Audit Acct 4400 Unt Dr. Roberston Exam 1 Ch 1-3, 5, 19,20

Front 1

Auditing

Back 1

Analytical and logical skills
More conceptual
Test assertions
Professional judgment

Front 2

Why Have an Audit?

Back 2

Public Company
- Required by SEC and SOXs
-Protect the public
ie. Investors, creditors, regulators, general public or any others.

If private company you would want an audit
-evaluate internal controls
-if you want a loan(creditors)
-gives you creditbility

Main Reasons:

-Shareholders
-Others ( crditors, underwriters, analysts)
-External Auditor
-Internally (BOD& AC, Mgmt, IA, Emps)

remember example of Home Inspector, Vehicle History Report, and Credit Check

Front 3

Auditor gather what?

Back 3

evidence to evaluate fairness of agent's financial reports.

Front 4

Auditor issue what?

Back 4

opinions to accompnay agent's financial reports, adding credibility to the reports and reducing principal's information risk.

Front 5

Why do agents(client or managers) hire auditors?

Back 5

To report on the fairness of agent's financial reports. (OPINION)

Front 6

Agents pay auditor to do what?

Back 6

To reduce principal information risk.

Front 7

In theory what are auditors?

Back 7

Independent

Front 8

How does the financial reports effect you?

Back 8

Indirectly-The Economy

Front 9

Principal(Absentee Owner) do what?

Back 9

Hire agent to manage resources.

Front 10

What are the risks of a principal?

Back 10

Information asymmetry and conflicts of interest lead to information risk for the principal.

Front 11

Auditing

Back 11

OBTAIN AND EVALUATE EVIDENCE REGARDING A ISSUE


A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users

Front 12

Attest

Back 12

ISSUE REPORT
BROADER THAN A AUDIT
MORE OR LESS A REVIEW(A SCALE DOWN VERSION OF A AUDIT)



Attest services occur when a practitioner is engaged to issue...a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.

Front 13

Assurance Services

Back 13

-IMPROVE QUALITY OF INFORMATION

-Which improves someones decision making.

-Audit is a form of Assurance.

-Review is also a Assurance and Attest


Independent professional services that improve the quality of information, or its context, for decision makers.

Front 14

Auditing Services
consist of what?

Back 14

Auditing
Attest
Assurance Services

Front 15

In deeper Attest services consist of what?

Back 15

(Attest) Audit
- positive assurance (conform to GAAP
-more in depth
-no material problems and confident there are no problems

(Attest) Review
-Report on subject matter
-negative assurance(simply state that you didn't see any problems
-not aware of material problems but no guarantee.

Front 16

Assurance also

Back 16

Encompasses both Attest and Auditing

Front 17

Attest also

Back 17

Encompasses Auditing

Front 18

Audit risk

Back 18

not finding the mistake and there is a material mistake and saying it is okay.

Front 19

Reasonable assurance

Back 19

very high assurance 90% and above, but not 100%.

Front 20

Materiality

Back 20

is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy. The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in conformity with an identified financial reporting framework such as Generally Accepted Accounting Principles (GAAP). The assessment of what is material is a matter of professional judgment.

Front 21

Evidentce

Back 21

-How we validate the assertations
-Also Relevant to the test performed
-And evidence has to tbe reliable

Front 22

Sampling

Back 22

Subset of a population

-The larger the sample the higher the level of assurance the more level of assurance you need a higher sample

Front 23

As you move (Reduce) materiality threshold down you..

(In the case of a riskier client)

Back 23

Increase the population.
(You want smaller increases of errors.)

Front 24

The Audit Process consists of

Back 24

1. Accept Client
2. Plan ( What kind of Test, Materiality, Time constraints)
3.Obtain Evidence
4. Evaluate Evidence
5. Opinion

Front 25

Why not accept some clients?

Back 25

Because they could be riskier and harm the reputation of the audit firm.
Other ways they harm audit firms are through auditor incentives(making money, hurring audit due to budget)

Taking on riskier clients can hurt audit quality

Front 26

Does the client have a choice among auditors?

Back 26

Yes.

-Historical (Reputation)
-Sole proprietor can't have stock in their company
-Opinion shopping try to find a opinion that they want when they switch auditors

Front 27

Opinion shopping

Back 27

trying to find a opinion that they want when they switch auditors

Front 28

Tolerable mistatement

Back 28

amount of materality allocated to differnent accounts
ie cash accounts, A/R

Some accunts have higher materiality

ex. 5% of net income
100k some went in cash account and some in allowance of accural
cash isn't a risky account-2500
Allowance of accural - has a higher level of materiality

Front 29

The Audit Report (Opinion)

Back 29

1. Introductory Paragraphy
2.Scope Paragraph
3. Opinion Paragraph
4. Control Paragraph

Front 30

Introductory Paragraph

Back 30

Introduction

Front 31

Scope Paragraph

Back 31

-Standards used (Public Company Accountings Oversight Board)
-Purpose of Audit- reasonable assurance of about if Financial Statement are free from material mistakes. Clearly state client management financial statement responsibility and auditiors responsibility.
-Sample of Evidence
-Asset to support opinion

Front 32

Opinion Paragraph (POSITIVE AND REASONABLE)

Back 32

-Opinion itself
-Financial Accounting Standard (GAAP) COULD BE ifrs BUT MUST BE REFERENCED

Front 33

Control Paragraph

Back 33

Frame work to evalutate their controls.
Committee of Sponsoring Organization (COSO)
unqualified opinion

Front 34

Audit Opinions

Back 34

Unqualified
Qualified
Adverse
Disclaimer


PCAOB qualifies the audit firms.

