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224 Cards in this Set
- Front
- Back
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: the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria; should be done by a competent independent person
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auditing
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criteria depends on:
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Financial statements : GAAP/IFRS
Internal control: COSO Tax returns: Internal Revenue Code Corporate Tax Returns: Internal Revenue Code Subjective Matter: entity and auditor agree on terms well before the audit |
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what is evidence
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any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria
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what are some different kinds of evidence?
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- Electronic and documentary data
- Written and electronic communications - Observations by auditors - Oral testimony |
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what are some things an auditor must do?
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- Obtain a sufficient quality and volume of evidence
- Determine types and amounts of evidence necessary - Be competent and independent (not biased and to keep confidence of users relying on their report) |
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what does an audit report do?
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communicates the auditor’s findings to users
- Of correspondence between the information audited and established criteria |
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what is accounting?
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: recording, classifying and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making
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What is the difference between auditing and accounting?
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An accountant must know the standards of the field to apply the knowledge to produce the financial statements of a company. The auditor must be an expert in the field of accounting so that they can assess the standards of accounting and make an informed decision about the statements.
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If a bank makes a loan: it will charge a rate of interest determined by primarily by 3 factors:
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risk free interest rate
business risk for the customer information risk |
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what is risk free interest rate?
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the bank will compare the amount of interest they will receive for buying a US treasury stock, that will have no risk, as compared to investing in a company by giving them then loan; assess their rate of return
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what is business risk for the customer?
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the possible risk that the customer will not be able to pay back his loan because of economic decisions
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information risk
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the risk that the information that the bank used to make the business risk decision was incorrect
** auditor comes into play |
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What are some reasons why
Decision makers are more likely to receive unreliable information |
Remoteness of information: it is impossible to have all firsthand knowledge, so they must rely on others’ information;
Biases and motives of the provider: if information is provided by someone whose goals are inconsistent with those of the decision maker, the information may be biased in favor of the provider; the reason can be honest optimism about future events or an intentional emphasis designed to influence users Voluminous Data: the increased volume of the exchange transactions increases the likelihood that improperly recorded information is included in the records Complex Exchange Transactions: transactions between organizations have become increasingly complex and hard to record properly; User Verifies Information: users want to examine records and obtain information about the reliability of the statements; some may go to the business but that is costly; companies use special audit teams to independently verify and evaluate key information User shares risk with management: management is responsible for providing reliable information to users; if they rely on inaccurate information, a lawsuit could occur Audited Financial Statements are Provided: the most common way for users to obtain reliable information is to have an independent audit; external uses such as stockholders to make business decisions look at auditors’ reports |
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what are assurance services?
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an independent professional service that improves the quality of information for decision makers
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why are assurance services valued?
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Valued because the provider is independent and unbiased; prove reliability and relevance
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what are attestation services?
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a type of assurance service in which the CPA firm issues a report about the reliability of an assertion that is made by another party
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what are some examples of attestation services?
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1. Audit of historical financial statements
2. Audit of internal control over financial reporting 3. Review of historical financial statements 4. Attestation services on information technology 5. Other attestation services that may be applied to a broad range of subject matter |
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what is a financial statement audit?
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Management asserts that the statements are fairly stated in accordance with applicable US or international accounting standards
Auditor issues a written report expressing an opinion about whether the financial statements are fairly stated in accordance with the applicable accounting standards Most common Publicly traded companies: required to have audits under federal securities act |
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what is an Audit of Internal Controls over Financing Reporting
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management asserts that internal controls have been developed and implemented following well established criteria
Section 404 of the Sarbanes Oxley Act requires public companies to report management’s assessment of the effectiveness of internal control; Increases user confidence because effective internal controls reduce the likelihood of future misstatements in the financial statements Increased demand for assurance about computer controls surrounding information transacted electronically and the security of the information related to the transactions |
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what is a Review of Historical Financial Statements
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Management asserts that the statements are fairly stated in accordance with accounting standards, the same as for audits
CPAs provide a lower level for reviews of financial statements than to audits Less evidence is needed |
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what are Attestation Services on Information Technology
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Various assertions about the reliability and security of electronic information
As transactions and information are shared online and in real time, business people demand even greater assurances about information, transactions, and the security protecting them: Webtrust and SysTrust |
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what are two things that only a CPA can do?
