Audit Flashcards
Define an “unconditional requirement”
Must be complied with in order for auditors to complete an engagement in accordance with GAAS. Will always include the word “must” or “is required to”
Define a “presumptively mandatory requirement”
Auditor is expected to comply with in every circumstance in which it applies. In rare circumstances the auditor may depart from a presumptively mandatory requirement if the required procedure would be ineffective but must document how an alternate procedure was sufficient to achieve the objective of the standard. Will always include the word “should”.
AR Turnover
Net Credit Sales / Average Receivables
Ratio of Allowance for Uncollectible Accounts Receivable to Gross Accounts
Allowance for Uncollectible A/R / Average Gross Receivables
Computer-Assisted Audit Technologies (CAAT)
Efficient and effective at handling large amounts of data in machine-readable form when the task involves a repetitive process and the identification or accumulation of objective information
General Controls (IT)
Policies and procedures that relate to many applications and support the effective functioning of application controls by helping to ensure the continued proper operation of information systems
Processes Often Subject to General Controls
(1) data center and network operations
(2) system software acquisition, change, and maintenance
(3) program change
(4) access security
(5) application system acquisition, development, and maintenance
IT Application Controls
Controls designed to achieve a specific control objectives related to specific accounting procedures - pertain to the processing of individual applications
IT Application Control Classifications
(1) Input Controls
(2) Processing Controls
(3) Output Controls
5 Basic Analytical Procedure Comparisons
CRAFT
Client vs Industry Related Accounts Actual vs Budget Financial vs Non-financial This year vs Prior
Audit Procedures
I-CORRIIA
Inquiry Confirmation Observation Recalculation Reperformance Inspection of tangible assets Inspection of records or documents Analytical procedures
Compliance Audit
Performed to determine if the entity is complying with appropriate laws and regulations - often performed by government or regulatory organization; may be randomly selected or based on indication of non-compliance
Operational Audits
Generally performed by internal auditors to determine if management’s policies are being followed appropriated and to evaluate entity’s performance as well as it’s compliance with internal controls
Financial Statement Audit
Examination for purpose of giving objective opinion regarding the fairness of the financial statement presentations
General Purpose Framework
designed to meet the common financial information objectives of a wide range of users
Special Purpose Framework
Framework other than GAAP
Special Purpose Framework Examples
(1) Cash basis
(2) Modified cash basis
(3) Tax basis
(4) Regulatory agency basis
(5) Contractual basis
Professional Skepticism
Attitude that includes a questioning mind and a critical assessment of audit evidence
Reasonable Assurance
A high level of assurance - NOT absolute assurance
Steps in an Audit
(1) Prepare for audit
(2) Obtain understanding of client, it’s environment, including internal control
(3) Assess risks of material misstatement and determine nature, timing, and extent of further procedures
(4) Perform tests of control
(5) Perform substantive procedures
(6) Formulate an opinion
(7) Issue an audit report
Clarity Project Standard Format
(1) Introduction
(2) Objectives
(3) Definitions
(4) Requirements
(5) Application and other explanatory material
Clarity Standards - Introduction
Includes the purpose and scope of each standard
Clarity Standards - Objective
What requirements it’s expected to achieve
Aids the auditor in:
- Determining if additional audit procedures are necessary in addition to those required in order to meet objective
- Evaluating whether auditor has obtained sufficient appropriate audit evidence
Significant Finding
Inability to achieve an objective - must be documented
Three GAAS Categories
(1) General Standards
(2) Fieldwork Standards
(3) Reporting Standards
GAAS General Standards Definition
Apply to all aspects of the engagement from acceptance to completion
GAAS Fieldwork Standards Definition
Apply only to the portion of the engagement devoted to gathering evidence
GAAS Reporting Standards Definition
Apply only to the manner in which the audit report is to be written
GAAS vs Audit Procedures
GAAS measures the quality of the auditors performance vs audit procedures which are acts to be performed by the auditor
10 GAAS Standards
TIPPICANOE
Training and proficiency Independence due Professional care Planning and supervision Internal controls Corroborative audit evidence Accounting principles in conformity with US GAAP No new accounting principles applied (consistency) Omitted informative disclosures (none) Expression of an opinion
GAAS General Standards
Training and Proficiency
Independence
Due Professional Care
GAAS Fieldwork Standards
Planning and Supervision
Internal Controls
Corroborative Audit Evidence
GAAS Reporting Standards
Accounting principles in conformity with US GAAP
No new accounting principles applied (consistency)
Omitted informative disclosures (none)
Expression of an opinion
GAAS - Training and Proficiency
Proper Education
Knowledge of the Industry and Business
Practical Experience
In making judgements about the extent of the effect of the internal auditors work on the auditors procedures, the auditor considers
