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33 Cards in this Set
- Front
- Back
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Role of accountants vs. auditors
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o Accountants- record, classify, and summarize economic events to provide financial information for decision making-
When auditing accounting data, auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period o Auditors- accumulate and evaluate evidence about information to determine the degree of correspondence between the information and established criteria- the information must be in verifiable form and meet a set of established criteria o In addition to understanding accounting, the auditor must possess expertise in the accumulation and interpretation of audit evidence. It is this expertise that distinguishes auditors from accountants- determining the proper audit procedures, deciding the number and types of items to test and evaluating the results are unique to the auditor |
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What are characteristics of attestation services?
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o Definition: type of assurance service in which the CPA firm issues a report about the reliability of an assertion that is made by another party
o 5 catagories: o 1) audit of historical financial statements- statements are in accordance with accounting standards o 2) audit of internal control over financial statements- internal controls have been established and implemented o 3) review of historical financial statements- asserts that the statements are fairly stated In accordance with accounting standards o 4) attestation services on information technology- asserts the reliability and security of electronic information o 5) other attestation services |
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Attestation services vs. assurance services
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o Look at figure 1-3- assurance services is the large bubble around attestation that includes all the attestation has plus other assurance services and certain management consulting. Attestation services (which is engulfed by assurance services) includes audits, reviews, internal control over financial reporting, attestation services on information technology and other attestation services
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Financial statement audits vs. reviews—degree of assurance provided
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o Much less assurance with a review. Only moderate level of assurance is provided for a review compared to a high level for audits, therefore less evidence is needed. Review is often adequate to meet a financial users needs. It is provided for a much lower price than an audit- many NONpublic companies use reviews to provide moderate assurance on the financial statements without incurring the cost of an audit
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Oversight- PCAOB
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o Public Company Accounting Oversight Board- appointed and overseen by the SEC- it provides oversight for public companies, establishes auditing and quality control standards for audits and performs inspections of the quality controls at audit firms performing those audits
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Oversight- SEC
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o Securities Exchange Commission- an agency of the federal government, assists in providing investors with reliable information upon which to make investment decisions
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oversight- AICPA
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o American Institute of Certified Public Accountants- national professional organization that is restricted to CPA’s, but not all members are practicing independent auditors. It sets professional requirements for CPAs, conducts research, publishes material on many different subjects relating to accounting. Sets standards not only for themselves but also for all other CPAs to follow
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Professional standards- private vs public company
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o Auditing standards board- auditing standards for private entities in the US- prior ot the Sarbanes-Oxley Act the ASB established auditing standards for private and public companies. Now the PCAOB is responsible for auditing standards for public companies and the ASB provides auditing standards for private companies
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Ten GAAS- list
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o General Standards:
1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care o Standards of Field Work: 1. Proper planning and supervision 2. Understanding of the entity 3. Sufficient appropriate evidence o Standards of Reporting: 1. Statements prepared in accordance with GAAP 2. Circumstances when GAAP not followed 3. Adequacy of disclosures 4. Expression of opinion on financial statements |
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Quality Control
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o Quality control- ensures that the firm meets its professional responsibilities to clients and others- methods include the organizational structure of the CPA firm and the procedures the firm establishes
Closely related to but distinct from GAAS- quality controls are established for the entire CPA firm whereas GAAS are applicable to individual engagements |
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Peer review
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- practice-monitoring. All public firms must be enrolled in an AICPA approved practice-monitoring program for members of the firm to be eligible for membership in the AICPA- it is the review, by CPAs, of a CPA firm’s compliance with its quality control system. The purpose is to determine and report whether the CPA firm being reviewed has developed adequate quality control procedures and follows them in practice.
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Who provides guidance regarding ethical standards for CPAs?
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o 2 most influential factors:
AICPA- Code of Professional Conduct PCAOB and SEC are both authorized to establish ethics and independence standards for auditors of public companies |
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What restrictions have SOX and the SEC imposed on CPAs to strengthen independence?
