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532 Cards in this Set
- Front
- Back
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Generally Accepted Accounting Principles (GAAP)
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the standards by which the quality of the financial statements is judged
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Auditor's primary role
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to provide an impartial (independent) assessment of the reliability of management's financial statement
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What do financial statements represent?
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representations of management
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benefits of an audit to a private company
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"1) more favorable cost of capital
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Generally Accepted Accounting Standards (GAAS)
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the standards by which the quality of the auditor's performance is judged
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Three Fieldwork standards
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"1. Planning and supervision
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Six Elements of a Quality Control System
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"1. leadership responsibilities for quality within the firm
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administration of quality control system
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may be vested in one person but everyone shares responsibility
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Statements on Auditing Standards (SASs)
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Pronouncements issued by the Auditing Standards Board of the AICPA that serve as interpretations of GAAS
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Four reporting standards
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"1. Consistency
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Three General Standards
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"1. Training
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Internal control consideration
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"1. obtain an understanding for planning purposes as required
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Types of tests of details
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"1. test of transactions
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Planning considerations
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"1. determine whether to accept or continue engagement
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Basic steps in audit process
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"1. planning
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types of substantive audit procedures
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"1. analytical procedures
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reasons for a disclaimer of opinion
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"1. lack of independence
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reason for adverse opinion
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1. major GAAP departure
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reasons for qualified opinion
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"1. minor GAAP departure
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Types of opinions
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"1. unqualified
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structure of the standard audit report
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3 paragraphs: introductory, scope, opinion
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SSARSs
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Statements on Standard for Accounting and Review Services
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SSAEs
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Statement on Standards for Attestation Engagements
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Compilation
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When the CPA assembles into financial statement format the financial records of a private company, without expressing any degree of assurance on the reliability of those financial statements
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Audits
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Conveys a high level of assurance about financial statements
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Review
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Convenys a moderate level of assurance about financial statements
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Audit planning procedures
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"1. reivew client records
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usual factors considered in planning
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"1. client's industry and business
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initiator of predecessor-successor communications
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successor
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characteristics of audit program
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"1. required in writing
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matters covered in successor's inquiry of predecessor
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"1. facts related to management's integrity
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pre-engagement activities
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"1. quality control concerning acceptance and/or continuance of clients and engagements
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Component risk within Auditor's control
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detection risk
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Audit risk model
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Audit risk= f(inherent risk, control risk, detection risk)
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Three variables adjusted to change detection risk
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"1. nature
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detection risk
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the probability that a material misstatement, that was not prevented or detected by internal control, was not detected by the auditor's substantive audit procedures
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planning stage materiality
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What size misstatements is the audit program designed to catch
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evaluation stage materiality
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at the conclusion of the fieldwork, does the evidence suggest that the financial statements are 'fairly' stated
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Inherent risk
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the probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures
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Audit risk
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the probability that the auditor fails to modify the opinion on the financial statements that contain a material misstatement
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Two contexts of materiality
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planning-level materiality and evaluation-level materiality
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control risk
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the probability that a material misstatement, that occurred in the first place, would not be detected by applicable internal controls
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analytical procedures in planning
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aids in understanding client activities and in targeting risky areas where material misstatements are more likely
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three purposes of analytical procedurse
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"1. required during planning
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factors affecting use of analytical procedures as substantive evidence
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"1. nature of assertion
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analytical procedures
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evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data
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analytical procedures in overall review
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verifies conclusions reached in audit
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Auditor's responsiblities concerning fraud
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"1. must design audit to provide reasonable assurance of detecting material misstatements
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Two categories of risk factors for misappropriation of assets
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"1. susceptibility of assets to misappropriation
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Two types of misstatements concerning fraud
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"1. from fraudulent financial reporting
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when auditor may inform others outside entity of fraud
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"1. in response to valid subpoena
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Three categories of risk factors for fraudulent financial reporting
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"1. management characteristics
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required communications about fraud
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"1. the appropriate level of management should be notified
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Audit procedures used to detect illegal acts
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make inquiries of management about compliance with applicable laws
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Auditor's basic responsibility to detect illegal acts
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must design the audit to provide 'reasonable assurance' of detecting illegal acts having a direct and material effect on the financial statements
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Audit procedures when an illegal act has been detected
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"1. gather additional evidence to determine facts
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Reporting effects of detected illegal acts
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"1. ask client to revise financial statements
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Factors in selection of a specialist
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"1. professional credentials
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Required communications with audit committees and those charged with governance
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"1. matters applicable to planning
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effect of a specialist on an audit report
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"1. unqualified opinions usually do not mention specialist
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Transaction cycle
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a group of essentially homogeneous transactions
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Disadvantages of Flowcharts
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"1. tedious and time consuming to prepare
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Disadvantages of internal control questionnairs (ICQs)
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"1. not tailored to client
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Advantages of Internal Control Questionnaires (ICQs)
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"1. can have standard form for many clients
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Limitations of Internal Controls
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"1. cost of controls should not outweigh benefits
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Advantages of Flowcharts
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"1. systematic approach
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Steps in Study and Evaluation of Internal Control
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"1. gain and document understanding
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Procedures in Obtaining and Understanding of Internal Control
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"1. inquiry of appropriate personnel
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Disadvantages of Narratives
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"1. easy to overlook internal control issues
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Ways of Documenting Understanding of Internal Controls
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"1. Flowcharts of transaction cycles
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Advantages of Narratives
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"1. tailored to client
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Control Environment
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deals with the overal control consciousness and attitudes of management, the Board of Directors, and the owners
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Components of Control Environment
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"1. Corporate governance
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Items affecting risk assessment
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"1. changes in operating environment
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Three Categories about which Internal Control is to provide reasonable assurance
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"1. reliability of financial reporting
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When Control Risk Should be Assessed at the Maximum
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"1. when controls are not very strong
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Monitoring
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deals with assessing the adequacy of the system of internal control over time, since adequate internal controls require on-going evaluation and modification
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Information and communication
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deals with the range of activities from capturing the initial transactions to preparing the financial statements
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Risk Assessment Procedures
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"Procedures performed to obtain an understanding of the entity and its environment, including internal control
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Requirement for assessing control risk at below the maximum
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test of controls
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Three activities that should be segregated
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"1. authorization
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Five components of internal control
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"1. Control environment
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Control Activities
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"1. segregation of duties
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Material weaknesses
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deficiency (or combination of deficiencies) in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis
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Significant deficiency
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deficiency (or combination of deficiencies) in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance
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Timing of communication
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early communication permitted; written communication no later than 60 days after audit report release date (including matters communicated orally during the audit)
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requirements of reporting significant deficiencies
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"1. must communicate the significant deficiencies and material weaknesses identified in the audit
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Form and content of report on internal control issues
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"1. restrict distribution of report
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Auditing procedures when internal auditors provide direct assistance
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"1. assess internal auditor's competence and objectivity
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Characteristics of Internal Auditors; Auditor must asssess if activities are deemed relevant
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"1. competence
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Audit procedures related to internal auditors
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"1. inquire about organizational status, access, and professionalism
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competence
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"1. education
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Objectivity of Internal auditors
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level to which internal auditors report (organizational status)
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SCARE
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"1. segregation of duties
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access to assets and records
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limited to authorized personnel
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Why group by transaction cycle?