Who qualifies for Private audit firms

answer: Peer review
ie. Deliotte gets a auditor from KPMG to give them an opinion

Front 35

Unqualified

Back 35

-clean, no material mistakes, might be errors but not material.
Not qualifying it with anything.

Front 36

Qualified

Back 36

Are material mistatements that are limited to a small number of accounts, (limited) "except for" (everything except for)

Front 37

Adverse

Back 37

-pervasive material mistatements or through out the financial state problems all over the place

Front 38

Disclaimer

Back 38

-must issue a report, withdrawing from the engagement .
-Because you are not independent from client can't obtain enough information (evidence) to make an opinion.
ie. Business in another country
-scope limitation

Front 39

Audit Objective:

Back 39

Provide reasonable assurance that the client’s financial statements are free of material misstatements.

Front 40

Why Have an Audit:

Back 40

• Protect users of financial information (e.g., investors; creditors)
o Reduce information asymmetry between principals and agents
• Legal reasons such as SOX
• Lend credibility to the financial statements

Front 41

4 Overall Phases:

Back 41

1. Planning
2. Evidence collection
3. Evidence evaluation
4. Form and report opinion

Front 42

Detailed Process, with Professional Skepticism throughout:

Back 42

1. Identify client assertions (Planning)
2. Consider risks, including risk of material misstatement (Planning)
3. Establish audit objectives (Planning)
4. Test controls (Evidence collection & evaluation)
5. Substantive testing: transactions, account balances (Evidence collection & evaluation)
6. Form and report opinion

Front 43

Assertions are

Back 43

Explicit, implicit, accurancy, presentation and disclosure
ie. long term; shor term assets

Front 44

Risk

Back 44

Uncertainty
1. Don't conform to GAAP and
2.We miss something

Front 45

Professional Skepticism

Back 45

disbelief not accepting at face value.
Chance people are higing something.

Front 46

Have to comply with all TEN GAAS

Back 46

If you violate one you violate all due to due professional care.

Assertions about classes of transactions and events for the period under audit:
• Occurrence-transactions and events that have been recorded have occurred and pertain to the entity.
• Completeness-all transactions and events that should have been recorded have been recorded.
• Authorization-all transactions and events have been properly authorized.*
• Accuracy-amounts and other data relating to recorded transactions and events have been recorded appropriately.
• Cutoff-transactions and events have been recorded in the correct accounting period,
• Classification-transactions and events have been recorded in the proper accounts.
Assertions about account balances at the period end:
• Existence-assets, liabilities, and equity interests exist.
• Rights and obligations-the entity holds or controls the rights to assets, and liabilities are the obligations of the entity.
• Completeness-all assets, liabilities, and equity interests that should have been recorded have been recorded.
• Valuation and allocation-assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded.
Assertions about presentation and disclosure:
• Occurrence and rights and obligations-disclosed events, transactions, and other matters have occurred and pertain to the entity.
• Completeness-all disclosures that should have been included in the financial statements have been included.
• Classification and understandability-financial information is appropriately presented and described, and disclosures are clearly expressed.
• Accuracy and valuation-financial and other information are disclosed fairly and at appropriate amounts.
'International and AICPA auditing standards consider Authorization to be a subset of the Occurrence assertion and thus do not list it separately

Front 47

Basic Concepts of Auditing

Back 47

Assertions

Risk

Materiality

Professional
Skepticism

Evidence

Front 48

The Audit Process

Back 48

Pre-engagement activities (client acceptance

1. ID client assertions
2. Consider risk of material misstatement (RMM)
3. Establish audit objectives
4. Consider reliance on client internal controls
(tests of controls - evidence)
5. Determine nature, timing, & extent of testing
(substantive testing - evidence)
6. Form and report our opinion

Professional skepticism throughout

Front 49

Audit Objectives

Back 49

Validity
Completeness
Cutoff
Accuracy
Ownership
Valuation
Classification
Disclosure

Front 50

Existence or occurrence

Back 50

assets & liabilities exist and
recorded transactions occurred.

Front 51

Completeness

Back 51

all transactions and accounts that
should have been recorded in the F/St were recorded

Front 52

Rights & Obligations

Back 52

- assets are actually rights of the
client and liabilities are truly obligations of the entity

Front 53

Valuation or Allocation

Back 53

assets, liabilities, revenues,
and expenses are appropriately valued and allocated to
the proper accounting period.

Front 54

Presentation and Disclosure

Back 54

F/St components
are properly presented and disclosed in conformity
with GAAP.

Front 55

What did SOX do?

Back 55

1. SOX stated audit can also do tax but no other services companies. Do other services is a conflict of interest.

SOX REQUIRED CEO TO SIGN OFF ON THE FINANCIAL STATEMENTS.

2. Increased responibility of CEO and CFO
3. Requires Audit within a company 404 Audit (Section Number)

Front 56

What is banned?

Relative to SOX

Back 56

We need to find out. ( )
SOX banned non -audited services.

Front 57

SOX requires more communication between

Back 57

Audit Committee ( on Board of Directors and the Audit Firm)

Front 58

Why should there be more communication between the Audit Committee and the Audit Firm ?

Back 58

This gives auditor direct line overseers of company and an extra line to report problems not just CEO and CFO.

Front 59

SOX

Back 59

-Mandatory Audit Partner Rotation
-But did NOT mandate Audit Company rotation
-SOX created the PCAOB.

Front 60

PCAOB

Back 60

is a private company that reports the SEC.

Front 61

The client’s industry affects the auditor

Back 61

Bussiness different for non-profit . Have to determine how to keep expenses low.

Front 62

Audit concern for a Hardware manufacturer?

Back 62

Cost Accounting Issue. Staging of Inventory

Front 63

Audit concern for a Jewelry store?

