the federal government, reports and is responsible solely to Congress, audits information prepared by federal government agencies before its submitted to congress evaluates the operational efficiency and effectiveness of federal programs
Internal revenue agents: auditors who work for the IRS and conduct examinations of taxpayers returns, responsible for enforcing federal tax laws, solely compliance audits
Internal auditors: auditors employed by a company to audit for the companies board of directors and management, can range from 1-100s, depending on the size of the company, involved in operational auditing or computer systems, reports directly to high executive office to remain independent from rest of business, outsiders don’t rely solely on internal audits because of the lack of independence
what are the requirements to become a CPA?
meet state requirements, pass the uniform CPA exam, keep up with continuing education
what are the 8 distinct parts of a standard unmodified opinion under AICPA standards?
Report Title: requires title, must include the word independent; independent auditors report or opinion; coveys that report was completed by an unbiased opinion
audit report address: addressed to who the report was prepared for; company, stockholders, or board of directors
opinion section: states the auditor’s conclusion based on results of the audit, under heading opinion, indicates firm that completed audit, lists documents audited, wording of financial statements should match the titles used in by management, stated as opinion, not a statement of fact, refers to framework used to complete audit
controversially states present fairly, meaning the auditors do not believe users will be misled by information presented
also means that they are in accordance with any guidelines
basis for opinion: states the audit was completed in accordance with GAAP, and refers to additional responsibilities taken on by firm, affirmation that firm is independent from the company, includes that auditor believes sufficient evidence has been obtained
management responsibility: describes management responsibility of the financial statements, includes selecting the appropriate principles and maintaining internal controls over financial reporting, free of material misstatements due to fraud or error
auditor’s responsibility: three paragraphs
says the auditor is designed to obtain reasonable assurance about whether statements are free from material misstatements (fraud or error), search for material misstatements that could impact decisions, provides high level of assurance but not guarantee
describes the scope of the audit and evidence collected about amounts and disclosures in the statements, includes procedures, assessment of the risk of material misstatements in statements, considers internal controls relevant to the preparation and fair presentation, evaluating appropriateness of accounting policies selected, reasonableness of accounting estimates, the overall statement presentation and ability of the company to continue as a going concern
indicates that auditor communicates to those charged with governance the planned scope and timing of the audit as well as significant findings
signature and address of CPA firm: Identifies the cpa firm or practitioner who performed the audit, city and state included
audit report date: date of which the auditor completed the procedures, indicates the last day of auditors responsibility for the review of significant events that occured after the date of statements
what conditions are required to meet to issue an unmodified opinion?
all statements and disclosures are included in the financial statements
sufficient appropriate evidence has been accumulated, and conducted the engagement in a manner that enables him or her to conclude that the audit was performed in accordance with the applicable auditing standards
statements are presented fairly in all material respects in accordance with GAAP or other framework, disclosures also included
no circumstances requiring an emphasis of matter paragraph or modification of the wording or auditor’s opinion in the report
what are the 5 circumstances where an emphasis of matter is required
lack of consistent application of principles; changes in principles, inventory valuation, mergers or additional companies added to statements, correction of errors
auditor agrees with departure from GAAP; auditor must be satisfied and explain why
substantial doubt about going concern for the company; recurring operating losses or capital deficiencies, inability for company to pay obligations, loss of major customers, catastrophes, legal proceedings
emphasis of other matters; existence of material related party transactions, important events occurring subsequent to balance sheet date, uncertainties disclosed in footnotes, major catastrophe with significant effect on financial positions
reports involving other auditors; makes no reference - other auditor is still liable for all information they audited, makes reference - shared opinion or report, qualify the opinion - states party will not be responsible for any of the information audited by someone else
what kind of opinions can be given if a standard unmodified opinion is not justified?
qualified opinion: report issued when the auditor believes that the overall financial statements are fairly stated, but either the scope of the audit was limited or financial data indicated failure to follow gaap; modifications to the opinion paragraph and the basis for opinion; “except for” term must be used
adverse opinion: used when auditor believes overall financial statements are so materially misstated or misleading they do not present fairly the financial position of the company
disclaimer: Issued when auditor has been unable to satisfy that statements have been fairly presented; lack of knowledge
Examples of Modified Wording
Lack of consistency (changing depreciation methods, changing from LIFO to FIFO, cash to accrual basis) - unmodified opinion with explanatory paragraph
Substantial Doubt About Going Concern (worry of company going bankrupt) - unmodified opinion with explanatory paragraph
Auditor Agrees with Departure from GAAP (smaller private companies, legislation requiring new way of recording something) - unmodified opinion with explanatory paragraph
Emphasis of Matter (contingencies, date of opinions something happened between financial statement date to audit date) - unmodified opinion with explanatory paragraph
Reports Involving Other Auditors (foreign auditor did work that was material) unmodified opinion with a reference to other auditors in opinion and basis for opinion)
materiality: a misstatement in the financial statements can be considered material if knowledge of the misstatement will affect a decision of a user of statements
what are the three levels of materiality?