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control risk is generally assumed to be contant within a category of transactions as all transactions are processed the same way.
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Transaction cycles
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"1. revenue/ receipts
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Records controls in revenue/receipts sales
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"1. sales invoices are pre-numbered
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comparisons in revenue/receipts sales
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"1. aged accounts receivable trial balance to general ledger
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Execution of transaction controls in revenue/receipts sales
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"1. management should review terms of sales and note approval
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Internal control objectives related to revenue/receipts sales
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"1. goods and services provided in accordance with management's orders
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segregation of duties in revenue/receipts sales
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"1. independent employee should review customer statements
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access control in revenue/ receipts sales
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"1. computer passwords limit access
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segregation of duties for cash receipts
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"handled separately:
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Comparisons in cash receipts cycle
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"1. initial cash receipts listing to total in cash receipts journal to bank deposit
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Objectivies of internal control in cash receipts
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"1. access to cash receipts records and accounts receivable records is limited to authorized personnel
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access controls in cash receipts cycle
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"1. employees with access to cash should be bonded
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execution of transaction controls in cash receipts
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"1. adjusting journal entries should be approved by management
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Vouchers payable system
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keeps track of individual transactions without summarizing amounts owed by vendor
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Records controls in expenditures cycle
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"1. pre-numbered purchase orders
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Execution of transaction contrls in expenditures cycle
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"1. all adjusting entries approved by management
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Comparison controls in expenditure cycle
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"1. supplier's monthly statements with payables
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access controls in expenditure cycle
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"1. cash disbursement employees should be bonded
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accounts payable system
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keeps track of payables by the name of the vendor
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segregation of duties in expenditure cycle
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"1. separate purchasing department
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Comparisons in Payroll Cycle
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payroll checks to payroll register
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Access controls in the payroll system
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"1. access to personnel files limited to authorized personnel
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segregation of duties in the payroll cycle
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"following activities should be performed by different people:
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execution of transactions controls in payroll cycle
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"1. payroll should be authorized by responsible official
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records controls in payroll cycle
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"1. maintain current and accurate payroll information
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Internal control objectives in investing/financing cycle
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"1. transactions recorded in accordance with management's authorization
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segregation of duties in manufacturing cycle
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"1. separate authorization, bookkeeping (recording), and custody of inventory
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execution of transaction controls in manufacturing cycles
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"1. acquisition and distribution of inventory in accordance with management's authorization
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objectives of internal control in production/manufacturing cycle
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"1. resources obtained and used recorded timely
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records controls in manufacturing cycle
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"1. pre-numbered purchase orders
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comparison controls in manufacturing cycle
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"1. actual inventory to recorded inventory
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objectives of internal controls in fixed assets cycle
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"1. transactions recorded in accordance with management's authorization
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access controls in manufacturing cycle
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access to physical inventory and to inventory records and documents limited to authorized personnel
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Types of Substantive tests
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"1. test of details
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extent of procedures
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how large the samples should be
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nature of procedures
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what procedures to perform
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component of audit risk model auditor controls
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detection risk
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three purposes of analytical procedures
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"1. required in audit planning
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timing of procedures
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when to perform procedures (interim vs. final)
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Two Broad Categories of Audit Evidence
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"1. underlying accounting data
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Rights and obligations
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that the company has all the rights associated with its reported assets and all the obligations associated with its reported liabilities; any limitations on such rights or obligations must be appropriately disclosed.