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audits and attestation services
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what are two differences between assurance services and attestation services?
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assurance services need not be written and assurance does not have to be about the reliability of another party's assertion about compliance with specified criteria
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what do CPAs have a competitive advantage for doing?
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having a reputation for competence and independence
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what do assurance services include?
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attestation services:
audits, reviews, internal control over financial reporting, certain management consulting |
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what are some non-assurance services
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certain management consulting
accounting and bookkeeping tax services |
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another assurance example:
controls over and risks related to investments, including policies related to derivatives involves: |
assessing the processes in a company's investment practices to identify risks and to determine the effectiveness of those processes
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other assurance services examples:
assess risks of accumulation, distribution, and storage of digital information involves: |
assessing security risks and related controls over data and other information stored electronically, including the adequacy of backup and offsite storage
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other assurance services examples:
fraud and illegal acts risk assessment: |
developing fraud risk profiles and assessing the adequacy of company systems and policies in preventing and detecting fraud and illegal acts
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what are three ways that users reduce information risk?
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1. user verifies information
2. user shares information risk with management 3. audited financial statements are provided |
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what is an operational audit?
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evaluates the efficiency and effectiveness of any part of an organization’s operating procedures and methods
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is an operational audit objective or subjective?
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subjective
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is an operational audit limited to accounting?
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no
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what are some examples of an operational audit?
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evaluate computerized payroll system for efficiency and effectiveness
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what is a compliance audit?
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conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority
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who is the primary group concerned with the results of a compliance audit?
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management
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in a compliance audit, who are the auditors employed by?
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the organization
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what is a financial statement audit?
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conducted to determine whether the financial statements are stated in accordance with specified criteria
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in a financial statement audit, what kinds of errors must the auditor distinguish between?
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material errors or other misstatements
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what are some examples of auditors?
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- Certified public accountants, accounting firms, government accountability office auditors, internal revenue agents and internal auditors
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what are CPA firms responsible for auditing mostly?
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the historical financial statements of all publicly traded companies
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what are two types of auditors within a CPA firms/
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external auditors or independent auditors
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what is an Auditor working for the US Government Accountability Office, a nonpartisan agency in the legislation branch
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Government accountability office auditor
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who does the government accountability office auditor work for?
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congress
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what does the government accountability office auditor do?
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• Audits financial information made by government agencies before they go to Congress
emphasis on compliance |
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what does an internal revenue agent do?
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- Responsible for enforcing the federal tax laws as they have been defined by Congress and interpreted by the courts
compliance audits |
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what do internal auditors do?
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- Many are involved in operational auditing or computer systems evaluation
audit for management lack independence because they work for the company reports to the president or audit committee |
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what are the three requirements of a CPA?
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• Educational requirement
• Uniform CPA Examination Requirement • Experience Requirement |
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which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?
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the opinion of an independent party is needed because a company may not be objective with respect to its own financial statements.
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independent auditing can best be described as
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a discipline that attests to the results of accounting and other functional operations and data
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which of the following professional services is an attestation engagement?
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an engagement to report on compliance with statutory requirements
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which of the following attributes is likely to be unique to the audit work of CPAs as compared to the work performed by practitioners of other professions?
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independence
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who is the right to do an audit given by?
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the state
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what are the four categories to describe CPA firms?
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- the big four international firms
- national firms - regional and large local firms - small local firms |
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what are three main activities of CPA firms/
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- Accounting and bookkeeping services
Tax Services Management Consulting Services |
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- Three main factors influence the organizational structure of all firms:
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The need for independence from clients: auditors remain unbiased
The importance of a structure to encourage competence: efficiently and effectively The increased litigation risk faced by auditors: |
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what are the six organizational structures allowed by CPA firms?