Back 63

What kind of controls to prevent theft.
-Hve expensive items.

Front 64

Audit concern for a Bank?

Back 64

Cash , A/R, Notes, Loans, Montoring; Sufficient Allowance, For Accounts they cant collect

Front 65

Audit concern for a University?

Back 65

How can we use this budget amounts on keep funding.

Front 66

What are the corporate governance

Back 66

Board of Directors & the Audit Committee

Front 67

Client exist to

Back 67

deliver value to shareholders

Front 68

Auditing involves much more than transactions, what are some other issues?

Back 68

-Consider client objectives and processes
-Remember audit risk?

Front 69

What are the assertions about classes of transactions and events for the period under audit?

Back 69

Occurrence, Completeness, Authorization, Accuracy, Cutoff, and Classification

Front 70

What assetions are about account balances at the period end?

Back 70

Existence, Rights and obligations, Completeness, and Valuation and allocation

Front 71

What assertions are about presentation and disclosure?

Back 71

Occurence and rights and obligations., Completeness, Classificationand understandablity, and accuracy and valuation

Front 72

Assertions about classes of transactions and events for the period under audit:

Occurrence

Back 72

transactions and events that have been recorded have occurred and pertain to the entity.

Front 73

Assertions about classes of transactions and events for the period under audit:

Completeness-

Back 73

all transactions and events that should have been recorded have been recorded.

Front 74

Assertions about classes of transactions and events for the period under audit:

Authorization-

Back 74

all transactions and events have been properly authorized.*

Front 75

Assertions about classes of transactions and events for the period under audit:

Accuracy-

Back 75

amounts and other data relating to recorded transactions and events have been recorded appropriately.

Front 76

Assertions about classes of transactions and events for the period under audit:

Cutoff

Back 76

transactions and events have been recorded in the correct accounting period,

Front 77

Assertions about classes of transactions and events for the period under audit:

Classification-

Back 77

transactions and events have been recorded in the proper accounts.

Front 78

Assetions about account balances at the period end:

Existence-

Back 78

assets, liabilities, and equity interests exist

Front 79

Assetions about account balances at the period end:

Rights and obligations-

Back 79

entity holds or controls the rights to assets, and liabilities are the obligations of the entity

Front 80

Assetions about account balances at the period end:

Completeness-

Back 80

all assets, liabilities, and equity interests that should have been recorded have been recorded.

Front 81

Assertions about accunt balances at the period end:

Valuation and allocation-

Back 81

assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded.

Front 82

Assertions about presentation and disclosure:

Occurrence and rights and obligations

Back 82

disclosed events, transactions, and other matters have occurred and pertain to the entity.

Front 83

Assertions about presentation and disclosure:

Completeness-

Back 83

all disclosures that should have been included in the financial statements have been included.

Front 84

Assertions about presentation and disclosure:

Classification and understandability-

Back 84

financial information is appropriately presented and described, and disclosures are clearly expressed.

Front 85

Assertions about presentation and disclosure:

Accuracy and valuation-

Back 85

financial and other information are disclosed fairly and at appropriate amounts.

Front 86

How do the assertions apply to inventory?

Back 86

It is there (physical)

Front 87

How do the assertions apply to notes payable?

Back 87

Have the obligation.
We can look at documentation to support the loan.

Front 88

How do the assertions apply to sales revenue?

Back 88

Any cash, what items, any documentation

Authorization must be provided by the CFO.
If check is over amount requires 2 statements and make sure they are following the controls.)

Front 89

Does your client explicitly state the assertions?

Back 89

Different accounts some assertion are more important. No you must find explicit assertions

Front 90

Why is existence more important than completeness for A/R?

Back 90

Existence- you have to make sure they have the accounts.

Completeness- they want to do this themselves.

Valuation- allowance and guess is the best

Some accounts are more important than others relative to risk of the account.

Front 91

Assertion

Back 91

have both Explict and Implicit risks.

Front 92

Auditing Standards

Back 92

consist of
1) Auditing Standards Board
a)Nonpublic Companies
2) PCAOB
a) Public Companies

Front 93

What is important to an auditor?

Back 93

Documentation and Refernce stands

Front 94

PCAOB

Back 94

-SAS 1-99
interim standards Lot overlap between public and private company
SAS 100 and up are PRIVATE corporations only

Front 95

Audit Risk

Back 95

-dealing with risk
-respond to risk
-assess risk

Front 96

GAAS

Back 96

sets of standards

Front 97

SAS

Back 97

interpretations of GAAS in chronological order

Front 98

AU

Back 98

organization of SASs by content

Front 99

AS

Back 99

PCAOB standards

Front 100

General Standards

Back 100

1. Adequate training in Auditing
2. Independent of client (must be objective)
3. Due professional care (Doing your job.)

Front 101

Field work

Back 101

4. Proper Planning
5. Staffing the Audit
6. Supervision
7. Understanding the client and internal contol
8. Obtain sufficient audit evidence. Enough good evidence to support opinion

Front 102

Reporting

Back 102

9. State GAAP conformity USA mayb GAAP or IFRS or countries standards
10. Make sure GAAP consistancy was applied all throughout
11. Disclosure (Foot notes on Financial Statements) Making sure they were disclosed and correct numbering.
12. Must Express a opinion

Front 103

What are the 10 GAAS?

Back 103

General:
1. Technical Training
2. Independence
3. Due Professional Care

Fieldwork:
1. Planning and supervision
2. Understanding client and controls
3. Sufficient competence evidence

Reporting:
1. GAAP conformity
2. GAAP consistency
3. Disclosures
4.Opinion

Front 104

The AICPA Code of Conduct consists of what?

