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51 Cards in this Set
- Front
- Back
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Reduce information risk |
–Potential inaccurate financial statements –Lending or investing decisions –Remove bias and motives |
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Goals of providers differ from those of users |
–Creditors –Investors |
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“Attest” |
provide independent assurance that financial information is reliable |
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AICPA definition |
A practitioner is engaged to issue or issues a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party |
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Personal qualities required of CPA |
–Judgment exercised –Quality of audit work –Audit engagement performance |
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Standards of Field Work |
•Adequately planned and properly supervised •Sufficient understanding of entity & environment, including internal controls •Sufficient, appropriate evidence |
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Materiality |
•Sufficiently important to influence decisions made by reasonable users of financial statements •Professional judgment •Adequate informative disclosure |
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Six Elements of Quality Control |
–Leadership responsibilities –Relevant ethical requirements –Client acceptance & continuance –Human resources –Engagement performance –Monitoring |
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PCAOB Inspections |
•Mandatory for PCAOB registered firms •Applicable to public audits •Every three years (if audit less than 100 issuers) •Every year otherwise (if audit more than 100 issuers) •Performed by the PCAOB •Review and testing of Quality Control Policies and Professional Standards •Review work papers and reports of selected engagements •Review administrative and personnel records •Interview firm personnel •Determine corrective actions •Inspection report (final version is available to the public) •Follow-up and resolutions |
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Auditor’s Standard Report |
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Title |
Must include "independent" |
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Address |
–Company –Board or Audit Committee |
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Introductory paragraph |
–Performed audit of financial statements –Entity that was audited –Financial statements & periods covered |
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Management’s Responsibility |
Proper preparation and presentation of financial statements |
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Auditor’s Responsibility |
–Done under US GAAS or PCAOB standards –Free of material misstatement –Scope and nature of the audit –Consider relevant internal controls –Sufficient evidence to support our opinion |
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Expression of an Opinion |
Types of Opinions: •Unmodified/Clean – Standard •Unmodified with Emphasis of Matter Explanatory Paragraph or Modified Wording •Modified (except for) •Adverse •Disclaimer |
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Separate Reports on Internal Controls—Sect. 404 (Page 53) |
•Effectiveness of internal control over financial reporting •6 paragraphs required for unmodified report •Opinion –Effectiveness of internal controls •Option of combined reports •Reference to audit of financial statements |
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Explanatory Language or Modified Reports (Page 54 - 58) |
Explanatory Language/Emphasis of matter paragraph required -No loss of quality -Does not “dirty” otherwise clean opinion -Still unmodified -Draws attention Causes -Lack of consistent application of GAAP -Substantial doubt about going concern -Agree with departure from GAAP -Emphasis of other matters -Other auditors involved (results in modified language, not separate paragraph) |
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Types of Explanatory Language (Page 55) |
-Lack of consistent application of GAAP -Consistency vs. Comparability -Inconsistency -Disclose change -Effects on financial statements -Keep unmodified if: -New principle is GAAP -Management justification for change is reasonable |
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Types of Explanatory Language (Page 56) |
“Going Concern” Indicators: –Recurring operating losses –Negative cash flows –Defaults on loan agreements –Legal proceedings –Work stoppages –Adverse financial ratios/trends |
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Emphasis of a matter |
–Related-party transactions described in a note to F/S –Significant subsequent events –Company is component of larger business enterprise –Comparability issues other than changes in principle –Risk of uncertainty (resolution of matter at future date - loss contingency) |
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Part of Audit Performed by Other Auditors (Page 57 - 58) |
•Make no reference to other auditors –Principal auditor accepts work as own •Make reference (shared opinion) –Other paragraphs are modified |
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Modified (Qualified) Opinions |
Overall f/s are fairly stated Results from: Scope limitation GAAP Departure Auditor is not independent Basis for Modified Opinion paragraph comes before qual. opinion paragraph Opinion = “except for” –Reasons –Materiality of exception “Significant enough to warrant mention, but not significant enough to necessitate adverse opinion” |
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Departures from GAAP (Modified vs. Adverse) (Pages 64 & 65) |