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Proprietorship
General Partnership General Corporation Professional Corporation Limited Liability Company Limited Liability Partnership |
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Describe a proprietorship
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one owner
with litigation risks |
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what is the Most important legislation affecting auditing since 1933 and 1934 Securities Act
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Sarbanes Oxley Act and Public Company Accounting Oversight Board
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what are three main factors influence the organizational structure of all firms:
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the need for independence form clients
the importance of a structure to encourage competence the increased litigation risk faced by auditors |
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what does the staff accountant do?
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0-2 years experience
performs most of the detailed audit work |
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what does the senior auditor do?
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2-5 years experience
responsible for the audit field work, including supervising staff work |
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what does the manager do
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5-10 years experience
helps plan and manages the audit, reviews work, and works with the client |
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what does the partner do?
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10+ years
reviews audit work and makes significant audit decisions |
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the does the PCAOB stand for?
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PUblic Company Accounting Oversight Board
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what does the PCAOB do?
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• Overseen by the SEC
• Provides oversight for auditors of public companies • Establishes auditing and quality control standards for public company audits • Performs inspection of the quality controls at audit firms performing those audits • Requires annual inspections of accounting firms that audit more than 100 issuers • Other firms – every 3 years |
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What does the SEC stand for
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Securities and Exchange COmmission
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what does the SEC do?
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- Assists in providing investors with reliable information upon which to make decisions
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what are the two acts created by the SEC
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Securities Act of 1933 - requires public companies to register with the SEC to issue new securities
Securities Act of 1934 - required public companies to file detailed annual reports |
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what does the AICPA stand for
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American Institute of Certified Public Accountants
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who can be a member of the AICPA?
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- CPAs can be members
- Not all members are practicing independent auditors - Largest professional association for CPAs in the US |
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what does the AICPA do?
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- Sets professional requirements for CPAs
- Conducts research - Publishes materials on different subjects - Promotes the accounting profession - Four major areas of standards and rules: |
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what are the four major areas of standards and rules of the AICPA?
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auditing standards
compilation and review standards other attestation standards code of professional conduct |
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what do accounting standards include?
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auditing standards board
- For all entities other than publicly traded companies - Pronouncements are called Statements on Auditing Standards |
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what do compilation and review standards include
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- Accounting and Review Services Committee
- Issues pronouncements of CPAs responsibilities when a CPA is associated with financial statements of privately owned companies not audited - Statements on Standards for Accounting and Review Services - Guidance for performing compilation and review services - Limited assurance |
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what are the duties of the AICPA?
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writes and grades the CPA exam
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what are the three main sets of auditing standards internationally
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international standards on auditing
US Generally Accepted Auditing Standards PCAOB Auditing Standards |
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what are the three types of standards?
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general standards
standards of field work standards of reporting |
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what are the general standards
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1. adequate technical training
2. independence 3. due professional care |
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what are the standards of field work
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1. work is adequately planned and assistants are properly supervised
2. sufficient understanding of internal control; to determine the nature, timing, and extent of tests to be performed 3. sufficient competent evidential matter through inspection, observation, inquiries, and confirmations |
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what are the standards of reporting?
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1. whether FS are in accordance with GAAP
2. report shall identify those circumstances in which such principles have been consistently observed in the current period 3. informative disclosures in FS are reasonably adequate 4. expression of opinion regarding the FS as a whole |
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who are the international standards on auditing issued by?
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International Auditing Practice Committee of the International Federation of Accountants IFAC
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do ISAs override a country's own regulations?
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no
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do most countries use their own auditing standards or the international standards?
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international standards
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who issues statements for private companies?
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Auditing Standards Board AICPA
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what is due professional care?
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• Auditors are professionals responsible for fulfilling their duties diligently and carefully
• Consideration of the completeness of the audit documentation • Sufficiency of the audit evidence • Appropriateness of the audit report • Can’t act negligently or in bad faith |
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does the GAAS and Standards of Performance... are they too general or too strict?