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Three General Rules about Competence of Evidence
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"1. evidence based on direct personal knowledge is better than that obtained indirectly
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Interim procedure considerations
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"1. may increase detection risk
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existence/ occurrence
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that the recorded transactions are valid economic events of the period in which they are reported
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Presentation and disclosure
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that the presentation of the financial statements and the footnote disclosures are appropriate and in accordance with GAAP
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work normally performed at interim
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"1. planning
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valuation or allocation
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that the dollar amounts attributed to the elements of the company's financial statements are appropriate and in accordance with GAAP
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Buzzwords to use in preparing audit programs
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"1. observe
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general sufficiency of evidence
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evidence is usually persuasive rather than compelling
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completeness
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that there are no omissions of transactions that should have been reported
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five main management assertions
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"1. existence/occurrence
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Permanent file
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contains documentation of matters having on-going audit significance
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Purposes of audit documentation
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"1. provides the principal support for the auditor's report
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Bulk file
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where documentation that is too voluminous can be stored
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audit documentation custody issues
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"1. audit documentation is the auditor's property subject to client confidentiality considerations
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report file
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where prior years' audit reports and management letters are organized (by client) so that the audit team can conveniently review formal reports previously issued for each client
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factors affecting quantity, type, and content of audit documentation
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"1. nature of the engagement
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types of files in audit documentation
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"1. permanent file
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correspondence file
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what letters (and email messages) to and from clients are organized so that the audit team can conveniently review communications related to each client organization
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payables confirmations alternative procedures
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verify subsequent cash disbursements as payments on the account
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negative confirmations
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where a response is only requested in the event of disagreement
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when to use negative confirmations
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"1. large number of small accounts
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receivable confirmation alternative procedures
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verify subsequent cash receipts
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positive confirmations
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where a response is requested whether or not the other party agrees with the client's recorded amount
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types of confirmations
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"1. positive
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when to use positive confirmations
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when individual accounts are large
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Two approaches to evaluate reasonableness
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"1. review and test process used by management to develop estimate
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key factors and assumptions used in evaluating the reasonableness of an estimate
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significant to the accounting estimate, sensitive to variations, deviatons from historical paterns, subjective and susceptible to misstatement and bias
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basic auditor responsibility for estimates
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evaluate reasonableness of any significant accounting estimates
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factors that affect the risk of material misstatement related to estimates
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"1. complexity and subjectivity of process involved
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audit procedures for accounting estimates
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"1. inquire of personnel to obtain understanding of how estimate developed
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auditor's objective regarding fair value and disclosures
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to provide reasonable assurance that fair value measurements and disclosures comply with GAAP
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audit process relating to fair value and disclosures
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"1. obtain understanding of entity's process for determining fair value measurements and disclosures
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responsibility for the financial statements, including the fair value measurements and disclosures, which are inherently imprecise
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management responsibility
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best evidence of fair value
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published price quotations in an active market
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the amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale
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fair value
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Client's lawyer inquiries
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"1. auditor may submit list of pending matters or ask lawyer to prepare list
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unasserted claims and litigation
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entity has exposure to litigation but has received no official filing and has no knowledge of anyone's intention to sue
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effect of limitation in lawyer's response
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scope limitation sufficient to prevent unqualified opinion
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purpose of lawyer's letters
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to corroborate management's responses to auditor inquiries about legal contingencies
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audit procedures for legal contingencies
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"1. inquiry of management
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contentsof management representations letters
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"documentation of verbal responses regarding:
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effect of unwillingness to sign the management representations letter
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scope limitation probably resulting in disclaimer or withdrawal
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period covered in management's representation letters
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all periods included in audit report
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characteristics of management representations letters
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"1. addressed to auditors
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procedures to test existence/occurrence
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"1. confirmation
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procedures to test valuation and allocation
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"1. verify mathematical accuracy
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procedures to test rights and obligations
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"1. inqnuire of applicable client personnel
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procedures to identify related party transactions
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"1. review minutes of board of directors' meeting for activities with related parties
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transactions that may indicate related party involvement
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"1. unusual or large transactions
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procedures to audit related party transactions
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"1. obtain understanding of business purpose of transaction
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procedures to identify related parties
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"1. inquire of management as to related entities
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auditor objective regarding transactions with related parties
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primary concern with adequacy of disclosure about transactions with related parties
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audit procedures to identify subsequent events
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"1. management inquiry
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subsequent events - type II
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relates to circumstances arising after balance sheet date and requires disclosure
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subsequent events
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events or transactions that occur after the balance sheet date and before the issuance of the auditor's report which have a material effect on the financial statements and, therefore, require either financial statement adjustment or disclosure