AU-C 610.22
(1) Materiality of the financial statement amounts
(2) Risk (inherent and control) of material misstatements of the assertions related to these financial statement amounts
(3) Degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions
Internal Auditors May Affect the Auditors Audit Plan By
Altering the procedures the auditor performs when obtaining and understanding of the entity’s internal control
Auditors May Use the Results of the Internal Auditors Tests of Controls Regarding
The effectiveness of relevant controls to reduce the extent of control testing procedures
Control Risk
Risk that a material misstatement that could occur in an assertion about a class or transaction account balance or disclosure will not be prevented or detected and corrected on a timely basis by the entity’s internal controls
Inherent Risk
Susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material either individually or in the aggregate
Standard Auditors Report Introductory Paragraph
1st paragraph - should include:
(1) Entity whose financial statements have been audited
(2) Statement that the financial statements have been audited
- identify the title of each statement
- specify date or period covered by each financial statement
Responses to address the assessed risk of material misstatement at the financial statement level
AU-C 330.A1
(1) Emphasizing to the audit team the need to maintain professional skepticism
(2) Assigning more experienced staff or those with specialized skills or using specialists
(3) Providing more supervision
(4) Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed
(5) Making general changes to the nature, timing, or extent of audit procedures
Internal Audit
Examination of accounting records and other evidence to establish compliance with entities policies and procedures
Quality Control Elements
HEAL-ME
(1) Human resources (personnel management)
(2) Ethical requirements (independence)
(3) Acceptance and continuance of client relationships and specific engagements
(4) Leadership responsibilities for quality within the firm (“tone at the top”)
(5) Monitoring
(6) Engagement performance
Entities Receiving Funds from Federal Programs Require a Single Audit in Any Year When
(1) The entity spends more than $750,000 in federal awards, grants, and funds
AND
(2) Spends funds from one or more federal program
* If entity only spends funds from one program it may be eligible for a program audit versus a single audit
Program Audit
Performed to determine if the projected objectives established by a legislative body for a particular program have been achieved
Evaluating Objectives of Program Audits
(1) Attainment of desired results or benefits
(2) Effectiveness of programs and related functions
(3) Compliance with requirements of laws and regulations related to the program
Single Audit Act Amendment of 2013
Implemented by OMB Circular A-133
Federal legislation that establishes uniform requirements for the audits of federal financial assistance provided to state and local governments and not-for-profit organizations that expend total federal financial assistance equal to or in excess of a specified amount in a fiscal year to have an audit performed in accordance with the act
Percentage-of-coverage rule
Included in Single Audit Act Amendment of 2013
(1) Major programs must be audited
(2) Low risk programs allow for percentage-of-coverage exception
Major Program Definition
Programs that account for at least 40% of spending of federal funding by that entity
Percentage-of-coverage exception
Low risk programs audit scope can be reduced to as low as 20% of federal funding spent by the entity
Audit Trail
Path left by transaction when it’s processed
Audit Trail Order
(1) Original source documents
(2) Transactions, entries, and posting of entries
(3) Financial statements
How Has IT Impacted the Audit Trail
(1) Source documents may no longer be produced and access to documents is more difficult
(2) Ledger summaries may be replaced by electronic master files
(3) Printed data may not be available
(4) Processing activities are difficult to observe - much is automated within the system
OMB’s Uniform Guidance Subrecipient Definition
Nonfederal entity that receives a subaward from a pass through entity to carry out part of a federal program
Management Affirmations Included in Management Representation Letter
AU-C 580
(1) Fair presentation of the financial statements and managements responsibility for them
(2) Completeness of all information provided to the auditor and in financial statements
(3) Representations relating to recognition, measurement, and disclosure (including absence of knowledge of fraud or suspected fraud)
(4) Information concerning subsequent events
Management Representation Letter
Written representation from management containing various affirmations;
(1) Addressed to auditor
(2) Written on client letterhead
(3) Signed by responsible auditor
(4) Dated as of date of auditors report
(5) Required audit procedure - refusal is scope limitation
Assurance Engagement
Objective to provide assurance regarding financial statements
Integrity
(1) An element of character fundamental to professional recognition - quality which the public trust derives and benchmark against which a member must ultimately test all decisions
(2) Requires a member to be honest and candid within the constraints of client confidentiality
(3) Measured in terms of what is right and just