immaterial: unlikely to have an affect on decisions - unmodified opinion
amounts are material but do not overshadow statements as a whole: would affect decisions, but statements are overall stated fairly, uses except for wording
amounts are so material or pervasive that overall fairness of the statements is in question: could cause decision makers to make the wrong decision if relying solely on information, not accurate or reliable, the more pervasive, the chances of issuing an adverse or disclaimer instead of a qualified opinion increases
US public companies are required to prepare financial statements that are filed with SEC compliance
Foreign companies listed on US exchanges are allowed to report under IFRS
Auditor’s basis for opinion must state what standards were used to conduct the audit
ethics: set of moral principles or values
unethical behavior: differs than from what they believe is appropriate given the circumstances
Ethical Framework (RIAACA)
obtain relevant facts
identify the ethical issues from the facts
determine who is affected by the outcome of the dilemma and how each person or group is affected
identify the alternatives available to the person who must resolve the dilemma
identify the likely consequence of each alternative
decide the appropriate action
professionals - expected to conduct themselves at a higher level than most members of society, responsibility for conduct that extends beyond satisfying individual responsibilities and beyond requirements of society laws and regulations
public confidence - reassurance to the public that work is being done right, trust
Accountants work is used to make important business decisions and it is expected that they provide accurate and complete information
What is the purpose and the content layout of the code of conduct?
The code consists of principles and rules, in addition to interpretations, provide the framework for the rules that govern the CPA’s performance of professional responsibilities, interpretations address circumstances that members may face that are threats to compliance with rules of conduct
what are the parts of the code?
preface - all members, principles of professional conduct
part I - members in public practice, conceptual framework, rules and interpretations
part II - members in business, conceptual framework, rules and interpretation
part III - other members, rules and interpretations
what are the principles of the code?
responsibilities: in carrying out thier responsibilities as professional , members should exercise sensitive professional and moral judgements in all their activities
public interest: members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism
integrity: to maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity
objectivity and independence: a member should maintain objectivity and to be free of conflicts of interest in discharging professional responsibilities. a member in public practice should be independent in FACT AND APPEARANCE when providing auditing and other attestation services
due care: a member should observe the professions technical and ethical standards, strive continually to improve competence and quality of services, and discharge professional responsibility to the best of the members ability
scope and nature of services: a member in public practice should observe the principles of the code of conduct in determining the scope and nature of services to be provided
adverse interest: the threat that a member will not act with objectivity because the members’ interests are opposed to the attest client’s interests
an officer, director, or significant shareholder participates in litigation against the firm
advocacy: the threat that a member will promote an attest client’s interest or position to the point that his or her objectivity or independence is compromised
a member endorses an attest client’s services or products
familiarity: the threat that, due to a long or close relationship with an attest client, a member will become too sympathetic to the clients interests or too accepting of the clients work or product
a members close friend is employed by the company, working for the company for many years, fall Into a routine and not diligent
management participation: the threat that a member will take on the role of an attest client management or otherwise assume management responsibilities, such as may occur during an engagement to provide nonattest services
due to a loss of client personnel, the attest client asks a member firm to assist with accounting activities, including authorization of transactions, actively participation within the company and still completing the audit
self interest: the threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, an attest client or persons associated with the client
the member has a financial interest in an attest client, and the outcome of a professional services engagement may affect the fair value of the financial interest
self-review: the threat that a member will not appropriately evaluate the results of a previous judgement or service performed or supervised by the member or an individual in the member’s firm and that the member will rely on that service in forming a judgement as part of another service
the members performs bookkeeping services for the attest client and then performs an audit on those financial statements
undue influences: the threat that a member will subordinate his or her judgement to an individual associated with a client or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the members
the client indicates that it will not award additional engagements to the firm if the firm continues to disagree with the client on an accounting or tax matter
integrity and objectivity: free of conflicts of interest, not knowingly misrepresent facts or subordinate his or her judgement to others
independence: independent in the performance of professional services as required by standards promulgated by bodies of teh council
general standards: undertake only assignments they can complete with professional competency and accuracy and completion, exercise due professional care, plan and supervise all engagements, obtain sufficient and relevant data to afford a reasonable basis for all conclusions or recommendations
compliance with standards: a member who performs any accounting services shall comply with standards designated by the council
accounting principles: follow standards by council in issuing reports about entities compliance with GAAP
acts discreditable: a member shall not commit an act discreditable to the profession
contingent fees: shall not perform for a contingent fee any professional service of the member also performs for the client an audit, review or certain compilations of financial statements or an examination of prospective financial statements, also shall not prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client