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subsequent events - type I
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relates to estimate already in financial statements and requires adjustment
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subsequent period
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the period after the balance sheet date up to the report date
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Internal matters raising doubts about 'going concern' issues
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labor problems, dependence on single projects or customers, or harmful long-term commitments
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required communication if substantial doubt exists regarding an entity's ability to continue as a going concern
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"to those charged with governance:
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negative trends raising doubts about 'going concern' issues
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recurring losses, negative cash flows, or working capital deficiencies
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auditor requirement regarding 'going concern' issues
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to identify if there is doubt about the entity's ability to continue as a going concern
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indicators of 'substantial doubt' related to 'going concern' issues
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defaults on debt, violations of debt covenants, disposals of major assets, or restructuring of debt
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SCARE
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"segregation of duties
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cash audit procedures
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"1. review and test bank reconciliations
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schedule of interbank transfers
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schedule used to verify that transfers are recorded properly and to detect kiting
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kiting
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an overstatement of the true cash balance at year-end caused by recording the receipt, while failing to record the disbursement, associated with a transfer between cash accounts
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proof of cash
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compares the beginning balance per bank plus deposits minus checks clearing the bank versus the beginning balancer per the books plus receipts minus disbursements according to the books
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cutoff bank statement
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short period bank statement obtained directly from the bank
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bank confirmation
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verifies existence and ownership of bank accounts
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Audit procedure related to completeness of accounts receivable
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perform cutoff test of sales
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lapping
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an attempt to cover up a theft of receipts, where a clerk might try to apply a later receipt to the prior customer's account (and so on) until the scam ends by writing off soemone's account as uncollectible
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cutoff test of sales
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examine the shipping documents for the last few shipments before year-end and the first few shipments after year-end; compare these shipping documents with the related sales invoices to assess whether the sales were recorded in the appropriate period
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audit procedures related to rights and obligations and presentation and disclosure of accounts receivable
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"1. inquire about receivables pledged as collateral
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audit procedures to support existence/occurrence of accounts receivable
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"1. verify subsidiary ledger agrees with control account in general ledger
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audit procedures to support valuation of accounts receivable
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"1. review aged trial balance for large delinquent items
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audit procedures related to existence/occurrence of inventory
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participate in the client count of inventory or confirm inventory stored in public warehouse
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audit procedures for valuation of inventory
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"1. price tests
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audit procedures related to completeness assertion for inventory
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"1. test cut-off
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inventory observation audit procedures
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"1. determine count will be complete and accurate
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audit procedures relating to rights and obligations and presentation and disclosure of inventory
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inquire of management for inventory held on consignment or pledged as collateral
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inherent risk assessment considerations
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"1. entity's experience
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valuation: procedures to consider
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"1. when the valuation is based on cost
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detection risk assessment considerations
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the size of the entity; its experience with such derivatives and securities; the types and complexity of the derivatives and securities; and the controls affecting the derivatives and securities (especially controls over segregation of duties, access/custody, recording, and authorization)
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derivative
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"financial instrument or other contract with:
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hedge
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defensive strategy designed to protect against risk of adverse price or interest rate movements
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control risk assessment considerations
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"1. 5 components of internal controls that the auditor is obligated to understand (control environment, risk assessment, information and communication system, control activities, monitoring)
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substantive tests of transactions of fixed assets
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usually employed to verify changes rather than audit entire ending balance
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audit procedures for valuation of fixed assets
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"1. review calculations for depreciation expense
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audit procedure for completeness of fixed assets
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review repairs and maintenance expense accounts to see if any should have been capitalized
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audit procedure for existence/occurrence of fixed assets
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"1. verify that detailed listing supports general ledger account
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audit procedures for rights, obligations, presentation and disclosure assertions
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"1. inquire about any fixed assets pledged as collateral
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audit procedures for existence/occurrence and valuation of accounts payable
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"1. compare general ledger control account to supporting detail of payables
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audit procedures for interest payable
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the auditor can compute an estimate of accrued interest for the time period involved, based on the interest rate (and payment dates) specified in the underlying debt agreements
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audit procedures for rights, obligations, presentation and disclosure of accounts payable
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inspect terms of payables and inquire about any related party transactions
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audit procedures for wages and salaries payable
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the auditor can compute the estimated acrual, in view of the number of days to be accrued relative to the whole pay period
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audit procedures for dividends payable
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the auditor can compute, in view of the declared dividends/share (per the minutes of the board meetings) times the number of shares outstanding
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audit procedures for completeness of accounts payable
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"1. review cash disbursements after year end for unrecorded liabilities
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audit procedures for completeness of long-term liabilities
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"1. verify due dates for payments in the loan agreements
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audit procedures for existence/occurrence of long-term liabilities
|
"1. obtain copies of new loan agreements for the audit documentation for the auditor's review
|
|
|
audit procedures for valuation assertion of long-term liabilities
|
"1. trace related cash receipts and disbursements
|
|
|
audit procedures for rights, obligations, presentation and disclosure of long-term liabilities
|
"1. disclose important debt covenant restrictions
|
|
|
audit procedures for valuation of stockholder's equity
|
"1. review cash recepts and disbursements for changes in stock accounts
|
|
|
audit procedures for completeness of stockholder's equity
|
"1. read board minutes
|
|
|
audit procedures for rights, obligations, presentation and disclosure of stockholder's equity
|
"1. review board minutes for transaction authorization
|
|
|
audit procedures for existence/occurrence of stockholder's equity
|
confirm outstanding shares of stock if extern registrar
|
|
|
audit procedures for valuation of stockholder's equity
|
"1. review cash receipts and disbursements for changes in stock accounts
|
|
|
audit procedures for existence and completeness
|
audit procedures for cutoff of payroll
|
|
|
audit procedures for completeness of payroll
|
"1. review time reports and time cards to verify support for production records