Back 104

Ethics and Professionalism

Front 105

Ethics are

Back 105

morals and integrity

Front 106

Professionalism represents what?

Back 106

Protraying yourself in a positive formal appearance.
Having technical confidence.

Front 107

AICPA Code of Conduct:Section 50 – Principles consists of

Back 107

Responsibilities


Integrity

Objectivity

Due Care

Front 108

Responsibilities

Back 108

1. provide insurance about the financial statements and screen for material mistakes.

2. Public trust
a. investors
b. regulators
c. creditors

Front 109

Integrity

Back 109

Don't talk to others about the company's business.

Front 110

Objectivity

Back 110

Non biased, objective and independent.

Front 111

Due Care

Back 111

Doing your job and following standards.

Front 112

Audit Teams consist of

Back 112

Partner,
Manager,
Senior/In-charge,
Associate/Staff

Front 113

Partner

Back 113

Reaching agreement with the client on the scope of the service to be provided.
• Ensuring that the audit is properly planned.
• Ensuring that the audit team has the required skills and experience.
• Supervising the audit team and reviewing the working papers.
• Signing the audit report.

Front 114

Manager

Back 114

Ensuring that the audit is properly planned, including scheduling of team
members.
• Supervising the preparation of and approving the audit program.
• Reviewing the working papers, financial statements, and audit report.
• Dealing with invoicing and ensuring collection of payment for services.
• Informing the partner about any auditing or accounting problems encountered.

Front 115

Seniorlln-charge

Back 115

Assisting in the development of the audit plan.
• Preparing budgets.
• Assigning audit tasks to associates and directing the day-to-day performance of
the audit.
• Supervising and reviewing the work of associates.
• Informing the manager about any auditing or accounting problems encountered.

Front 116

Associate/Staff

Back 116

Performing the audit procedures assigned to them.
• Preparing adequate and appropriate documentation of completed work.
• Informing the senior about any auditing or accounting problems encountered.

Front 117

Auditor Types

Back 117

External
Internal
Government
Forensic

Front 118

Key Organizations

Back 118

AICPA
PCAOB
SEC
FASB

Front 119

Audit Risk (AR) Model

Back 119

AR – risk auditor will fail to appropriately modify an unqualified opinion on materially misstated f/s.

Risk you giva a clean opinion when there is actually a misstatement n the financial statements.

Front 120

AR refers to

Back 120

to the acceptable level of AR (i.e., what the auditor takes on)

Front 121

Engagement risk (ER)

Back 121

risk auditor will suffer financial or reputational loss from an audit

Front 122

(IR)

Back 122

Inherent Risk

Material misstatement before we take on the client

Front 123

(CR)

Back 123

Control Risk

The client controls willn't prevent detect material misstatement

Front 124

(DR)

Back 124

Detection Risk

The risk the auditor will detect material mistake

Front 125

AR Model

Back 125

AR = IR x CR x DR

Front 126

Inherent risk and control risk:

Back 126

Risk of material misstatement (RMM)

IR X CR

Front 127

Detection risk:

Back 127

Risk that auditor will not detect misstatements

DR

1. Nonsamplingrisk
2. Samplingrisk

Front 128

When planning how do you utilize the AR Model?

Back 128

1. Set a planned level of audit risk such that an opinion can be issued on the financial statements.
2. Assess IR and CR (RMM).
3. Use the audit risk equation to solve for the appropriate level of detection risk:

AR= IR x CR x DR

1- AR = gives you the level if audit assurance you are providing.


Auditors use this level of detection risk to design audit procedures that will reduce audit risk to an acceptable level.

Front 129

DR equals

Back 129

AR/ IR x CR

Front 130

If AR is very low and RMM is High then DR should be..

Back 130

Low (More Work)

Front 131

If AR is low and RMM is Moderate then DR should be..

Back 131

Moderate to High ( Less work moving timing to interim date)

Front 132

If AR is very low and RMM is Low then DR should be..

Back 132

High (Less work)

Front 133

How can you assess a firm

Back 133

Both qualitatively and quantatively

Front 134

AR Model - Limitations

Back 134

1. Haven't really got into the financial statement transactions.

2. Hard to determine High or Low AR (Audit Risk)

3. Before and After you aren't 100% sure about the audit.

Front 135

How to perform a risk assessment?

Back 135

Inquiries of management and others
• Analytical procedures, and
• Observation or inspection
to obtain an understanding of the entity
and its environment.

Front 136

What are types of misstatements?

Back 136

1. Capitalization vs Expense
2. Omission
3. Over and Understatement
4. Fraud
5. Estimates

As long as it is material .
Materiality is difficult to assess.

Front 137

Misstatements arise from error or fraud

Back 137

1.Legal Liability
2. Intentional

Front 138

When assessing a firm what do auditors first assess?

Back 138

Assess RMM at both F/St and assertion levels

Front 139

If a risk is pervasive

Back 139

auditor should develop overall response:

Enhance are level of skeptism by using specialist, upper level management involvement, use test that the client wouldn't expect, used experienced staff, unpredictable.

Front 140

If a risk is not pervasive

Back 140

focus on the assertion

Front 141

Materiality

Back 141

Important enough to matter

- magnitude of a misstatement that makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by misstatement

Implication of materiality ( the basis of the audit) designed to detect misstatement

ie. $10 misstatement

Financial:
Wrong and unethical

Auditor:
Wrong, unethical and not material
yet still give a unqualified opinion issued.

Only matters if it is an aggregate misstatement.

Must evaluate the direction and the amount .

Look for Under and Overstatement on Income Statement and Balance Sheet.