(4) Requires observation of the principles of objectivity and independence and due professional care
Workpapers Should Show
(1) Audit work was adequately planned and supervised
(2) Sufficient understanding of the entity and it’s environment, including internal control, was obtained
(3) Audit evidence obtained provides sufficient appropriate audit evidence to provide a reasonable basis for opinion
Once Engagement has been Accepted Successor Auditor May
(1) Make specific inquiries of the predecessor auditor as to matters that affect the conduct of the audit
(2) Review predecessors workpapers
In Evaluating Reasonableness of Estimates Auditor Concentrates on Key Factors and Assumptions that are
(1) Significant to the accounting estimate
(2) Sensitive to variations
(3) Deviations from historical patterns
(4) Subject and susceptible to misstatements and bias
Factors Related to Control Activities that May Impact Auditors Consideration of the Effect of IT on Internal Controls
(1) Information processing
(2) Segregation of duties
(3) Physical controls
Elements of Prospective Compilation Report
(1) Identification of prospective financial statements
(2) Statement that the compilation was performed in accordance with attestation standards established by AICPA
(3) Statement that compilation is limited in scope and CPA doesn’t issue an opinion or any assurance
(4) Statement that forecasted results may not be achieved (usually difference between forecast and actual results)
(5) Explanation that CPA assumes no responsibility to update the report for future events and circumstances occurring after the date of the report
(6) Be dated and signed by the practitioners firm
Disclosure of Known Departure from GAAP Needed for
Compilation
Review
Audit
Code of Ethics
Established by the AICPA to “express the professions recognition of it’s responsibilities to the public, to clients, and to colleagues”
–“principles for honorable behavior, even at the sacrifice of personal advantage”
applies to all members of the AICPA
Code of Ethics Principles
Broad guidelines that provide framework for the rules - the spirit behind the rules
Code of Ethics Rules
Establish fundamental behavior - minimum acceptable level of conduct that form the basis for disciplinary action
Code of Ethics Interpretations of Rules of Conduct
Guidelines on the scope of the rules - answer many applicability questions - not enforceable but deviations must be justified
Code of Ethics; Ethics Rulings
Formal rulings made by the Professional Ethics Division’s Executive Committee - presented as factual questions and answers; departures in similar circumstances must be justified
Factors to Consider Regarding Accountants Needs for Retention of Engagement Documentation
(1) Nature of the engagement and the firms circumstances
(2) Whether professional standards, law, or regulation prescribe specific retention periods for certain types of engagements
(3) If there are generally accepted retention periods
Request to Change Engagement May Result From
(1) Change in circumstances affecting the entity’s requirement for an audit or review
(2) Misunderstanding as to nature of an audit, review, or compilation
(3) Restriction on the scope of audit/review whether client or circumstance imposed
Factors to be Considered Before Agreeing to Change in Engagement
(1) Reason for client request (particularly implications of a scope restriction)
(2) Additional effect required
(3) Estimated additional cost
Elements of the Engagement Letter
FACSIMILE
Fees Auditors responsibility (GAAS) Confirmation of engagement Scope and objective of engagement Internal control Managements responsibility Irregularities - fraud iLlegal acts - noncompliance with applicable laws and regulations Errors
Review Engagement Documentation Should Include
(1) Engagement letter
(2) Analytical procedures performed
(3) Expectations when not otherwise readily determinable from documentation and factors considered in development of expectations
(4) Significant matters covered in accountants inquiry procedures and responses
(5) Significant findings
(6) Unusual matters considered during review, including their disposition
(7) Communications (oral or written) to appropriate management regarding fraud or noncompliance with laws and regulations that come to the accountants attention
(8) Representation letter
Auditors Responsibility
(1) Conducting an audit in accordance with GAAS
(2) Informing the client of improvements in control or economy of operations that come to auditors attention during the engagement
Client’s Audit Responsibilities
(1) Making all records available
(2) Not limiting the scope of auditors work
(3) Paying the fee based on the agreed upon method
Financial Interests that Impair Independence
(1) Direct Financial Interests
(2) Material Indirect Financial Interests
Direct Financial Interest
Ownership in entity/client or nonclient investee of client
Material Indirect Financial Interest
Involvement other than direct ownership that exceeds 5% of member’s net worth
Member considered to include individual, their firm, and family
Examples of Indirect Financial Interest
(1) Member is trustee of any trust or executer/administrator of any estate that has or is committed to acquire any direct or material indirect interest in the entity/client
(2) Member has any joint closely held business investment with the entity or with any officer, director, or principal shareholder
(3) Member holds stock in a bank that holds loans to the client