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too general ...
no specific requirements for auditors' decisions making them too narrow would make it into mechanistic evidence gathering |
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what is quality control?
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- Comprises the methods used to ensure that the firm meets it professional responsibilities to clients and others
- required by each audit |
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what can a quality control system provide (only)
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reasonable assurance
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what do the elements of Quality Control depend on?
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size of the firm
number of practice offices nature of the practice |
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what are the 6 elements of quality control?
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• Leadership responsibilities for quality within the firm
• Relevant ethical requirements • Acceptance and continuation of clients and engagements • Human resources • Engagement performance • Monitoring |
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what is a peer review?
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• Review by CPAs of a CPA firm’s compliance with its quality control system
• To determine and report whether the CPA firm has developed adequate quality control policies and procedures and uses them • No peer review: all member lose their eligibility of AICPA |
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what do peer reviews do?
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- Help them meet quality control standards
- Improve practitioner performance and higher-quality audits - Enhances its reputation and effectiveness and reduces the likelihood of lawsuits |
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what is the center for audit quality CAQ
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autonomous public policy organization affiliated with the AICPA serving investors, public company auditors and the capital markets
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what does the Center for audit quality CAQ do?
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• Mission is to foster confidence in the audit process and to make public company audits even more reliable and relevant for investors
• Private Companies Practice Section PCPS provides practice management information to firms of all sizes |
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what is the overall purpose of the SEC
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to assist in providing investors with reliable information upon which to make investment decisions
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what effects a CPA to conduct themselves at a high level
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CPA examination
quality control peer review PCAOB and SEC Code of Professional conduct AICPA practice sections Legal liability continuing education requirements |
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what are the types of audit reports?
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report on financial statements and related disclosures
report on internal control over financial reporting |
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what is the purpose of the audit report
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indicate whether the FS are in accordance with GAAP
indicate any unusual aspects of the audit examination indicate any unusual matters related to the company |
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what are the two requirements of : unusual aspects of the audit examination
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scope of limitations
division of responsibility |
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what ther the two requirements of unusual matters related to the company?
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going concern uncertainty
consistency emphasize a matter |
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what are the four types of audit reports on financial statements?
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standard unqualified
standard with explanatory language qualified adverse disclaimer |
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what are the seven distinct parts of the standard unqualified?
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report title
audit report address introductory paragraph scope paragraph opinion paragraph name of CPA firm Audit Report Date (date audit field work is completed) |
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what does the report title require?
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independent
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what are the four types of audit reports on financial statements?
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standard unqualified
standard with explanatory language qualified adverse disclaimer |
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who does the audit report address?
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company, stockholders, board of directors,
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what are the seven distinct parts of the standard unqualified?
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report title
audit report address introductory paragraph scope paragraph opinion paragraph name of CPA firm Audit Report Date (date audit field work is completed) |
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what does the introductory paragraph of the standard unqualified contain?
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o that the firm has done an audit
o lists the financial statements that were audited o the statements are the responsibility of management and that the auditor’s responsibility is to express an opinion on the statements based on the audit |
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what does the report title require?
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independent
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what does the scope paragraph include?
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o Factual statement
o Followed US GAAP o Public – followed PCAOB o Country of origin o Designed to obtain reasonable assurance about whether the statements are free of material misstatement o Audit provides a high level of assurance but is not a guaranty o Discusses the evidence accumulated o Test basis – indicate that sampling was used rather than an audit of every transaction on the statements o Auditor evaluates the appropriateness of those accounting principles, estimates, and financial statement disclosures and presentations given |
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who does the audit report address?
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company, stockholders, board of directors,
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what does the opinion paragraph include?
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o Auditor’s conclusions based on the results of the audit
o Conclusions are based on professional judgment o In our opinion o First and fourth standards on pg 35 o State opinion about financials o Conclusion about whether they followed GAAP o Fairly presented – meaning is controversial • The users might be misled even if those generally accepted principles are followed |
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what does the introductory paragraph of the standard unqualified contain?