Front 142

To Apply Materiality a auditor must

Back 142

Assess planning materiality- determine the amount of materiality either by percentage or historical

Determine tolerable misstatement- Cash and Sales Account

Evaluate audit evidence - Acceptable to make changes to the amount.

Check for Aggregated amount and over/under statements

Front 143

What are some Quantitative factors:

Back 143

: % of
Total revenues
Gross profit
Pre-tax earnings
Total assets

Front 144

What are someQualitative Factors

Back 144

EPS forecast
Management compensation
Close to violating debt covenants
Break-even earnings
Management turnover
High fraud risk
Higher bankruptcy risk
Reversal of negative trend

Front 145

If you find a misstatement

Back 145

1. Inform Senior Management
2. Propose the mistatement

Front 146

Why should a auditor do a risk assessment

Back 146

To know where to focus your audit.

Front 147

Why do we have materiality

Back 147

Know where to focus where misstatement effects client.

Front 148

What would the client lose from the misstatement?

Back 148

Benchmar or important outcome. Net loss to Net profit. Changes in sales.

Front 149

Utilitarianism

Back 149

trade-off between costs and benefits of alternatives

Front 150

Rights-based Approach

Back 150

individuals have certain rights

Front 151

Justice-based Approach

Back 151

focus on fairness, impartiality, and equity

Front 152

Professional Standards: Private company audit consist of

Back 152

Auditing Standards
ASB (AICPA)-GAAS


Standards of
Professional Conduct
AICPA-Code of Professional Conduct
ISB-apply unless AICPA expressly disagrees

Front 153

Professional Standards: Public company audit

Back 153

Auditing Standards
PCAOB-currently similar to ASB
standards, with notable exceptions


Standards of
Professional Conduct
PCAOB-Code of Professional Conduct
(adopted from AICPA)
SEC-more stringent independence rules
for public company audits
ISB-a cooperative effort between the AICPA
and SEC; now defunct but standards apply

Front 154

Professional AICPA Code of Conduct:

Back 154

Not Principles of ), Ideal attitudes
enforceable ) Professional Conduct 1I ) and behaviors

Front 155

Professional AICPA Code of Conduct:

Back 155

Specifically " Minimally acceptable ) Rules of Conduct )
enforceable ~ standards r -- -- "

Front 156

Professional AICPA Code of Conduct:

Back 156

Not specifically ~ ".lli. Rules of~onduct, ---' ~ Detailed interpretations
enforceable, but - l and answers to questions
departures must regarding rules of conduct
Specific be justified . ~ ---!
Rulings by the}
~ Professional Ethics !
Executive Committee
,

Front 157

AICPA Code of Conduct

Principles – 6 fundamental principles that provide framework

ON EXAM

Back 157

Section 50 - Principles of Professional Conduct


Section 51 - Preamble
Section 52 - Article I: Responsibilities
Section 53 - Article II: The Public Interest
Section 54 - Article III: Integrity
Section 55 - Article IV: Objectivity and Independence
Section 56 - Article V: Due Care
Section 57 - Article VI: Scope and Nature of Services

Front 158

Principles of Professional Conduct

Responsibilities:

Back 158

In carrying out their responsibilities as professionals, members should exercise sensitive professional.
and moral judgments in all their activities

Front 159

Principles of Professional Conduct 2

The public interest:

Back 159

Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.

Front 160

Principles of Professional Conduct 3

Integrity:

Back 160

To maintain and broaden public confidence, members should perform all professional responsibilities with
the highest sense of integrity.

Front 161

Principles of Professional Conduct 4

Objectivity and independence:

Back 161

A member should maintain objectivity and be free of conflicts of interest in discharging
professional responsibilities. A member in public practice should be independent in fact and appearance when providing
in auditing and other attestation services.

Front 162

Principles of Professional Conduct 5

Due care:

Back 162

A member should observe the profession's technical and ethical standards, strive continually to improve
competence and the quality of services, and discharge professional responsibility to the best of the member's ability

Front 163

Principles of Professional Conduct 6

Scope and nature of services:

Back 163

A member in public practice should observe the Principles of the Code of Professional,
Conduct in determining the scope and nature of services to be provided.

Front 164

Rules of Conduct – more specific guidance grouped into 5 sections:

Back 164

100: Independence, Integrity, and Objectivity
200: General Standards & Acctg. Principles
300: Responsibilities to Clients
400: Responsibilities to Colleagues
500: Other Responsibilities and Practices

Front 165

Review AICPA code of Conduct on pg 650

Back 165

Know Table 19-2

ON EXAM

Front 166

A “covered member” is

Back 166

Individual on the attest engagement team
Individual who can influence the attest engagement team
A partner/manager who provides 10 hours of nonattest services to the attest client
Partner in the office associated with the attest engagement
The firm, including employee benefit plan
Entity whose operating, financial, or accounting policies can be controlled by any individual described above or by multiple individuals described above acting together

Front 167

Prohibited relationships with your client:

Back 167

Direct financial interest such as stock ownership
Indirect financial interest such as stock ownership through a mutual fund
Serving in managerial role for the client during period under audit

Front 168

Other factors to consider when auditing a client and keeping "independent"

Back 168

Your immediate family (spouse, spousal equivalent, or dependent) is subject to Rule 101 and its interpretations and rulings

A close relative with a material investment in (to the relative) or control over the client impairs your independence

Close relatives include nondependent children, brothers, sisters, parents, grandparents, parents-in-law, and their respective spouses

Front 169

More ideas to keep independent from client when dealing with legal issues

Back 169

Litigation by the client alleging deficient audit work impairs independence if
Litigation is filed
Litigation is threatened and is reasonably probable to be filed

Litigation by the auditor against the client impairs independence

Front 170

AICPA can discipline non-compliant CPAs
by...