(4) Ownership of mutual fund that holds shares of client
(5) Member has lessor relationship with the client
(6) Litigation between member and client
(7) Member owed fees by client
ARSC
- Accounting and Review Services Committee
- Issues SSARS
SSARS
Statements on Standards for Accounting and Review Services
Govern the compilation and review services rendered in connection with unaudited financial statements or other unaudited financial information of an entity that is not required to file financial statements with a regulatory agency
Who Issues SSARs
Accounting and Review Services Committee (ARSC)
Responsibilities of the PCAOB
(1) Register public accounting firms that prepare audit report for issuers
(2) Establish or adopt auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers
(3) Conduct inspections of registered public accounting firms
(4) Conduct investigations and disciplinary proceedings concerning, and impose appropriate sanctions with justified upon, registered public accounting firms and associated persons of such firms
(5) Enforce compliance with SOX, the rules of PCAOB, professional standards, and the securities laws relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants with respect thereto, by registered public accounting firms
PCAOB
-Nonprofit corporation established by SOX to oversee the audits of issuers that are subject to the securities laws in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports
- Not an agency or establishment of US government
- Composed of 5 members
Members of PCAOB
5 member with high integrity who have demonstrated a commitment to the interest of investors and the public; should have an understanding of the financial reporting process as it exists under the securities laws as well as the responsibilities of accountants regarding the preparation and issuance of audit reports; appointed to 5 year staggered terms by SEC
Subsequent Event
AU-C 560
An event occurring after the balance sheet date but prior to the issuance of the auditors report which has a material effect on the financial statements and therefore requires adjustment or disclosure in the statements
2 Types of Subsequent Events
(1) Provide additional evidence regarding conditions that existed at the balance sheet date and affect estimates in the financial statements - require adjustments
(2) Provide additional evidence regarding conditions that DID NOT exist at the balance sheet date but arose subsequent to that date but may require disclosure
How should auditors handle information brought to their attention after the report date?
Auditor has no obligation to perform any further procedures after the report date
Auditor should:
(1) Consult with an attorney
(2) Determine if the subsequently discovered information:
a. is reliable
b. existed at the date of the report
c. is material to the report
and
d. is applicable to the report that’s still being relied on
Elements of Accountants Compilation Report
- In writing
- Statement that management’s responsible for financial statements
- ID financial statements subject to compilation
- ID entity whose financial statements were subject to compilation
- Specify date or period covered
- Statement that compilation with performed in accordance with SSARs
- Statement that accountant did not audit or review statements nor were they required to perform any procedures to to verify accuracy or completeness therefore doesn’t express opinion, conclusion, nor provide any assurance
- Signature of accountant or firm
- City and state where accountant practices
- Date of report ( date accountant completed procedures required)
- Each page of financial statements compiled by accountant may include reference such as “see compilation report” at accountants discretion
Obtaining an understanding of the entity and it’s environment will help the auditor:
(1) Establish materiality for planning purposes and to evaluate whether judgment remains appropriate
(2) Consider appropriateness of selection and application of accounting policies
(3) Consider adequacy of financial statement disclosures
(4) ID areas where special audit considerations may be necessary
(5) Develop expectations for analytical procedures
(6) Design and perform further audit procedures to reduce risk to an appropriately low level
Obtaining an understanding of the entity and it’s environment is:
A continuous, dynamic process of gathering, updating, and analyzing information through an audit
Qualified opinion should be expressed when
Sufficient appropriate audit evidence concludes that misstatements are material but not universal to the financial statements
OR
Auditor is unable to obtain sufficient appropriate audit evidence but concludes that the possible effects could be universal but not material
Adverse opinion is expressed when
Sufficient appropriate audit evidence is acquired but misstatements are both material and universal to the financial statements
Adverse Opinion
An “overall” audit opinion which states that the financial statements do not present fairly the financial position or the results of operations or cash flows in conformity with the applicable financial reporting framework
Must have sufficient appropriate audit evidence to support
Requires disclosure of all substantive reasons for the adverse opinion and the principal effects of the inconsistency on the financial statements if known OR a statement in a separate emphasis-of-matter or other-matter paragraph that the effects aren’t reasonably determinable
When is an adverse opinion warranted?