|
|
|
audit procedures for classification of payroll
|
"1. audit procedures for accuracy and occurrence
|
|
|
audit procedures for accuracy and existence of payroll
|
"1. examine personnel records on a test basis
|
|
|
detailed testing of payroll
|
usually perfrmed only when analytical procedures suggest risk of material misstatement relating to payroll exists
|
|
|
two general approaches to sampling
|
"1. statistical
|
|
|
sampling
|
application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class
|
|
|
type I error
|
"1. the risk of under-reliance on controls or incorrect rejection
|
|
|
non-sampling risk
|
any other mistakes by the auditor other than sampling risk not a direct consequence of using a sampling approach
|
|
|
type II error
|
"1. risk of over-reliance on controls or incorrect acceptance
|
|
|
sampling risk
|
the risk that the sample may not be truly representative of the population
|
|
|
two types of statistical sampling
|
"1. attributes sampling
|
|
|
attributes sampling results necessary for an auditor to rely ono the control
|
only if the error rate, based on the upper bound of the confidence interval is less than or equal to the stated 'tolerable error' rate
|
|
|
items considered in identifying the relevant population
|
"1. relevant time period
|
|
|
observed deviation rate
|
(# errors)/n
|
|
|
eight steps in attributes sampling plan
|
"1. identify sampling objective
|
|
|
haphazard sampling
|
arbitrary selection, with no 'conscious' biases
|
|
|
factors inversely related to sample size
|
"1. tolerable error rate
|
|
|
block sampling
|
a group of contiguous items
|
|
|
judgemental sampling approaches
|
"1. block
|
|
|
factors directly related to sample size
|
"1. expected error rate
|
|
|
systematic sampling
|
e.g. selecting every nth item
|
|
|
statistical sampling approaches
|
"1. random number
|
|
|
random number sampling
|
each transaction has the same probability of being selected
|
|
|
sampling techniques
|
"1. difference estimation
|
|
|
eight basic steps in variables sampling
|
"1. identify sampling objectives
|
|
|
basic sample size formula
|
sample size = (estimated population standard deviation x coefficient of reliability x number of items / allowance for sampling risk) squared
|
|
|
items inversely related to variables sample size
|
"1. allowance for sampling risk
|
|
|
two parameters of a normal distribution
|
"1. mean
|
|
|
results of stratification
|
reduces overall variability within a population
|
|
|
items directly related to variables sample size
|
"1. estimated population standard deviation
|
|
|
PPS
|
probability-proportional-to-size
|
|
|
check digit
|
a check digit is an arithmetic manipulation of a numerical field that captures the information content of that field and then gets 'tacked' onto the end of tht numerid field
|
|
|
five categories of general controls
|
"1. organization and operation
|
|
|
types of logic checks
|
"1. limit tests
|
|
|
validity checks
|
are the data recognized as legitimate possibilities
|
|
|
particular internal control considerations in an EDP environemtn
|
"1. segregation of duties may be undermined
|
|
|
built in controls for hardware and systems software
|
"1. parity check
|
|
|
application controls
|
related to the specific computer processing applications
|
|
|
objective of input application controls
|
that the input of data is accurate and as authorized
|
|
|
types of physical safeguards
|
"1. file labels
|
|
|
objective of processing application controls
|
that the processing of data is accurate and as authorized
|
|
|
EDP duties that should be segregated
|
"1. systems analyst
|
|
|
record count
|
keeping track of the number of records processed to determine that the appropriate number was accounted for
|
|
|
missing data checks
|
are there any ommissions from any fields in which data shuld have been present
|
|
|
limit tests
|
are the data all within some predetermined range
|
|
|
objective of output application controls
|
that the output of data (and the distribution of any related reports) is accurate and as authorized
|
|
|
types of control totals
|
"1. batch total
|
|
|
batch totals
|
total that actually mean something
|
|
|
general controls
|
controls that have pervasive effects on all the specific applications
|
|
|
hash total
|
totals that have no meaningful interpretation
|
|
|
characteristics of generalized audit software
|
"1. canned audit programs to access and test client's files
|
|
|
customized audit software
|
programs specifically written to access the files of a particular client
|
|
|
integrated test facility
|
create fictitious division or department within the client and process the 'dummy' data along with the client's 'live' data
|
|
|
test data procedures
|
"1. include known errors to see if computer catches them
|
|
|
tagging transactions
|
tagging specific client transactions and tracing them through the client's system
|
|
|
parallel simulation
|
processing the client's actual data on the auditor's software and then comparing auditor's output to client's output for agreement
|
|
|
real time processing
|
means that the data files are immediatellly updated
|
|
|
distributed systems
|
a network of remote computers connected to the man syste, allowing simple processing functions to be delegated to the employees at the remote sites
|
|
|
database system
|
a set of interconnected files that eliminates the redundancy associated with maintaining separate files for different subsets of the organization
|
|
|
service bureaus
|
independent computer centers engaged to process a client's transactional data
|
|
|
on-line processing
|
means that the user is in direct communication with the computer's central processing unit
|
|
|
limited reporting engagement - auditor access
|
access to information underlying basic financial statements must not be limited
|
|
|
limited reporting engagement- audit report
|
report refers only to specific financial statement audited
|
|
|
limited reporting engagement - audit procedures
|
auditor must be able to complete all procedures considered necessary
|
|
|
limited reporting engagement - scope
|
does not involve scope limitation; instead limited reporting objective
|
|
|
division of responsibility report - scope paragraph
|
includes sentence "we believe that our audits and the report of other auditors provide a reasonable basis for our opinion
|
|
|
division of responsibility
|
affects each paragraph of the auditor's report
|
|
|
division of responsbility report - other auditors referenced
|
referred to only as 'other auditors' not mentioned by name
|
|
|
division of responsibility report - areas audited by other auditors
|
areas of audit specifically mentioned in the introductory paragraph
|
|
|
division of responsibility report - when appropriate?
|
when impractical to review other auditor's work or when part audited by other CPA is material in relation to the whole
|
|
|
qualified for inadequate disclosure report - explanatory paragraph
|
additional paragraph describing omitted or inadequate disclosure and effects on financial position, results of operations and cash flows, if practicable, or indicating that information is not reasonably determinable
|
|
|
definition of inadequate disclosure
|
failure to present disclosures required by GAAP
|
|
|
effect of inadequate disclosure on audit report
|
report includes additional paragraph describing omitted or inadequate disclosure and modified wording in opinion paragraph
|
|
|
qualified for inadequate disclosure report - practicable
|
when information can be obtained from accounts and records without substantial increase in effort by auditor
|
|
|
qualified for inadequate disclosure report - auditor requirements
|
if practicable, auditor should present required information in audit report; it not practicable, audit can so indicate
|
|
|
qualified for omission of cash flows - requirement on audit report
|
additional paragraph noting omission of statement of cash flows and modification of opinion paragraph
|
|
|
qualified for omission of cash flows report - preparation of statement of cash flows
|
auditor is not required to prepare a missing statement of cash flows (or any missing financial statement)
|
|
|
qualified for omission of cash flows report - departure from GAAP
|
failure to include a statement of cash flows
|
|
|
qualified for accounting principles - effect on audit report
|
additional paragraph disclosing principal effects of GAAP departure, if practicable, or otherwise stating effects not reasonably determinable and modification of opinion paragraph
|
|
|
qualified for accounting principles report - explanatory paragraph
|
paragraph usually includes specific dollar amounts related to the GAAP departure, or may refer to a note to the financial statements where details are provided
|
|
|
qualified for accounting principles report - materiality
|
determination of qualified versus adverse opinion based on materiality of GAAP departure and related effects on financial position, results of operations, and cash flows
|
|
|
qualified for scope limitation - causes of scope limitation
|
client imposed or due to other circumstances
|
|
|
qualified for scope limitation report - opinion paragraph
|
paragraph includes direct reference to explanatory paragraph
|
|
|
qualified for scope limitation - explanatory paragraph
|
additional paragraph describing scope limitation
|
|
|
qualified for scope limitation - audit adjustments
|
unknown, as auditor was unable to perform all procedures considered necessary to audit the area and obtain the required audit evidence
|
|
|
qualified for scope limitation- effect on audit report
|
modified wording in scope and opinion paragraphs; additional paragraph to describe scope limitation
|
|
|
adverse opinion - effect on audit report
|
require additional paragraph to describe GAAP departure and modified wording in opinion paragraph
|
|
|
adverse opinion report - explanatory paragraph
|
paragraph should disclose all substantive reasons for adverse opinion and principal effects on financial position, results of operations, and cash flows, if practicable, or indicate not reasonably determinable
|
|
|
adverse opinion - materiality
|
amounts hihgly material or pervasive
|
|
|
adverse opinion report - scope limitation
|
cannot result in an adverse opinion
|
|
|
adverse opinion report - opinion paragraph
|
paragraph includes direct reference to explanatory paragraph
|
|
|
disclaimer of opinion report - explanatory paragraph
|
paragraph added to describe the substantive reasons for the disclaimer
|
|
|
disclaimer of opinion- effect on audit report
|
complete modification of all paragraphs in audit report
|
|
|
disclaimer of opinion report - introductory paragraph
|
paragraph changed to read 'we were engaged to audit" instead of 'we have audited'
|
|
|
disclaimer of opinion report- opinion paragraph
|
paragraph rewritten in full to indicate that no opinion is provided
|
|
|
disclaimer of opinion report- scope paragraph
|
paragraph deleted in full
|
|
|
prior year unqualified, current year qualified - during current audit
|
auditor must be alert for circumstances or events that affect the prior period financial statements
|
|
|
prior year unqualified, current year qualified - rules regarding comparative financial statements
|
no prohibition against issuing different reports on one or more comparative financial statements presented
|
|
|
prior year unqualified, current year qualified - update of prior period report
|
before reissuing audit report on prior period financial statements, auditor should consider whether report is still appropriate
|
|
|
different opinion than previously expressed - when does this occur?