Back 170

Revoke or suspend AICPA membership

Front 171

Does the SEC have the right to discipline non compliant CPAs?

Back 171

Yes
SEC has similar powers involving CPA license
inwhich they can revoke or suspend AICPA membership.

Front 172

What are SEC and PCAOB guidelines for independence rules:

Back 172

1.An auditor should not audit his or her own work.

2.An auditor should not function in the role of management.

3.An auditor should not serve in an advocacy role for his or her client.

Front 173

What does the SEC have to say about keeping auditors and their firm independent from the client?

Back 173

Partners rotate after 5 consecutive years.
One year “cooling off” period if auditor takes job with client in a “financial reporting oversight role”
A firm is not independent if audit partner’s compensation is based on selling engagements to that client for services other than audit, review, and attest services(Can't get extra money)
More communication between auditor and audit committee

Look at page 650 and 665

Front 174

What does NAS stand for and who applies?

Back 174

Non-Audit Services

AICPA Code, SEC, and SOX restrict

Look on pg 661 for NAS restrictions

Understand why the restrictions?

Front 175

What are the audit's firm quality control measures?

Back 175

are the CPA firm’s policies and procedures that monitor its practices and provides assurance about compliance with stds.
6 elements (see Table 19-5)

PCAOB inspects firms’ quality control and audit practices

AICPA has peer review program

Front 176

What are the 6 elements to an audit firms quality controls?

Back 176

1. Leadership responsibilities for quality in the firm (the "tone at the top''): The firm's leadership should promote an
internal culture based on performing high quality work that complies with professional standards and regulatory
and legal requirements. Policies and procedures should be established to support that culture; management is
held responsible for the firm's system of quality control (SaCS 7.15-16).

2. Relevant ethical requirements: Policies and procedures should be established to provide reasonable assurance
that the firm and its personnel perform their work in an ethical manner and according to the relevant ethics
requirements (SaCS 7.19).

3. Acceptance and continuance of client relationships and specific engagements: Policies and procedures should
be established for deciding whether to accept or continue a client relationship and whether to perform a specific
engagement for that client. Such procedures should provide the firm with reasonable assurance that the likelihood
of association with a client whose management lacks integrity is minimized, the firm has sufficient competent
personnel to perform the engagement, and the firm can comply with legal and ethical requirements (SaCS 7.27).

4. Human resources: Policies and procedures should be established to provide reasonable assurance that the firm's
personnel are able to comply with regulatory and legal requirements and perform engagements according to
professional standards. Such procedures should cover (SaCS 7.37 -38):
a. Recruitment and hiring.
b. Determining capabilities and competencies.
c. Assigning personnel to engagements.
d. Professional development.
e. Performance evaluation, compensation, and advancement.

5. Engagement performance: Policies and procedures should be established to provide the firm with reasonable
assurance that engagements performed meet applicable standards, regulatory requirements, and the firm's
standards of quality. The procedures should also ensure that the partner issues the proper audit report given the
circumstances. These procedures should cover (SaCS 7.57):
a. Engagement performance.
b. Supervision responsibilities.
c. Review responsibilities.


6. Monitoring: Policies and procedures should be established to provide reasonable assurance that the policies
and procedures over each of the

Front 177

What does the vicious cycle consist of? (Legal Liability)

Back 177

1.Incentive to sue
(Plaintiffs, Attys

2.Relationship to
company

3.Ability to pay
(“deep pockets”)

4.Willingness to pay

Front 178

Business (Engagement) Risk

Back 178

exposure to loss or harm to an auditor


Could be monetary or reputation risks being in business with a client.

Front 179

w to minimize RISK during the audit?

Back 179

Maintain a good client portfolio (Do a good job on the following standards, document and collaborate with what the client is saying

Front 180

Common Law

Back 180

case law developed by judges in cases over time.

Front 181

Statutory Law

Back 181

Legislative, some created this law.

Front 182

Breach of contract

Back 182

Occurs when the client or auditor fails to meet the terms and obligations established in the contract (either expressly or
implied), which is normally finalized in the engagement letter. Third parties may have privity or near privity of contract.

Front 183

Civil law

Back 183

All law that does not relate to criminal matters.

Front 184

Class action

Back 184

Lawsuit filed by one or more individuals on behalf of all persons who may have invested on the basis of the same false and
misleading information.

Front 185

Criminal law

Back 185

Statutory law that defines the duties citizens owe to society and prescribes penalties for violations

Front 186

Fraud

Back 186

Actions taken with the knowledge and intent to deceive.

Front 187

Gross negligence

Back 187

An extreme, flagrant, or reckless departure from professional standards of due care. This is also referred to as constructive fraud.

Front 188

Ordinary negligence

Back 188

An absence of reasonable or due care in the conduct of an engagement 'e care is evaluated in terms of what other
professional accountants would have done under similar circumstance

Front 189

Privity

Back 189

A contract or specific agreement exists between two parties. Absent a contractual or fiduciary relationship, the accountant
does not owe a duty of care to an injured party.

Front 190

Scienter

Back 190

Acting with intent to deceive, defraud or with knowledge of a false representation.

Front 191

Tort

Back 191

A wrongful act, other than a breach of contract, for which civil action may be taken.

Front 192

What kind of image should a audit firm portray.

Back 192

Maintain Innocence and Believabilty.

Front 193

Innocent

[(Ordinary) Negligence]


Error

Back 193

believed with
adequate basis

[(Ordinary) Negligence]


believed with
debatable basis

Front 194

Gross Negligence


[(Ordinary) Negligence]

Back 194

(Massive Problem)


[(Ordinary) Negligence]



Fraud
(Intentional and Deliberate)

Front 195

[(Ordinary) Negligence]

Back 195

Fail to Excercise Due Care or not following what standards are saying. (Small amount of Problems)

Front 196

Common Law – Clients
Auditor sued by client. Reasons?

