Auditing: Ch 3

Front 1

General Decision Making Framework

Back 1

1. structure problem
(2. assess consequences 3. assess risks)
4. evaluate information/evidence gathering alternatives
5. conduct sensitivity analysis
6. gather information/evidence
7. make decision about problem

Front 2

high quality decisions

Back 2

unbiased, meet expectations of users, in compliance w/ professional standards, based on sufficient factual information to justify decision

Front 3

Importance of ethical decision making

Back 3

professional integrity based on personal moral standards and reinforced by codes of conduct:
-maintain public trust
-monetary benefits from public trust

Front 4

ethical problem

Back 4

morally or ethically required to act in way conflicting with personal self interest

Front 5

ethical dilemma

Back 5

conflicting moral duties or obligations

Front 6

Ethical theories

Back 6

-utilitarian
-rights

Front 7

Utilitarian theory

Back 7

-identification of potential problem
-identify potential impact of actions on stakeholders
-assess "goodness" of each action
-assess greatest good for greatest number

Front 8

Rights Theory

Back 8

evaluating actions based on fundamental rights of parties involved-
highest order rights: life, autonomy, dignity
second order: granted by government
third order: social rights
lowest-level: nonessential interests or tastes

Front 9

ethical framework

Back 9

-identify issue/s
-identify affected parties and their rights
-determine most important rights
-develop alternative actions
-evaluate likely consequences of each possible action
-assess consequences of each action, including greatest good for greatest number and whether rights framwork would cause any action to be eliminated
-decide appropriate action

Front 10

SOX Titles

Back 10

Title 1: PCAOB
Title 2: Auditor Independence
Title 3: Corporate Responsibility
Title 4: Enhanced financial disclosure
Section 5: Analysts conflict of interest
Section 6: Commission Resources and Authority
Section 7: Studies and Reports
Section 8: Corporate and Criminal Fraud Accountability
Title 9: White-Collar Crime Penalty Enhancements
Title 10: Corporate Tax Returns
Title 11: Corporate Fraud and Accountability

Front 11

SOX 101

Back 11

establishment and administrative provisions:
-nonprof, non governmental
-5 members w/ integrity and reputation-commitment to interest of public
-authority to set audit standards and inspect registered CPA firms

Front 12

SOX 102

Back 12

accounting firms auditing public companies must register with PCAOB

Front 13

SOX 103

Back 13

Regarding firms auditing public companies:
-establish/adopt rules on conduct of audits and audit firm quality control standards
-audit firms must describe scope of internal control tests

Front 14

SOX 104

Back 14

PCAOB will:
-inspect registered acct firms auditing more then 100 issuers
-every 3 yrs inspect acct firms auditing less than 100 issuers
-publicly report results of inspections

Front 15

SOX 105

Back 15

PCAOB will:
-adopt disciplining procedures for registered firms
-require firms to provide documentation and testimony necesary to conduct investigations
-sanction firms for noncooperation

Front 16

SOX 108

Back 16

Accounting Standards:
SEC recognize GAAP established by standard setter meeting Act's criteria

Front 17

SOX 201

Back 17

registered firms may not perform services outside scope of audit: bookkeeping, system design, appraisal services, internal audit (tax only w/ preapproval)

Front 18

SOX 203

Back 18

Audit partner rotation: lead and reviewing partnater must rotate every 5 yrs

Front 19

SOX 204

Back 19

Auditor reports ot Audit Committees:
-critical acct policies and practices
-alternative treatments of financial information with GAAP considered by mgmt and preferred by acct firm
-significant written communication b/w firm and mgmt

Front 20

SOX 207

Back 20

mandatory rotation of public accounting firms studied by Comptroller General of US (GAO)

Front 21

SOX 301

Back 21

Audit Committees:
-directly responsible for appointment, compensation, and oversight of registered firm
-each member must be independent
-must establish "whistleblowing" mechanism
-authority to engage their own independent counsel
-issuers must adequatly fund committee

Front 22

SOX 302

Back 22

Corporate Responsibility (CEO, CFO must sign off on report)
-certify quarterly and annual reports filed with SEC: no untrue statements of material facts, disclosures and financials fairly presented
-establish and maintain effective internal controls
-design, asses, disclose material deficiencies in controls

Front 23

SOX 906

Back 23

penalties for corporate directors who knowingly provide incorrect certification

Front 24

SOX 401

Back 24

disclosures in periodic reports:
-accordance with GAAP
-material off-BS transactions and other unconsolidated entities must be disclosed
-SEC issue new rules on pro forma figures, study off-BS transactions and use of SPE's

Front 25

SOX 404

Back 25

mgmt assessment of internal controls-annual reports:
- responsibility of mgmt for establishing and maintaining adequate internal control structure + procedures
-assessment of effectiveness of structure + procedures
-each registered acct firm must attest and report on mgmt assessment not the subject of seperate engagement (integrated audit)

Front 26

International Ethics Standards Board for Accountants (IESBA)

Back 26

5 fundamental principles:
-integrity
-objectivity
-professional competence and due care
-confidentiality
-professional behavior

Front 27

integrity

Back 27

straight forward and honest in performing services

Front 28

objectivity

Back 28

no bias, conflict of interest, or undue influence of others to override judgments

Front 29

professional competence and due care

Back 29

maintain professional knowledge and skill, act diligently and in accord with technical and professional standards

Front 30

confidentiality

Back 30

respect confidentiality of information, don't disclose info to third parties w/o proper authority unless legal or professional right/duty to do so, don't use for personal advantage

Front 31

professional behavior

Back 31

comply w/ relevant laws and regulations and avoid action that discredits profession

Front 32

Formal self-regulatory mechanisms for professional conduct

Back 32

AICPA, IIA, IMA
- if not covered by codes, use common sense, moral value, and framework outlined to resolve situation

Front 33

Code/Principles of Professional Conduct: AICPA

Back 33

-responsibility
-public interest
-integrity
-objectivity and independence
-due care
-scope and nature of services

Front 34

AICPA Rules of Conduct

Back 34

detailed guidance reflecting broad principles- specifically enforceable under bylaws of AICPA- most apply to ALL cpa's

Front 35

Rules of Conduct: Rule 101

Back 35

Independence!!