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o that the firm has done an audit
o lists the financial statements that were audited o the statements are the responsibility of management and that the auditor’s responsibility is to express an opinion on the statements based on the audit |
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is the audit report signed by just the auditor(singluar) or the whole firm?
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the whole firm
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what does the scope paragraph include?
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o Factual statement
o Followed US GAAP o Public – followed PCAOB o Country of origin o Designed to obtain reasonable assurance about whether the statements are free of material misstatement o Audit provides a high level of assurance but is not a guaranty o Discusses the evidence accumulated o Test basis – indicate that sampling was used rather than an audit of every transaction on the statements o Auditor evaluates the appropriateness of those accounting principles, estimates, and financial statement disclosures and presentations given |
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when does the auditor date the report
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on the day the field work is completed.
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what does the opinion paragraph include?
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o Auditor’s conclusions based on the results of the audit
o Conclusions are based on professional judgment o In our opinion o First and fourth standards on pg 35 o State opinion about financials o Conclusion about whether they followed GAAP o Fairly presented – meaning is controversial • The users might be misled even if those generally accepted principles are followed |
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is the audit report signed by just the auditor(singluar) or the whole firm?
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the whole firm
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the standard unqualified report is issued if:
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all statements are included
the three general standards have been followed sufficient appropriate evidence has been accumulated financial statements are in accordance with GAAP no circumstances requiring an explanatory paragraph |
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when does the auditor date the report
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on the day the field work is completed.
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the standard unqualified report is issued if:
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all statements are included
the three general standards have been followed sufficient appropriate evidence has been accumulated financial statements are in accordance with GAAP no circumstances requiring an explanatory paragraph |
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what is the report on internal control over financial reporting
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auditor's opinion must address whether the company maintained, in all material respects, effective internal control over financial reporting as of the end of the fiscal year
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who are accelerated filers?
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larger public companies
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what does the PCAOB require of accelerated filers?
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the audit of financial statements + internal control
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what does the unqualified report with explanation
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1. lack of consistency with GAAp
2. Substantial doubt about going concern 3. Auditor Agrees with a departure from promulgated accounting procedures. 4. emphasis of a matter 5. reports involving other auditors |
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which lack of consistency applications do NOT require an explanatory paragraph?
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changes in estimate
error corrections not involving principles variations in format and presentation of FS changes because of substantially different transactions or events |
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what are the factors that cause a substantial doubt about going concern?
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1. significant recurring operating losses or working capital deficiencies
2. inability of the company to pay its obligations. 3. loss of major customers, the occurrence of uninsured catastrophes 4. legal proceedings, legislation, that might jeopardize the entity's ability to operate |
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if an auditor uses another auditor, what are the three options they have to include it in the report?
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1. make no reference in the report
2. make reference in the report - modified wording report 3. qualify the opinion |
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what are the three departures from an unqualified report
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scope of limitation
GAAP departure auditor not independent |
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if the scope of the audit has been restricted, what does this mean?
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the auditor has not accumulated enough evidence
restrictions imposed by the client or other circumstances |
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what can a qualified opinion result from?
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limitation on the scope of the audit
failure to follow GAAP |
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GAAP departures can result in
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adverse opinions or qualified opinions, depending on severity and materiality
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what are the report modifications with a qualified opinion
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intro and scope paragraph remain the same
add middle paragraph explaining problem change opinion paragraph |
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what phrase is used in the qualified opinion?
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except for
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when is an adverse opinion used?
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when the auditor believes that the financial statements are so materially misstated or misleading that they do not fairly present the financial position or results of operations and cash flows in conformity with GAAp
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is an adverse opinion used always or rarely
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rarely
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what are the modifications for an adverse opinion?
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intro and scope paragraph remain the same
add middle paragraph explaining the problem change opinion paragraph |
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when is a disclaimer of opinion issued?
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when the auditor is unable to be satisfied that the overall financial statements are fairly presented
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what are three possibilities of a disclaimer of opinion?