Back 196

No independence if sued.

Can be sued for
1. negligence
2. fraud
3. breach of contract

Front 197

Burden of proof is on?

Back 197

It is on the client

Front 198

What is auditor’s defense?

Back 198

Not guilty, and followed standards and exerciesed due care with documentation

Front 199

Common Law – Third-Parties
Third-party (plaintiff) must prove all:

Back 199

Auditor had duty to third-party
Auditor breached duty to third-party(no due care)
Direct causal link between auditor’s negligence and third-party’s loss
Third-party suffered actual loss

Front 200

Common Law – Third-Parties
4 legal standards for third-party suit of auditor

Back 200

Privity - no duties without a specific contract with the third party (narrow and most strict

Near Privity - is a implied contract, ie large creditors that you are aware of.

Foreseen Third-Party - foreseeable third party, institution investors and creditors. We could have seen in advance

Reasonably Foreseeable Third-Party - could be investors or creditors (common)
(more and more people can join the lawsuit.

Front 201

Statutory Law – Civil Liability
Securities and Exchange Act of 1934

Back 201

Applies to all public company audits
Plaintiff must prove
1.Loss

2.Audited F/St were materially misstated

3.Reliance on audited F/St

4.Scienter – intent to deceive, manipulate, or defraud

Front 202

Private Securities Litigation Reform Act of 1995

Back 202

(Limits liability to only your role.)

Provides for proportionate liability for defendants based on percentage of responsibility and a specific statement of fraud at the beginning of the case

Front 203

Securities Litigation Uniform Standards Act of 1998

Back 203

(closed the loop hole)

Prevents plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State, rather than Federal Court

Front 204

Class Action Fairness Act of 2005

Back 204

ie. Friend files a lawsuit because their friend lost money (Frivolous lawsuit)

Expands federal jurisdiction to include multistate class actions where there is more than $5 million in dispute. Expected to help in more consistent dismissal of dubious claims.

Front 205

SOX (2002) – what affects auditors?

Back 205

1. Partner Rotation
2. Stricter Independence Provisions
3. CEO, CFO, client sign financial statement
4. If you (Auditor) are negligent you can be liable.

Front 206

How to reduce Legal Liability

Back 206

1. Professional skeptism
2. Documentation is key
3. Hire outside attorney
4. Insurance
5. Quality Control(Training)
6. Peer Review (Send to Partners in another firm
7. PCAOB
8. Engagement and Concurrent Partner

Front 207

SEC and PCAOB Sanctions

Back 207

Suspend practicing privileges
Fines
Remedial measures
Training
New quality control procedures
Appointment of independent monitor

AICPA (if private) cna do similar type of sanctions on CPA, can punish both the firm and the individual

Front 208

Auditors can be

Back 208

held criminally liable under the laws we’ve discussed

Front 209

Criminal prosecutions require

Back 209

Fraud – intent to deceive

Gross negligence (constructive fraud)

Front 210

What are the pros of eating time?

Back 210

Mainain customer base

Front 211

What are the cons of eating time?

Back 211

Firm willn't be billed the amoun they should

Front 212

Sets forth the nature and extent of supervisory
activities necessary for proper supervision

Back 212

For example, the extent of supervision should be
commensurate with the risk of material
misstatement

Front 213

Should materiality play and ethical role

Back 213

How much would it cost. Some say yes and others say no.

Front 214

How do I decide if I want a client?

Back 214

Evaluate for each engagement
-New Client
-Existing Client

Determine Risk how would we balance the risk.
-Background check
-Industry
-Do we have people that know, have the expertise
-Money
-Independence

Front 215

Engagement Letter

Back 215

-Requred by auditing standards
-Outline your responsiblilities as a audit firm
-Conduct the audit
-Managements Responsiblities
-Fees Structure
-Timeline Structure
-Any use of specialist and going to use internal audit
-Can provide legal protection in court setting

pg 147-148 Exibit 5-1

Front 216

What does the sample engagement report look like?

Back 216

-Services and Related Report
-Our Responsiblities and Limitations
-Managements Responsiblities

Front 217

What do we evalute in a internal audit?

Back 217

Competence-what type of certifications and education

Objectivity- are they Independent from the CEO, CFO, and Managers; and do they report only to the audit committee

Front 218

Role of Audit Committee (subcommittee of BOD)

Back 218

Independent
Hires, fires, and compensates auditor
Approves audit and non-audit services
Establish process for handling audit issues
Each member can engage independent counsel

Front 219

Why is the Audit Committee independent?

Back 219

Shareholder's have rights to vote council on boards and thus should remain independent from agents(managers)
They receive a fee from the coporations so they must be independent
They are also independent from daily operations and serve as a advisor role.

Front 220

If you are on the Audit Committe are you on the Board of Directors?

Back 220

Yes

Front 221

Planning flows out of preliminary risk assessment from client acceptance; other steps:

Back 221

Risk assessment procedures - understand the client and its environment, including controls

Tests of controls - evaluate the effectiveness of the design and operation of controls

Substantive tests - detect MM in transaction class, account balance, and f/st disclosures

Dual purpose test – simultaneously test controls and transactions (substantive test)

Front 222

Risk assessment procedures

Back 222

- understand the client and its environment, including controls

Front 223

Tests of controls

Back 223

evaluate the effectiveness of the design and operation of controls

Front 224

Substantive tests

Back 224

detect MM in transaction class, account balance, and f/st disclosures

Front 225

Dual purpose test

Back 225

simultaneously test controls and transactions (substantive test)

Front 226

Higher risk

Back 226

More risk of misstatement

Front 227

Why must we know the nature extent and time

Back 227

Where to address materiality and how much time spent, where to check, and so on.