When departure from an applicable financial reporting framework or the inconsistency is sufficiently material and pervasive
Qualified Opinion
Except for the effects of the matter to which the qualification relates, the financial statements present fairly in all material respects
Requires disclosure of all substantive reasons in one or more separate emphasis-of-matter or other-matter paragraph
The words “except for” and a reference to the emphasis-of-matter or other-matter paragraphs should appear in the opinion paragraph
When is a qualified opinion warranted?
When the matter is material enough to prevent an unmodified opinion but not sufficiently material to require an adverse or disclaimer of opinion. Expressed when there is one of the following:
(1) Lack of sufficient appropriate evidence that doesn’t warrant a disclaimer of opinion
(2) Restriction of scope that doesn’t warrant a disclaimer of opinion
(3) Departure from GAAP that doesn’t warrant an adverse opinion
Unaudited Financial Statements Presented Comparatively With Audited Financial Statements Should:
(1) Be clearly marked as unaudited
AND
(2) Include either:
- A separate paragraph in the audit report describing the responsibility assumed for the unaudited financial statements
OR
- The reissued report on the unaudited statements
Employee Retirement Income Security Act
ERISA
Regulates employers who offer pension or welfare plans
Review Report Elements
- Must Be Written*
(1) Title (including the word “independent”)
(2) Addressee (as appropriate)
(3) Introductory Paragraph
(4) “Management’s Responsibility” section
(5) “Accountant’s Responsibility” section
(6) Concluding section
(7) Manual or printed signature of accountants firm
(8) City and state where accountant practices
(9) Date of review report
(10) Each page of financial statements reviewed should include reference to report
Review Report Introductory Paragraph Elements
Identifies
(1) Entity whose financial statements have been reviewed
(2) The financial statements reviewed
Specifies
(1) Date or period covered by each financial statement
Includes statements that
(1) The financial statements identified were under review
(2) A review includes primarily applying analytical procedures to managements financial data
(3) A review is substantially less in scope than an audit - don’t express an opinion
Review Report Management’s Responsibility Section
Includes explanation that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; this responsibility includes the design, implementation, and maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation of financial statements in accordance with the applicable financial reporting framewok
Review Report Accountants Responsibility Section
Includes the following statements:
(1) The accountants responsibility is to conduct the review engagement in accordance with SSARs promulgated by the Accounting and Review Services Committee of the AICPA. Accountant’s review report should also explain that those standards require that the accountant perform the procedures to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework
(2) The accountant believes that the review evidence obtained is sufficient and appropriate to provide a basis for conclusion
Review Report Conclusion
Must have appropriate heading and include statement about whether the accountant is aware of any material modifications to the accompanying financial statements for them to be in accordance with applicable financial reporting framework and identifies origin of those principles, if applicable
Date of Review Report
No earlier than the date on which the accountant completed procedures sufficient to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, including evidence that:
(1) All statements including notes have been prepared
(2) Management has asserted that they have taken responsibility for those statements
Auditor May Request Direct Assistance From the Internal Auditors In:
(1) Obtaining an understanding of internal control
(2) Performing tests of controls
(3) Performing substantive tests
In Regards to Litigation, Claims, and Assessments the Auditor Must Obtain Audit Evidence Relevant To:
(1) It’s existence
(2) The accounting period in which it’s underlying cause occurred
(3) Degree of probability of an unfavorable outcome
(4) Range of potential loss
Corroborating Evidence
(1) Evidence other than the books of original entry which allows the auditor to reach a conclusion
(2) Includes both internally and externally generated documents
(3) All information obtained by the auditor through inquiry, observation, inspection, and physical examination and any other information developed by or available to the auditor
When Are Contingent Fees Permitted?