commissions and referral fees: member shall not receive or pay a commission or referral fee for any client an audit, review or certain compilations of financial statements or an examination of prospective financial statements, non prohibited commissions or ref fees must be disclosed of such fees to the client
advertising and solicitation: shall not seek to obtain clients by advertising false, deceptive, or misleading information, solicitation by the use of coercion overreaching or harassment is prohibited
confidential client informations: shall not disclose confidential client information without specific consent of the client
form of organization and name: shall not practice under a nape that is misleading, all partners must be cpas to have cpa in the firm names
independence of mind: state of mind that permits the audit to be performed with an unbiased attitude (independent in fact, independence in appearance)
independence rule: a member in public practice shall be independent in the performance of profession services as required by standards promulgated by bodies designated by the council
Non audit services - SOX and SEC restrict but don’t eliminate all non-audit services
bookkeeping and other accounting services
financial information systems design and implementation
appraisal and valuation services
actuarial services
internal audit outsourcing
management or HR functions
broker, dealer, investment advisor, or investment banker services
legal and expert services unrelated to the audit
any other service that the PCAOB determined by regulation is impermissible
CPA firms are not prohibited from performing services for private companies and public companies as long as the public company is not their audit client
Other regulations to be followed:
must have audit committees involved
designated cooling off period before auditor can take a job with a client company
partner rotation - must change partners every 5 years
fees must be paid before audits can take place
auditors cannot have any ownership of client companies
AICPA professional ethics division is responsible for investigating violations of the code and deciding disciplinary action
unintentional violations result in a remedial or corrective actions
second level of disciplinary action is action before the Joint Trial Board
Joint Trial Board has authority to suspend or expel members from the AICPA for violations of professional ethics
what are the three primary objections of effective internal control?
reliability of reporting
efficiency and effectiveness of operations
compliance with laws and regulations
reliability of reporting - management has a legal and professional responsibility to be sure the information they provide is correct and fairly presented; to fulfill these financial reporting responsibilities
efficiency and effectiveness of operations - controls encourage efficient and effective use of its resources to optimize the company’s goals; accurate financial and nonfinancial information about companies operation for decision making
compliance with laws and regulations - sox 404 requires all public companies to issue a report over their internal controls; as well as many other laws and regulation regarding all aspects of the business
What do management responsibilities consist of?
establishing and maintaining the entiti’s internal control
preparation of financial statements
design and implementation must have reasonable assurance and inherent limitations
required by SOX 404, must issue an internal control report including a statement and assessment of effectiveness
what is the auditors responsibilities relating to internal controls?
must identify and asses risks of material misstatements
obtain an understanding of internal controls relveant to the audit and engagement
ensure controls over reliability of financial reporting and controls over classes of transactions
what does the CRIME acronym stand for?
Control Environment
Risk Assessment
Information and Communication
monitoring
existing control activities
Control environment: actions, policies, procedures reflecting overall attitudes of top management, directors, and owners
Risk Assessment: identifying and analysing risks that may prevent
Information and Communication: initiate, record, process, and report entities transactions and to maintain accountability for related assets
Monitoring: ongoing or periodic assessment of quality of internal control by management to determine controls are operating as they should be
Existing Control Activities: policies and procedures to ensure necessary actions are taken to address risks to achieve objectives
general controls: apply to all aspects of the IT functions, including IT administration; separation of IT duties; system development; physical and online security over access to hardware, software, and related data; apply to entire entity and affect many different software applications
application controls: typically operate at the business process level and apply to processing transactions, such as controls over the processing of sales or cash receipts; only effective when general controls are effective
what are some examples of general controls?
administration of IT function - CIO or IT manager reports to senior management and board
separation of IT duties - responsibilities for programming, operations, and data control are separated
system development - teams of users, system analysts, and programmers develop and test software
physical and online security - access to hardware is restricted, passwords and users IDs limit access to software and data files, and encryption and firewalls protect data and programs from external parties
backup and contingency planning - written backup plans are prepared and tested regularly throughout a year
hardware controls - memory failure or hard-drive failure causes error messages on the monitor
what are some examples of application controls?
input controls - preformatted screens prompt data input personnel for information to be entered
processing controls - reasonableness tests review unit-selling prices used to process a sale
output controls - the sales department does post processing review of sale transactions
what are the types of IT systems and what do they do for internal controls
local area networks (LANs)
wide area networks (WANs)
database management systems
enterprise resource planning systems (ERPs)
LANS: networks that connect computer equipment, data files, software within a local area such as a building
WANS: networks that connect computer equipment, files, software across different geographical locations, businesses with offices around the world
database management systems: hardware and software systems that allow clients to establish and maintain databases shared by multiple applications
ERPS: systems that integrate numerous aspects of an organization’s activities into one accounting information systems