Front 228

AR DR

Low High

Back 228

Interim testing or some test in the middle of the year.

Front 229

AR DR

High Low

Back 229

Test should be performed at the end of the year.

Front 230

What are some evidences of types of control

Back 230

Invoice
Receiving Report
Revenue
(If the documents match then they are good, also a good way to judge the controls via qty, items

Front 231

Risk assessment in planning involves getting an understanding of the client, its industry, its controls, regulations, etc.

Back 231

Evidence of Controls and Risk assement
-Inquiry (Asking the client)
-General Industry Knowlege
-Observing how their system works
-Inspect Assets or Documents
-Analytical Procedures
Comparison and F/S and Benchmark
ie. Budget, Industry Avg.
Trend analysis
Fairly low operating loss-results in high operating loss.

Front 232

Controls Testing

Back 232

Inquiries
Observation
Inspection
Walkthrough
Reperformance

See Table 5-4

Front 233

Inquiries

Back 233

talk to client

Front 234

Observation

Back 234

observe controls

Front 235

Inspection

Back 235

inspect assets

Front 236

Walkthrough

Back 236

observation walking transcation through the system

Front 237

Reperformance

Back 237

see if you come up with the same numbers

Front 238

Controls Testing

Back 238

More Automated better controls
-Create more control issues
-Harder to diagnose
-Manual input
-Auditor needs more technical exportise
-Auditor highers MIS

Front 239

Substantive Procedures

Back 239

Tests of details- substanstive test of transactions
Analytical procedures
count inventory and what records say
-reperform general entries

Front 240

Substantive Procedures
Tests of Details

Back 240

Substantive Tests of Transactions – test for misstatements in individual transactions

Front 241

Tests of Details of Account Balances and Disclosures

Back 241

look for misstatements in F/St balances and footnote disclosures

Front 242

Substantive Procedures

Back 242

Analytical Procedures – now occurring during fieldwork, not planning
Figure 5-2
Tolerable difference < planning materiality
Basically, compare your expectation with recorded amount
Look at trends, ratios, or reasonableness of balances

Front 243

Analytical Procedures

Back 243

Standards require auditor to develop an expectation
How would you develop an expectation?

Confirming with 3rd parites (Account Balances client records match customers)

Are the making their required disclosures set by GAAP

Front 244

Compare and investigate if actual difference > tolerable

Back 244

Must obtain corroborating evidence about differences unless at planning stage

Front 245

Analytical Procedures using Ratios

Back 245

ST Liquidity
Activity
Profitability
Coverage

Understand the 4 and individual ratios within each

Front 246

Analytical Procedures

Back 246

– now occurring during fieldwork, not planning
Figure 5-2
Tolerable difference < planning materiality
(whether or not the difference is material) If not greater, except the amount and document it (Might becom material and aggregate)
If not tolerable could propose a audit adjustment.

If greater than tolerable then you must investigate it could be ie. caused by the recession, lost large client so it mightn't be a material misstatement.

Basically, compare your expectation with recorded amount
Look at trends, ratios, or reasonableness of balances

Come up with expectation of the amount of the audit
1. Expectations for period of the audit
2. Tolerable difference

Front 247

Standards require

Back 247

Expection but not required on substansive test

Front 248

Standards require auditor to develop an expectation
How would you develop an expectation?

Back 248

by looking at
-Industry Benchmark
-Budget
-Last year F/S
-Third Party Source

Front 249

Compare and investigate if actual difference > tolerable

Back 249

If at planning document, and do detail later testing

If substansive Testing then go ahead and go into detail testing

Front 250

How would you develop an expectation?

Back 250

You must look at the Industry Bench mark
Budget
Last year F/S
Third party sources

Front 251

Types of Tests: Substantive Procedures

Back 251

Tests of Details
Substantive Tests of Transactions – test for misstatements in individual transactions

Tests of Details of Account Balances and Disclosures – look for misstatements in F/St balances and footnote disclosures

Confirming with 3rd parites Acct Balances client records match customers
Are they making their required disclosures set by GAAP

Front 252

Types of Tests: Substantive Procedures

Back 252

Analytical Procedures – now occurring during fieldwork, not planning
Figure 5-2
Tolerable difference < planning materiality
Basically, compare your expectation with recorded amount
Look at trends, ratios, or reasonableness of balances

Front 253

Types of Tests: Substantive Procedures

Analytical Procedures

Back 253

Standards require auditor to develop an expectation



Compare and investigate if actual difference > tolerable
Must obtain corroborating evidence about differences unless at planning stage

If at planning document, and do detail later testing

If in Substantive Testing go ahead and go into detail testing.

Front 254

Types of Tests: Substantive Procedures

Analytical Procedures using Ratios

Back 254

Analytical Procedures using Ratios
ST Liquidity
Activity
Profitability
Coverage

Understand the 4 and individual ratios within each

Front 255

What are the timing of Analytical Procedures

Back 255

Planning
Substantive (during fieldwork)
Final Review

Front 256

Planning

Back 256

Identify where misstatements might happen

Front 257

Substantive (during fieldwork)

Back 257

have to use tested details

Front 258

Final Review

Back 258

Analytical procedures are required right before you are able to use an opinion

Why now? Test your conclusions and a way to lower your audit risk.

Front 259

Types of Tests and the Assurance Bucket
Look at fig 5-4, 5-5, 5-6

Back 259

From bottom or the bucke to the top.

1. Risk Assessment Procedures
2.Tests of Controls
3.Sustantive Analytical
4.Remainign assurance needed from test of details.