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severe limitation on the scope of the audit
non-independent relationship going concern problem lack of knowledge |
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what are the three levels of materiality
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amounts are immaterial
amounts are material but do not overshadow the financial statements amounts are so material or so pervasive that overall fairness of the statements is in question |
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amounts are immaterial
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unlikely to affect the decisions of a reasonable user
unqualified opinion |
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amounts are material but do not overshadow the financial statements
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would affect a user's decision, but overall statements are fairly stated and useful
auditor must evaluate qualified opinion |
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amounts are so pervasive that overall fairness of the statements is in question
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users will make a wrong decision if they relied on those statements
disclaimer or adverse opinion pervasiveness |
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if a client fails to follow GAAP, what can the audit report be?
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unqualified, qualified opinion, or adverse
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are auditors required to read information provided on electronic sites?
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no
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which of the following statements about a combined report on the financial statements and internal control over financial statements is true?
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the report includes additional paragraphs for the definition and limitations of internal control
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the date of the CPA's opinion on the financial statements of the client should be the data of the
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completion of all important audit procedures
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which of the following statements about a combined report on the financial statements and internal control over financial statements is true?
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the report includes additional paragraphs for the definition and limitations of internal control
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if a principal auditor decides to refer in his or her report to audit of another auditor, he or she is required to disclose the
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portion of the financial statements audited by the other auditor
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the date of the CPA's opinion on the financial statements of the client should be the data of the
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completion of all important audit procedures
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an entity changes from straight line method to the declining balance method of depreciation for all newly acquired assets. this change has no material effect on the current years' financial statements but is reasonably certain to have a substantial effect in later years. if the change is disclosed in the financial statements, auditors should report a
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unqualified opinion
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if a principal auditor decides to refer in his or her report to audit of another auditor, he or she is required to disclose the
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portion of the financial statements audited by the other auditor
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an entity changes from straight line method to the declining balance method of depreciation for all newly acquired assets. this change has no material effect on the current years' financial statements but is reasonably certain to have a substantial effect in later years. if the change is disclosed in the financial statements, auditors should report a
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unqualified opinion
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when the statements are fairly stated but the auditor concludes there is a substantial doubt whether the client can continue in existence, the auditor should pick an
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unqualified opinion with explanatory paragraph
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when the statements are fairly stated but the auditor concludes there is a substantial doubt whether the client can continue in existence, the auditor should pick an
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unqualified opinion with explanatory paragraph
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which of the following statements about a combined report on the financial statements and internal control over financial statements is true?
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the report includes additional paragraphs for the definition and limitations of internal control
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the date of the CPA's opinion on the financial statements of the client should be the data of the
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completion of all important audit procedures
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if a principal auditor decides to refer in his or her report to audit of another auditor, he or she is required to disclose the
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portion of the financial statements audited by the other auditor
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an entity changes from straight line method to the declining balance method of depreciation for all newly acquired assets. this change has no material effect on the current years' financial statements but is reasonably certain to have a substantial effect in later years. if the change is disclosed in the financial statements, auditors should report a
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unqualified opinion
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when the statements are fairly stated but the auditor concludes there is a substantial doubt whether the client can continue in existence, the auditor should pick an
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unqualified opinion with explanatory paragraph
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what are some ways people rationalize ethical behavior?
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everybody does it
if its legal, its ethical likelihood and discovery of consequences |
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what are the 6 principles of the code of professional conduct
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1. responsibilities - sensitive and moral judgments
2. public interest serve the public 3. integrity 4. objectivity and independence 5. due care 6. scope and nature of services |
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a member cannot: in audit and review services:
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have a direct financial interest in a client
have a material indirect interest be a trustee or board of directors joint investment |
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how do the rules of independence apply to the family
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immediate family members cannot have the same as the auditor: spouse, spousal equivalent or dependent
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advertisements are allowed, but they cannot be
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false, misleading or deceptive
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when are commissions allowed?
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permitted for non-attest if disclosed
prohibited for attest services |
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loans are allowed if:
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obtained with old rules
before the lender was a client attest client before the CPA became a client |
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what kind of litigation impairs independence?