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o SEC further restricts the provision of nonaudit services to audit clients, they also include restrictions on employment or former audit firm employees by the client and provide for audit partner rotation to enhance independence
o PCAOB also issued additional independence rules related to the provision of certain tax services |
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Considering the AICPA’s Code of Professional Conduct, understand the difference between Principles, Rules of Conduct, Interpretations of the rules of conduct, and Ethical rulings.
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o Principles- not very specific- ideal standards of ethical conduct stated in philosophical terms- they are not enforceable
o Rules of conduct- minimum standards of ethical conduct stated as specific rules- they are enforceable o Interpretations of the rules of conduct- interpretations of the rules of conduct by the AICPA division of professional ethics- they are not enforceable, but a practitioner must justify departure o Ethical rulings- HIGHLY specific- published explanations and answers to questions about the rules of conduct submitted to the AICPA by practitioners and others interested in ethical requirements- they are not enforceable, but a practitioner must justify departure |
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Understand Rule 101 (pp.90-95) thoroughly and have a general understanding of the other rules.
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o 101- independence- a member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council
Prohibits covered members from owning ANY stock or other direct investment in audit clients because it is potentially damaging to actual audit independence- indirect investments like from a grandparent are also prohibited if material There is independence in fact (unbiased attitude throughout audit) and independence in appearance (result of others interpretations of this independence) Former practitioners can be involved in the firm that was audited if they have left or retired- unless there is reason to believe that the person is still active in the firm o Read the rest of 90-95 |
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business failure
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o Business failure- occurs when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions (recession, poor management, competition)
1. Even when there is an business failure statement users try to blame it on an audit failure- the conflict between statement users and auditors is called an “expectation gap.” Auditors believe that the conduct of the audit in accordance with auditing standards is all that can be expected of auditors. Users believe that auditors guarantee the accuracy of financial statements and some even believe that the auditor guarantees the financial viability of the business. Courts support auditors view. |
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audit failure
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o Audit failure- occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards (assigning unqualified auditor to audit and they miss something that a qualified auditor would have picked up on)
1. They have contributed to litigation against accountants because it is difficult to determine when the auditor has failed to use due care because of the complexity of auditing. Legal precedent makes it difficult to determine who has the right to expect the benefit of an audit and recover losses in the event of an audit failure, an auditor’s failure to follow due care often results in liability and sometimes damages against the CPA firm. |
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audit risk
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o Audit risk- it represents the risk that the auditor will conclude that the financial statements are fairly stated and an unqualified opinion can be issued when, in fact, they are materially misstated- audit risk is unavoidable because auditors gather evidence only on a test basis and because fraud is difficult to detect- they may fully comply with auditing standards and still fail to uncover a material misstatement due to fraud
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What is the standard that accountants should meet?
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o Prudent person concept- agreement within the profession and the courts that the auditor is not a guarantor or insurer of financial statements. The auditor is expected only to conduct the audit with due care, and is not expected to be perfect.
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ordinary negligence
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absence of reasonable care that can be expected of a person- what other competent auditors would have done in the same situation
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gross negligence
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lack of even slight care, equivalent to reckless behavior- some states don’t distinguish between ordinary and gross negligence.
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constructive fraud
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extreme or unusual negligence even though there was no intent to deceive or do harm- also termed recklessness- which is present if the auditor knew an adequate audit was not done but still issued an opinion, even though there was no intention of deceiving statement users
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fraud
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a misstatement is made and there is BOTH knowledge of its falsity and the intent to deceive.
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On what basis can auditors be found liable?
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o Common law- laws that have been developed through court decisions rather than through government statutes
o Civil liability under federal securities law- combined group of stockholders sues auditor for not discovering materiality misstated financial statements o Criminal liability- federal government prosecutes auditor for knowingly issueing an incorrect audit report o Liability to client- client sues auditor for not discovering a material fraud during audit o Bank sues auditor for not discovering that a borrower’s financial statements are materially misstated |
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Who can assert claims against auditors?