•Immaterial (Unmodified) •Material (Modified or Adverse) –Materiality/ Pervasiveness –Misleading •Modified –Material departure, not pervasive –Does not otherwise overshadow overall fairness of f/s •Adverse –Material departure AND pervasive –Misleading, overshadows overall fairness of f/s5 |
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What is the product of the CPA? |
•Product of CPA = Credibility •Public has positive view of attest function •Public relies on our work •Confidence enhancements –Peer review –SEC & PCAOB –Legal liability |
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Independence |
•In fact and appearance •Attest –Audits –Reviews –Examinations of forecasts –Agreed-upon procedures |
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Prohibited Services |
–Bookkeeping –Financial information systems –Appraisal & valuation –Actuarial –Internal audit outsourcing –Management and human resources –Broker dealer/investment banker –Legal & expert –Other |
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Prudent person concept: |
Standard of due care (auditor is not expected to be perfect). |
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Negligence: |
Failure to exercise degree of care that ordinary prudent person would exercise under similar circumstances (follow GAAS). |
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Gross negligence: |
Lack of even slight care - reckless disregard for truth and professional responsibilities |
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Constructive fraud: |
Extreme or unusual negligence even though no intent to deceive. |
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Fraud: |
Misrepresentation of material fact, known to be untrue with intention of deceit, other party was injured based upon reliance. |
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Privity: |
Individual or entity in which an auditor is in contract (client and parties explicitly identified in EL) |
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Third Party Beneficiary: |
Party outside contracting party benefiting under contract (bank getting report) |
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Engagement Letter: |
Contract communicating relationship and services, time frames, fees, responsibilities, etc. Establishes what the firm has a duty to perform (best defense). |
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Proximate cause: |
The reason a loss was incurred |
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What should the auditor do if they believe they have discovered an illegal act? |
–First – obtain an understanding of the nature and circumstances of the act. –Then obtain additional information to evaluate the possible effects on the financial statements. –Discuss the matter with management at a level above those involved with the suspected noncompliance – and, when appropriate, those charged with governance. |
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International Auditing Standards and AICPA Auditing Standards classify assertions into 3 categories: |
–1. Assertions about classes of transactions and events for the period under audit. –2. Assertions about account balances at period end. –3. Assertions about presentation and disclosure. |
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Financial Statement Assertions |
•Existence or Occurrence •Completeness •Valuation/Allocation– Gross & Net–Accuracy•Cutoff •Rights & Obligations •Presentation & Disclosure |
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Existence or Occurrence |
Is it really there? Did it happen? Direction: FS GL Source documents |
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Completeness |
•Did all items get recorded? (Expenses) •Are all liabilities presented? –Direction: Source documents GL FS |
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Valuation - Gross |
•Is it really valued correctly? •Historical cost principle (GAAP) •Classification –S-T/L-T –Current/noncurrent –Operating/non-operating |
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Valuation - Net |
•Is it really worth what they say it is? •NRV, LCM •Impaired? The Company says goodwill has sustainable value.Does it? |
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Valuation - Net |
•Collectability •Allowance—Accounting estimates –Bad debts –Inventory obsolescence |
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Valuation - Accuracy |
•Are quantities accurate? •Are prices or costs accurate? •Are extended values correct? •Footing errors? |
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Cutoff |
•Are all items for the period end included? •Are there out of period items included? •Did the records “cut-off” at 12:00 midnight exactly on Dec 31, 2014? |
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Rights & Obligations |
•Does the Company have the rights to the assets? •Does the Company have an obligation for a liability not presented? |
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Rights & Obligations |
•Is there an unrecorded liability? – Commitment – Agreement/Arrangement – Guarantee •The Company claims the rights to a whole warehouse of inventory Do they have the rights? – Consignment? The Company has entered into a purchase commitment with a vendor. What is the extent of the obligation? |
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Presentation & Disclosure |
•Adequacy of disclosure •Per GAAP •Classification of accounts |
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Analytical Procedures |
evaluations of of financial information through analysis of plausible relationships among financial and nonfinancial data. |
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Tests of Details |
specific procedures designed to test for monetary misstatements in the balances in the financial statements. |