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if the two are in litigation against each other
but allowed to be a client if they are both in a lawsuit by the same person third party |
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what is the only enforceable part of the code?
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rules of conduct
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what should you do if you disagree with the way the financial statements were put together?
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take the supervisor's position
report to an even higher level consider resigning |
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a CPA cannot disclose information about a client EXCEPT:
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to remain in compliance with standards
if workpapers are subpoenaed by a court as part of a peer review ethics violation for state board of accountancy investigation |
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contingent fees are allowed for __ and not allowed for ____
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allowed for non-attest services
prohibited for attest services |
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are advertising and solicitation of new clients permitted?
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yes
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what are two self-regulatory disciplines?
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AICPA
State Societies of CPAs |
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what are public regulation discipline?
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State Board of Accountancy
SEC PCAOB IRS |
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what is the audit committee?
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- A selected number of members of a company’s board of directors who responsibilities include helping auditors remain independent of management
- 3-5 people - not part of company management - all members must be independent - responsible for the appointment, compensation and oversight of the work of the auditor - preapprove all audit and nonaudit services - oversight of the work of the auditor - a CPA firm must describe in writing and document its discussions with the audit committee about all relationships between the firm and the company; made annually |
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can a company hire a previous auditor immediately?
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NO - one year cooling off period
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how long can a partner be on one audit engagement
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5 years
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independence is impaired by unpaid fees if:
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unbilled fees remain unpaid for professional services more than 1 year before the date of the report
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what is the meaning of the GAAS that requires the auditor be independent?
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the auditor must be without bias with respect to the client under audit
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the independent audit is important to readers of financial statements because it
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involves the objective examination of and reporting on management-prepared statements
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an auditor strives to achieve independence in appearance to
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maintain public confidence in the profession
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in which of the following situations would a CPA be in violations of the AICPA Code of Professional Conduct in determining the audit fee?
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a fee based on whether the CPAs report on the client's financial statements results in the approval of a bank loan
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audit professionals have a responsibility under common law to
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fulfill implied or expressed contracts with clients
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if they do not fulfill the contract, they can be held for
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negligence and/or breach of contract
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what is business failure:
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when a business is unable to repay its lenders or meet the expectations of its investors because of economic or business conditions such as recession, poor management decisions, or unexpected competition in the industry
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what is audit failure
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occurs when the auditor issues an incorrect audit opinion because it failed to comply with the requirements of auditing standards
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audit risk
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represents the possibility that the auditor concludes after conducting an adequate audit that the financial statements were fairly stated when, in fact they were only on a test basis and because well-concealed frauds are extremely difficult to detect.
- Expectation gap between auditors and statement users - Auditors expect to follow the GAAP guidelines, while users expect CPAs to ensure the accuracy of the statements - Courts continue to support the auditors view |
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what are the legal concepts affecting liability?
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prudent person concept: due care - what another competent auditor would do in this situation
liability for the acts of others: personally responsible for you and those under you lack of privileged communication: no audit privilege; if the auditor is told something, they have to tell someone |
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what are some terms related to negligence and fraud?
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ordinary negligence
gross negligence constructive fraud fraud |
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what are some auditors' defenses against client suits?
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lack of duty: no implied or expressed contract
nonnegligent performance: claim that the audit was done in accordance with GAAP |
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what is contributory negligence?
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the auditor claims that the client’s own actions either resulted in the loss that is the basis for the damages or interfered with the conduct of the audit in such a way that prevented the auditor from discovering the cause of the loss
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what is absence of causal connection?
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the client must be able to show that there is a close causal connection between the auditor’s failure to follow auditing standards and the damages suffered by the client; the auditor can claim that it was a thirds party that was the reason for this loss
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what is ordinary negligence?
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failure to exercise that standard of care that a reasonable person would exercise in like circumstances
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what qualities must be present for ordinary negligence?
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duty to care
breach of that duty causation damages |
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what is gross negligence?
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lack of even slight care; reckless behavior
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what elements must be present for gross negligence?
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duty to care
breach of that duty causation damages |
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what is constructive fraud?