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o (common law--clients, foreseen parties, reasonably foreseeable parties; securities laws—users of financial statements)
o The most common source of lawsuits against CPAs is from clients |
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What are some auditor defenses in client law suits?
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o Lack of duty- the CPA firm claims that there was no implied or expressed contract
o Nonnegligent performances- the CPA firm claims that the audit was preformed according to accounting standards o Contributory negligence- the auditor claims that the clients own actions either resulted in the loss that is the basis for damages or interfered with the conduct of the audit in such a way that prevented the auditor from discovering the cause of the loss o Lack of causation- to succeed in an action against the auditor the client must be able to show that there is a close causal connection between the auditor’s failure to follow the auditing standards and the damages suffered by the client- if the auditor fails to meet one standard or deadline and it causes damages (ex- deadline not met so bank did not fulfill loan) then the auditor gives other reasons that the bank did not fulfill the loan which weakens the attack from the client. |
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Which securities act does not require reliance by a financial statement user who is the original purchaser of the securities?
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o 1933- deals only with the reporting requirements for companies issuing new securities- the only parties who can recover from auditors are the original purchasers. This act imposes an unusual burden on the auditor
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Which securities act requires knowledge and intent to deceive on the part of the CPA?
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1934
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What are the responsibilities of management and the independent auditor regarding the financial statements and internal controls?
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o Manager- responsible for adopting sound accounting principles, maintaining adequate internal control and making fair representations in the financial statements rests with the manager- NOT the auditor. They operate the business daily and know more about the company than the auditor
o Auditor- knowledge of the matters and internal control is limited to that acquired during the audit |
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Have a clear understanding of the auditor’s responsibilities per AU 110 (pp. 144-147)
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o The auditor has a responsibility to detect material misstatements in the financial statements, also responsible for identifying material weakness in internal control over financial reporting.
o Material misstatements- when the combines uncorrected errors and fraud in the financial statements would likely have changed or influenced the decision of a reasonable person using the statements. o Assurance- measure of the level of certainty that the auditor has obtained at the completion of the audit- should be high but not absolute Reasons it does not have to be absolute: sampling, mainly a judgment call which can be in good faith but not always correct, many estimates involved, fraud is hard to detect especially when there is collusion among auditors o Fraudulent financial reporting vs. Misappropriation of Assets- Fraudulent financial reporting harms users by providing them incorrect financial statement information for the decision making- they are harmed because assets are no longer available to their rightful owners |
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What are the management assertions that relate to transaction?—know these!!!
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o Management assertions- implied representations by management about classes of transactions and the related disclosures in the financial statements
o Occurrence- did the recorded transactions that are stated in the financial statements actually occur during the accounting period- concerned with the inclusion of transactions that should not have been recorded – relate to account overstatements o Completeness- all transactions that should have been recorded were recorded- relate to account understatements o Accuracy- are the transactions recorded at the correct amounts o Classification- are the transactions recorded in the appropriate accounts o Cutoff- are the transactions recorded in the correct accounting period |
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• What are the management assertions that relate to account balances?—know these!!!
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o Existence- assets, liabilities and equity interests actually exist on the date they are recorded on the balance sheet- relate to account overstatements
o Completeness- all assets, liabilities and equity interests that should have been recorded have been- relates to account understatements o Valuation and allocation- assets, liabilities and equity interests are recorded in the financial statements at the appropriate amounts- valuation adjustments are made so that assets reflect the net realizable amount o Rights and obligations- the business holds the rights to assets and liabilities are the obligation of the business |
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• What are the management assertions that relate to presentation and disclosure? –know these!!!
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o Occurrence and rights obligations-assertion confirms whether the events that a company discloses have actually occurred and are the rights and obligations of the business
o Completeness- assertion confirms that all required disclosures are in the financial statements o Accuracy and valuation- is information disclosed fairly and in appropriate amounts o Classification and understandability- are amounts properly classified in financial statements and footnotes, also are the balance descriptions and related disclosures understandable |