|
during current audit, auditor becomes aware of circumstances or events that affect prior period financial statements causing previously issued audit report to change
|
|
|
different opinion than previously expressed - effect on audit report
|
auditor must disclose all substantive reasons for different opinion in explanatory paragraph which precedes opinion paragraph
|
|
|
different opinion than previously expressed report - explanatory paragraph
|
paragraph includes 1) date on prior audit report 2) type of opinion previously expressed 3) circumstances or events that caused opinion to change 4) statement that updated opinion differs from opinion previously expressed
|
|
|
predecessor's prior year report not presented - reasons for nonstandard report
|
description of nature of and reasons for the explanatory paragraph added to report or opinion qualification
|
|
|
report of predecessor auditor
|
report normally reissued by predecessor at the request of client when comparative financial statements presented
|
|
|
predecessor's prior year report not presented - restatement of prior period financial statements
|
if prior period financial statements restated, introductory paragraph of audit report must indicate that a predecessor auditor reported on the financial statements before restatement
|
|
|
predecessor's prior year report not presented - effect on audit report
|
successor auditor must indicate in introductory paragraph : 1) financial statements of prior period audited by another auditor 2) date of predecessor report 3) type of report issued by predecessor 4) if report not standard, reasons for a nonstandard report
|
|
|
reports on application of accounting principles - prohibition
|
cannot issue written report on application of accounting principles to hypothetical transaction
|
|
|
reports on application of accounting principles
|
"written report or verbal advice on:
|
|
|
reports on application of accounting principles - performance standards
|
requires due professional care, adequate technical training and proficiency, planning, supervision, and accumulation of sufficient information to support judgement
|
|
|
reports on application of accounting principles - considerations
|
1) circumstances under which report or advice requested 2) purpose of request 3) intended use of report or advice
|
|
|
reports on application of accounting principles - addressee
|
report addressed to principal(s) to transaction or to their representatives
|
|
|
report contents for reports on application of accounting principles
|
"1. describe the nature of engagement and refer to the applicable AICPA standards
|
|
|
procedures on reporting on application of accounting principles
|
"1. obtain an understanding of the form and substance of the transaction
|
|
|
reports on financial statements prepared under a comprehensive basis other than GAAP
|
"1. introduction - standard
|
|
|
reporting on financial information presented in prescribed forms or schedules
|
auditor should edit the form appropriately or refer to (and attach) a separate report
|
|
|
reporting on special-purpose financial presentations
|
"report consists of the following:
|
|
|
reporting on compliance with contractual agreements related to audited financial statements
|
"1. state that financial statements were audited
|
|
|
reporting on specified elements, accounts, or financial statement items when such elements have been audited
|
"1. introduction -- identify elements audited
|
|
|
user auditor procedures if substantive procedures performed by service auditors
|
"1. inquire about the service auditor's professional reputation
|
|
|
service auditor procedures
|
"1. inquiry
|
|
|
independence requirement for service auditors
|
must be independent of service organization, but not necessarily independent of all user organizations
|
|
|
when a user auditor may assess control risk at less than the maximum
|
"1. when the service auditor has performed tests of effectiveness for specified objectives
|
|
|
user auditor
|
the auditor whose client has out-sourced the processing of its transactions to the service organization for whom such processing may be more efficient
|
|
|
service auditor
|
the auditor who issues a report on the adequacy of internal control at the service organization
|
|
|
purpose of reports on the adequacy of the design of internal control
|
"to obtain reasonable assurance that controls are:
|
|
|
two types of service auditor reports on internal control
|
"1. on the adequacy of design of internal control
|
|
|
requirement for reporting on the effectiveness of internal control
|
tests of controls
|
|
|
form and content of comfort letters
|
"1. accountants must be independent
|
|
|
comfort letter comments on previously audited financial statements
|
give positive assurance (opinion) as to whether the audited financial statements comply with the form and content required by the SEC
|
|
|
references to tables, statistics, and other financial information in comfort letters
|
can only comment if such matters are related to accounting matters
|
|
|
reference to unaudited, condensed, capsule or forecast information
|
"1. give negative assurance with respect to this information
|
|
|
reference to certain non-financial statement information
|
can give negative assurance (usually not audited)
|
|
|
GAS factors to consider in evaluating results of compliance
|
"1. frequency of non-compliance identified
|
|
|
single audit requirements
|
"1. a single coordinated audit of the aggregate federal financial assistance provided to a government entity
|
|
|
single audit act of 1984
|
requires state and local government entities receiving federal assistance aggregating at lease $500K in a fiscal year to be audited according to the Act
|
|
|
review reporting requirements
|
"1. identify the financial statements involved; indicate that the review followed the standards of the AICPA; and point out management's responsibility
|
|
|
compilation reporting requirements
|
"1. identify the financial statements involved; indicate that the compilation followed the standards of the AICPA
|
|
|
compilations
|
presenting the client's information in financial statement form, without providing any level of assurance on it
|
|
|
reviews
|
performing limited procedures (especially inquiry and analytical procedures) as a basis for expressing limited (or negative) assurance on the financial statements
|
|
|
review procedures
|
"1. read statements for consistency with GAAP
|
|
|
compilation procedures
|
read the compiled financial statements; and consider whether their format is appropriate and whether any obvious material errors exist
|
|
|
statements not titled properly
|
if the auditor believes that the statements are not titled appropriately, the opinion should be qualified
|
|
|
cash basis
|
an accepted type of comprehensive basis of accounting other than GAAP
|
|
|
report title
|
must include the word 'independent' unless not independent
|
|
|
names of statements
|
not allowed to use terms such as balance sheet, statement of financial position, statement of operations, and statement of cash flows as those imply GAAP
|
|
|
explanatory paragraph
|
identifies basis of presentation and notes that the basis is a comprehensive basis other than GAAP
|
|
|
report reservations
|
disclose any reservations in explanatory paragraph preceding the opinion paragraph
|
|
|
report distribution
|
if presented to comply with a contract or other agreement, restrict distribution to contracting parties
|
|
|
type of engagement
|
an engagement to report on an element, accont, or item of financial statement can be a separate engagaement or in conjunction with audit of financial statements
|
|
|
report requirement
|
if specified item is based on net income, must have audited complete financial statements
|
|
|
aplicability of GAAS
|
all except for 4th reporting standard - opinion on financial statements as a whole does not apply
|
|
|
auditor communication requirements
|
auditor must communicate if entity subject to additional laws and regulations beyond those specified in engagement
|
|
|
GAAS versus government auditing standards
|
government auditing standards have additional/expanded fieldwork and reporting requirements
|
|
|
additional reporting requirements relating to audits of government entities
|
audits of governmental entities require reporting on compliance with laws and regulations having a material, direct effect on the financial statements
|
|
|
governmental auditing standards
|
portiong of the GAO's yellow book dealing with financial audit standards
|
|
|
applicable standards
|
statements on standards for accounting and review services (SSARS)
|
|
|
known GAAP departures
|
must be described in separate paragraph with modification of report to refer to GAAP departures
|
|
|
inquiries of management
|
inquiries include queries about internal control considerations, changes in business activities and accounting practices, litigation, and other risks and uncertainties
|
|
|
requirement regarding representation letter
|
required
|
|
|
requirements regarding review of financial statements
|
each page of financial statements clearly marked 'see accountant's review report'
|
|
|
understanding with client
|
report addresses type and limitations of services to be provided and report expected to be issued, preferably in written engagement letter
|
|
|
is independence required?