Front 36

Rules of Conduct: Rule 102

Back 36

integrity and objectivity

Front 37

Rules of Conduct: Rule 201

Back 37

General Standards:
-professional competence
-due professional care
-planning and supervision
-sufficient relevant data

Front 38

Rules of Conduct: Rule 202

Back 38

compliance w/ standards

Front 39

Rules of Conduct: Rule 203

Back 39

Accounting Principles-
compliance with gaap and materiality

Front 40

Rules of Conduct: Rule 302

Back 40

contingent fees:
-no professional services for contingent fees by member's who perform an audit or review of financials, a compilation of financial statements used by third party, examination of prospective financial information
-may not prepare orginial or amended tax return for refund for a contingent fee

Front 41

Rules of Conduct: Rule 501

Back 41

member shall not commit an act discreditable to profession

Front 42

Rules of Conduct: Rule 502

Back 42

Advertising and other forms of solicitation:
-members in public practice may not seek clients by advertising/soliciting in false, misleading, or deceptive manner
-coercion, overreaching, or harassing solicitation is prohibited

Front 43

Rules of Conduct: Rule 503

Back 43

Commissions and Referral fees:
a. prohibited commissions:
-refer/recommend client any product or service
-refer/recommend product or service supplied by client
b. disclosure of permitted commissions
c. disclosure of permitted referral fees

Front 44

Rules of Conduct: Rule 505

Back 44

Form of Organization or Name
- member can't practice under firm with misleading name
-firm may not designate iteself as members of AICPA unless ALL CPA owners are members

Front 45

Independence: Financial Interest

Back 45

-applies only to covered members and immediate family- directly or indirectly

Front 46

covered members

Back 46

-individual on the attest engagement team
-individual in position to influence attest engagement
-partner in office in which lead attest engagement partner primarily practices in connection with attest engagement

Front 47

direct financial interest

Back 47

financial interest owned directly by, or under the control of, an individual or entity or beneficially owned through an investment vehicle, estate, or trust when beneficiary controls the intermediary or has authority to supervise participant in investment decision (5%)

Front 48

indirect financial interest

Back 48

beneficiary neither controls the intermediary nor has the authority to supervise or participate in investment decisions (5%)

Front 49

Family Relationships

Back 49

covered member's independence impaired if:
family member/close relative employed by audit client in key position (i.e. CEO, CFO, chief accountant, member of BOD, chief internal audit exec, treasurer)

Front 50

Loans

Back 50

limits on types and amts of loans covered members may obtain from financial institution that is also audit client- no large loans, or loans for investment purposes
allowable: "normal" loans-standard terms (i.e. auto loan or lease)

Front 51

Performing non-audit services

Back 51

mgmt must not cede decision making authority to CPA (daily operations)

Front 52

Allowable circumstances for communicating confidential information

Back 52

-assure adequacy of accounting disclosures required by GAAP/GAAS
-comply w/ subpoena,summons, law, gov't regulation
-relevant info for outside quality review to AICPA, PCAOB or state board of accountancy
-to initiate complaint or respond to inquiry to/for relevant authority

Front 53

privileged communication

Back 53

confidential info cannot be subpoenaed by court to be used against client- allowed for lawyers but (in most cases) not auditors

Front 54

contingent fee

Back 54

fee established for the performance of any service in which a fee will not be collected unless a specified finding or result is attained, or amount of fee depends on the finding or result of such service

Front 55

Goals of independence

Back 55

1. high quality audits by minimizing external factors influncing auditors judgments- professional skepticism and willingness to decide in unbiased and objective manner
2. promote investor confidence

Front 56

Impaired auditor independence-SEC- Regulation S-X Rule 2-01

Back 56

Relationships that:
-create mutual or conflicting interest between accountant and client
-accountant audits his own work
-accountant acts as mgmt or employee of client
-acct advocates for client

Front 57

Regulation S-X Rule 2-01- prohibited non-audit services

Back 57

-bookkeeping or other services related to accounting records of client
-financial info systems design and implemenatation
-appraisal and valuation services, fairness opinions, or contribution-in-kind reports
-actuarial services
-internal audit outsourcing services
-mgmt functions
-human resources
-broker-dealer, investment adviser, or investment banking services
-legal service
-expert services unrelated to audit

Front 58

Prohibited tax-related services

Back 58

-tax services to certain members of mgmt and immediate family members in financial oversight roles
-services related to marketing, planning,, or operating in favor of tax treatment of confidential transactions based on aggressive interpretations of applicable laws and regulations

Front 59

Major Threats to Independence

Back 59

-compensation schemes
-Who is the client? (stakeholders)
- Familiarity w/ client
-Time Pressures
-Rationalizing behavior
-providing non-audit services

Front 60

Managing threats to independence

Back 60

-establishing and monitoring codes of conduct
-developing appropriate compensation schemes
-high-level reviews of decisions in accepting/retaining clients
-separating consulting activities from audit activities
-performing w/in-firm reviews of audit work and documentation-perfroming reviews and inspections w/in profession

Front 61

concurring partner

Back 61

audit partner who is not otherwise conneted with the audit client or involved in the conduct of the audit engagement who provides an independent review of the engagement prior to issuance of an audit opinion