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extreme or unusual negligence even though there is no intent to deceive or harm
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what elements must be present for constructive fraud?
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misrepresentation of amterial facts
reliance on the information damages |
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what is fraud?
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a false, material misrepresentation of face knowing it to be false and intent to deceive
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what elements must be present for fraud?
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misrepresentation of material facts
intent to defraud - scienter reliance on the information damages |
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what are the major sources of auditor's legal liability
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liability to clients under common law.
liabilty to third parties under common law liability under federal securities laws criminal liability |
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what is the ultramares doctrine?
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- Accountants may be liable but they may not be liable to third arties because the creditors are not primary beneficiaries
- Primary beneficiary: one about whom the auditor was informed before conducting the audit - Ordinary negligence is insufficient for liability to third parties because of the lack of privity of contract between the third party and the auditor, unless the third party is a primary beneficiary |
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what is a foreseen user?
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- Members of a limited class of users that the auditor knows will rely on the financial statements
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what is liability to clients under common law
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the most common source of lawsuits against CPAs from clients
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what are the auditor's defense against client suits
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lack of duty to perform
non-negligent performance contributory negligence absence of causal connection |
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what three things are under the forseen users?
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credit alliance
restatement of torts foreseeable users |
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what is the best defense against third party suits
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nonnegligent performance
lack of duty to perform absence of causal connection |
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what are the auditor's defenses against third party suits?
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nonnegligent performances
lack of duty to perform absence of causal connection |
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who are the only ones that can collect?
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the original purchasers of the securities
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what is the liability under Federal Securities laws
|
Securities act of 1934: centers on the audied financial statements issued to the public in annual reports or submitted to the SEC as a part of annual form 10-K reports
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what are auditor defenses according to the 1934 Act?
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nonnegligent performance
lack of duty to perform absence of causal connection |
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what is the foreign corrupt practices act of 1977
|
makes it illegal to offer a bribe to an official of a foreign country for the purpose of exerting influence and obtaining or retaining business
also requires the SEC registrants to maintain reasonably complete and accurate records and an adequate system of internal control |
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CPAs can be held liable under criminal liability fora accountants.
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CPAs can be found guilty for criminal action under both federal and state laws
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|
|
Sarbanes Oxley Act
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makes it a felony to destroy or create documents to impede or obstruct a federal investigation
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how can you protect individual CPAs from legal liability
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deal only with clients possessing integrity
hire qualified personnel follow the standards of the profession maintain independence understand the clients business perform quality audits document the work properly obtain an engagement and a representation letter maintain confidential relations carry adequate insurance seek legal counsel choose a form of organization with limited liability exercise professional skepticism |
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what are the auditor's defenses against third party suits?
|
nonnegligent performances
lack of duty to perform absence of causal connection |
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|
who are the only ones that can collect?
|
the original purchasers of the securities
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|
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what is the liability under Federal Securities laws
|
Securities act of 1934: centers on the audied financial statements issued to the public in annual reports or submitted to the SEC as a part of annual form 10-K reports
|
|
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what are auditor defenses according to the 1934 Act?
|
nonnegligent performance
lack of duty to perform absence of causal connection |
|
|
what is the foreign corrupt practices act of 1977
|
makes it illegal to offer a bribe to an official of a foreign country for the purpose of exerting influence and obtaining or retaining business
also requires the SEC registrants to maintain reasonably complete and accurate records and an adequate system of internal control |
|
|
CPAs can be held liable under criminal liability fora accountants.
|
CPAs can be found guilty for criminal action under both federal and state laws
|
|
|
Sarbanes Oxley Act
|
makes it a felony to destroy or create documents to impede or obstruct a federal investigation
|
|
|
how can you protect individual CPAs from legal liability
|
deal only with clients possessing integrity
hire qualified personnel follow the standards of the profession maintain independence understand the clients business perform quality audits document the work properly obtain an engagement and a representation letter maintain confidential relations carry adequate insurance seek legal counsel choose a form of organization with limited liability exercise professional skepticism |