|
Yes
|
|
|
general use- report distribution
|
report distribution not restricted
|
|
|
is independence required?
|
No
|
|
|
restricted use- report distribution
|
report distribution restricted to specified parties
|
|
|
compilation of financial statements - requirement
|
each page of financial statements clearly marked 'see accountant's compilation report'
|
|
|
known GAAP departures
|
must be described in separate paragraph but not required to quantity effects
|
|
|
first general attestation standard
|
technical training in the attest function
|
|
|
third general attestation standard
|
reason to believe -- that the assertion can be evaluated by reasonable criteria and is capable of reasonably consistent measurement
|
|
|
types of attestation engagements
|
"1. examinations
|
|
|
third attestation standard of reporting
|
reservations about engagement or assertion
|
|
|
review
|
negative assurance and, therefore, a moderate level of 'attestation risk'
|
|
|
second general attestation standard
|
knowledge in the subject matter of assertion
|
|
|
fourth general attestation standard
|
independence
|
|
|
second attestation standard of field work
|
sufficient evidence for conclusions
|
|
|
first attestation standard of field work
|
adequate planning and supervision
|
|
|
examination
|
a positive expression of opinion and, therefore, a low level of 'attestation risk'
|
|
|
attest engagement
|
issuing a written communication that expxresses a conclusion about the reliability of a written assertion that is the responsibility of another party
|
|
|
first attestation standard of reporting
|
nature of engagement
|
|
|
second attestation standard of reporting
|
conclusions
|
|
|
fifth general attestation standard
|
due professional care
|
|
|
agreed-upon procedures
|
where the client participates in specifying the criteria by which the reliability of the assertion will be evaluated or in specifying the specific procedures to be applied to gather evidence
|
|
|
fourth attestation standard of reporting
|
limited use
|
|
|
forecast
|
Represents the predicted financial statement outcome
|
|
|
projection
|
Represents the expected financial statement outcome based on certain specified hypothetical assumptions
|
|
|
reporting on compilations of prospective financial statements
|
"1. identify information examined
|
|
|
reporting on prospective financial statements
|
"1. Identify information examined
|
|
|
Type of Prospective Financial Statement for which an Examination Report Can Have General Distribution
|
forecast
|
|
|
two types of prospective financial statements
|
forecasts and projections
|
|
|
pro forma financial information
|
shows the significant effects on historical financial information that might have resulted from a transaction consummated after the balance sheet date
|
|
|
examination report - paragraphs
|
"4 paragraphs
|
|
|
procedures in pro forma engagements
|
"1. obtain an understanding of the transaction
|
|
|
required conditions for reporting on pro forma financial information
|
"1. the document containing the pro forma information includes or references the complete historical financial statements
|
|
|
two types of engagements related to pro forma information
|
"1. examinaton
|
|
|
consequence of material non-compliance
|
qualified or adverse opinion
|
|
|
representations in compliance attestation
|
must obtain management's written representations letter as evidential matter
|
|
|
two types of engagements related to compliance attestation
|
"1. examination
|
|
|
applicability
|
when reporting on compliance with requirements of laws, regulations, or contracts or effectiveness of internal controls related to such compliance
|
|
|
distribution of reports on internal control representations
|
general or restricted
|
|
|
standard unqualified report on internal control representations
|
"1. introduction -- identify management's assertion
|
|
|
phases of an examination of itnernal control representations
|
"1. planning considerations
|
|
|
reasons for modifying report on internal control representations
|
"1. material weakness
|
|
|
scope paragraph, explanatory paragraph
|
paragraph consisting of three sentences each
|
|
|
opinion paragraph
|
consists of one long sentence
|
|
|
the underlying information, assumptions, etc., that provide a reasonable basis for the disclosures within the MD&A
|
basis for conclusions
|
|
|
four assertions implicitly embodied in the MD&A presentation
|
occurrence, consistency with the financials, completeness of the explanation, presentation and disclosures
|
|
|
date of completion of the examination procedures
|
report date
|
|
|
report consisting of four paragraphs
|
standard examination report
|
|
|
MD&A
|
attesting to management's discussion and analysis
|
|
|
focus of assurance services
|
may address relevance of information in additional to reliability of information
|
|
|
not limited to financial statements
|
attestation
|
|
|
prime plus services
|
formerly eldercare services; address needs of aging persons
|
|
|
The AICPA's assurance service regarding systems reliability
|
SysTrust
|
|
|
Independent professional services that improve the quality or context of information for decision makers
|
assurance services
|
|
|
document limited to presenting in the form of a forecast information that is the representation of management and does not include evaluation of the support for the assumptions underlying the forecast
|
a compilation report
|
|
|
PCAOB sanctions
|
range from revocation of firm registration or barring persons from participating in audits of public companies to monetary penalties or remedial measures
|
|
|
self-regulation of accounting profession
|
practice ended by Sarbanes-Oxley Act
|
|
|
directed to conduct a continuous program of inspection that assess compliance with SOA, PCAOB rules, SEC rules, and applicable professional standards
|
PCAOB
|
|
|
SAG
|
Standing Advisory Group
|
|
|
registration and annual fees from public accounting firms
|
PCAOB's budget is funded by
|
|
|
standard setting responsibilities of PCAOB
|
auditing and related attestation, quality control, ethics and independence standards
|
|
|
enacted by Congress in response to a series of highly visible financial reporting frauds and audit failures
|
Sarbanes-Oxley Act of 2002
|
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firms are required to add their city and state (or country, as applicable)
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required addition to firm's signature on audit report
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references in auditor's report to the standards of the PCAOB
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auditing standard no. 1
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opinion paragraph reference change - accounting principles
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Changed wording to : US generally accepted accounting principles
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interim standards adopted by PCAOB
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range from revocation of firm registration or barring persons from participating in audits of public companies to monetary penalties or remedial measures
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title of report - required change
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changed to: report of independent registered public accounting firm
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audit documentation
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auditing standard no. 3
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date when the auditor grants permission to use the auditor's report in connection with the issuance of the company's financial statements
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report release date
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numbers of years audit documentation must be retained
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7 years from the report release date
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45 days after the report release date
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documentation completion date
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components of significant findings or issues
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"includes
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the written record of the basis for the auditor's conclusions that provides the support for the auditor's representations
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audit documentation
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actions required when significant findings or issues are present
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must be documented along with actions taken to address them and basis for conclusions reached
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reporting on whether a previously reported material weakness continues to exist
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auditing standard no. 4
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conditions for engagement performance
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"1. management acceptance of responsibility for internal control over financial reporting
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the specific control objective identified by management
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stated control objective
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elements of testing operating effectiveness
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inquiry, observation, inspection, re-performance
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walkthrough
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following a transaction from origination through the company's processes until reflected in the financial records
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operating effectiveness
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the control is working as designed and the person performing the control has the necessary authority and qualificataions to perform the control effectively
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action required by auditor when material weakness exists
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express and adverse opinion
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elements of testing design effectiveness
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inquiry, observation, inspection
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auditing standard no. 5