When they involve a legal proceeding or ruling
Statistical Sampling Allows the Auditor to Make _________ Statements About the Population on the Basis of a Sample
Objective
Key Considerations in the Development of an Audit Program
(1) Materiality
(2) Risk of material misstatement
(3) Business and industry considerations
Audit Risk
Risk of Material Misstatement (RMM) + Detection Risk (DR)
Sampling Methodologies
(1) Random-Number Sampling
(2) Systemic Sampling
(3) Haphazard Sampling
(4) Block Sampling
Random-Number Sampling
Numbered documents or transactions are selected through the use of random number tables or computer software
Systemic Sampling
Every “nth” item is selected from a randomly distributed population from a randomly selected starting point
Haphazard Sampling
Sample consisting of units selected without any conscious bias - assuming random distribution of the population
Block Sampling
aka Cluster Sampling - Sample consisting of contiguous units
Inquiries to Make of Predecessor Auditor
RID-C
(1) Reasons for change
(2) Integrity of management
(3) Disagreements during audit
(4) Communication with management or those charged with governance
Matters to Be Communicated to Those Charged with Governance
DISAPPROVE
(1) Disagreements with management
(2) Illegal acts (Noncompliance with laws and regulations)
(3) Significant accounting policies adopted or changed by management
(4) Adjustments proposed by auditor with significant impact on the financial statements
(5) Prior discussions with management before acceptance of the engagement
(6) Problems or significant difficulties arising during the audit in obtaining evidence and employee cooperation
(7) Responsibilities of the auditor under GAAS to form and express an opinion
(8) Other information
(9) Views of the accountant regarding the qualitative aspects of the entity’s significant accounting policies , estimates, and disclosures
(10) Estimates in the accounting records and the process used to obtain them
Other Information to be Communicated to Those Charged with Governance
(1) Corrected misstatements brought to managements attention as a result of audit procedures
(2) Items discussed with or communicated to management regarding significant findings or issues
(3) Auditor views on accounting or auditing matters about which management consulted with other accountants
(4) Written representations requested by the auditors
Review Conclusion Should be Obtained By:
(1) Making inquiries of management and other personnel
(2) Performing analytical procedures
(3) Obtaining representations from management
CPA Should Establish Policies and Procedures for Determining the Acceptance of a Client to:
Minimize the risk of being associated with a client whose management lacks integrity
Audit Procedure in Regards to Related Party Transactions
(1) Determine existence
(2) Identify transactions
(3) Examine as to business purpose, substance, extent and effect on financial statement
(4) Be certain appropriate information is disclosed
Information to be Disclosed Regarding Related Party Transactions
(1) Nature of relationship(s)
(2) Description of transactions
(3) Dollar volume of transactions
(4) Amounts due from or to relate parties and terms if relevant
Assertions Related to Over or Understatement of Revenue
(1) Valuation
(2) Completeness
(3) Cutoff
To Compile or Review the Financial Statements, Accountant Should Possess and Understanding of:
The clients business.
(1) The clients organization
(2) The operating characteristics
(3) The nature of it’s asset’s, liabilities, revenues, and expenses
Pro Forma Included in Any Report Filed with the SEC must be Presented in a Matter that:
(1) Doesn’t contain an untrue statement of a material fact or omit a material fact necessary to in order to make the pro forma financial information not misleading
(2) Reconciles it with the financial condition and results of operating of the issuer under GAAP
Letter of Inquiry Required for
Audit
For Review Engagement Accountant Should Consider
(1) Making inquiries concerning actions taken at meetings of stockholders, board of directors, committees of the board of directors or comparable meetings that may affect the financial statement
(2) Reading the financial statements to consider whether the financial statements appear to conform with the applicable reporting framework
(3) Obtaining reports from other accountants who have been engaged to audit or review the financial statements of significant components of the entity, it’s subsidiaries, and other investees
Indepence and Compilation Engagements
(1) Accountant isn’t precluded from issuing a compilation report for an entity from which the accountant isn’t independent - must determine whether they are independent or not
(2) When not independent accountant should indicate lack of independence in final paragraph of compilation report
(3) If elect to disclose reasons for impaired independence all such reasons should be included in descriptions
Accountant May Obtain Industry Knowledge Through
(1) AICPA guides
(2) Industry publications
(3) Financial statements of other entities in the industry
(4) Textbooks and periodicals
(5) Appropriate continuing professional education
(6) Individuals knowledgeable about the industry
When an Independent Auditor is Engaged to Report on Financial Statements Prepared for Use in Another Country the Auditor Should Perform Audit Procedures Necessary to Comply With
The general and fieldwork standards of that country as well as GAAS or International Standards on Auditing when requested to do so
SOX Section 409
Real Time Issuer Disclosures
Issuers must disclose to the public on a rapid and current basis any additional information concerning material changes in financial conditions or operation in plain english
Auditors Planning Activities
(1) Identifying characteristics of the engagement that affect the scope of the audit
(2) Determining the reporting objectives to plan the nature and timing of communications
(3) Consider other factors that the auditor deems significant to the direction of the audit
(4) Ascertain the nature, timing, and extent of resources needed to perform the engagement
Steps in Planning an Audit
BRAINSTOPS
(1) Basic discussions with the client
(2) Review of audit documentation
(3) Ask about recent developments
(4) Interim financial statements analyzed
(5) Non-audit personnel of the accounting firm who have provided services to the client should be identified and consulted
(6) Staffing for audit should be determined
(7) Outside assistance needs should be determined
(8) Pronouncements reflecting changes in accounting principles should be read or reviewd
(9) Scheduling with the client
Analytical Procedures are _______ in the Planning of an Audit
Mandatory
Detection Risk
Risk that audit procedures will incorrectly lead to a conclusion that material misstatement doesn’t exist when it does.