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an audit of internal control over financial reporting that is integrated with an audit of financial statements
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applicability of standard
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when engaged to 'perform an audit of management's assessment of the effectiveness of internal control over financial reporting'; the objective of such an engagement is to express an opinion on the effectiveness of ICFR
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top down approach
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begins at the financial statement level and works down to significant accounts and disclosures and assertions
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communication requirements
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all material weaknesses, significant deficiencies, and control deficiencies must be reported in writing to the management and/or the audit committee
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definition of material weakness
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a deficiency, or combination of deficiencies, in internal control over financial reporting, that creates a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis
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controls that often have a pervasive effect
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company level controls
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Significant deficiency
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a deficiency, or combination of deficiencies, in ICFR that is less severe than a material weakness, yet impportant enough to merit attention by those responsible for oversight of the company's financial reporting system
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control deficiency
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when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis
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distinction between responsibilities of auditor and management
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"1. financial statements are responsibility of management
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is required to comply with an unconditional requirement when the circumstances exist to which the unconditional requirement applies
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the auditor (practitioner)
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identified by the terms "may," "might," or "could"
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explanatory material
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first standard of reporting
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the auditor must stte in the auditor's report whether the financial statements are presented in accordance with GAAP
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fourth standard of reporting
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The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor's report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor's report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report.
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first general standard
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the auditor must have adequate technical training and proficiency to perform the audit
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first standard of fieldwork
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the auditor must adequately plan the work and must properly supervise any assistants
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second standard of fieldwork
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The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to fraud or error, and to design the nature, timing, and extent of further audit procedures
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second standard of reporting
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the auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period
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third standard of fieldwork
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the auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit
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third general standard
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the auditor must exercise due professional care in the performance of the audit and the preparation of the report
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second general standard
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the auditor must maintain independence in mental attitude in all matters relating to the audit
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third standard of reporting
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when the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor's report
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required by rule 202 of the rules of conduct of the AICPA code of professional conduct
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compliance with GAAS
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relate to the conduct of a firm's practice as a whole
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quality control standards
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relate to the conduct of individual audit engagements
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GAAS
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the nature of the general standards is:
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personal
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the expression of an opinion on the financial statements
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the objective of the audit
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provide assurance on internal control or to identify significant deficiencies
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an audit is not designed to…
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bears responsibility for compliance with applicable laws and regulations affecting the entity
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management
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bears responsibility for the entity's financial statements and the selection/application of accounting principles
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management
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factors to consider in moving substantive tests to interim
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"1. planned reliance on internal control
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types of interim work
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"1. planning activities
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a matter of professional judgement - may include narrative descriptions, questionnaires, checklists, and flowcharts
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form of documentation
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components of internal control
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control environment, risk assessment, information and communication systems, monitoring, control activities
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basic responsibilities of the auditor
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identity and assess the risks of material misstatement at the financial statement level and at the relevant assertion level related to classes of transactions, account balances, and disclosures
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needed to determine the extent of the required understanding of the entity and its environment
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professional judgment
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who initiates predecessor-successor communications?
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the successor
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successor auditor's actions when predecessor has reported on misstated financial statements
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successor should ask the client to inform the predecessor of the situation and try to arrange a meeting with the three parties involved for resolution
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required topics in predecessor-successor communications
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"1. matters bearing on the integrity of management
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requirements of predecessor-successor communications
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"1. written or verbal
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roles of auditors 're-audting' financial statements
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"1. 're-auditors' are successor auditors
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optional predecessor-successor communications
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"1. successor should usually request client to authorize access to predecessor's audit documentation
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documentation of fraud risk
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"1. in planning document performance of the assessment of the risk of material misstatement due to fraud
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fraud for which auditor must specifically assess risk
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"1. fraudulent financial reporting
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when auditor can disclose illegal acts to outside parties
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"1. in conjuction with a change in auditors
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audit procedures when there is evidence of illegal acts
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"1. obtain an understanding of the nature of the act, the circumstances surrounding it, and the effects on the financial statements
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audit procedures when no evidence of illegal acts
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"1. make inquiries of management about compliance with laws and regulations
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auditor's responsibilities concerning illegal acts
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"1. consider the effects on the financial statements
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