DR = Test of Details Risk + Substantive Analytical Procedure Risk
Detection Risk has _______ Relationship to Risk of Material Misstatement
Inverse
Two Types of Fraud
(1) Fraudulent Financial Reporting
(2) Misappropriation of Assets
Fraudulent Financial Reporting
Manipulation, falsification, alteration of accounting records or supporting documents.
Misappropriation of Assets
(1) Defalcation schemes
(2) Embezzlement of funds
(3) Theft of other assets
(4) Misuse of entity assets
Known Misstatements
Misstatements specifically identified during the audit
Likely Misstatements
Have not been specifically identified but are considered likely to exist based on audit evidence obtained or due to a difference between between management and auditor judgement
May be based on the assumption that known misstatements identified in a sample are proportionately present in the population
May be based on the auditors knowledge of of entity, it’s industry, or it’s environment
Successor Auditor May Review Predecessor Auditors Workpapers Including
(1) Planning Documentation
(2) Internal Control
(3) Audit Results
(4) Analysis of balance sheet accounts
(5) Analysis relating to contingencies
Auditors Must Document Consideration of Fraud Including:
(1) Brainstorming session
(2) Procedures performed to obtain information used to identify risks of material misstatement due to fraud
(3) Identified risks of material misstatement
(4) Reasons revenue recognition wasn’t considered a fraud risk factor if appropriate
(5) Results of procedures performed in response to risk of management override of controls
(6) Other factors drawing the auditor to the conclusion that additional procedures were required
(7) Nature of communication about fraud
Fraud Risk Factors
- Motivation
- Opportunities
- Attitudes/ Rationalizations
If Independence is Impaired During a Compilation Engagement Accountant Should
Include a final paragraph in compilation report referencing non-independence
In Planning an Examination of Internal Control the Auditor Should Consider
(1) Knowledge of the entity’s internal control obtained during other professional engagements
(2) Matters affecting the industry in which the entity operates
(3) Matters relating to the entity’s business
(4) Extent of recent changes, if any, in entity, operations, or internal control
(5) Preliminary judgements about materiality and risk
(6) Deficiencies previously communicated to those charged with governance
(7) Legal or regulatory matters of which the entity is aware
(8) Type and extent of available evidence related to effectiveness of internal control
(9) Public information about the entity relevant to the evaluation of the likelihood of material misstatement
(10) Knowledge about risks related to the entity evaluated as part of the auditors client acceptance and retention evaluations
Auditors Report on Summary Financial Statements Derived From Those that the CPA has Audited Should Indicate that:
(1) Auditor has audited and expressed an opinion on the complete financial statements
(2) Date of the auditors report on the complete financial statements
(3) Type of opinion expressed
(4) Whether, in the auditors opinion, the information set forth in the summary financial statements is presented fairly
Actions Auditor Should Take if Other Supplementary Information Contains Material Inconsistency with Financial Statements
(1) Determine if financial statements or auditors report require revision
(2) Request client revise other information
(3) If client refuses, consider taking further action
Further Action to Consider if Client Refuses to Revise Other Supplementary Information Containing Material Inconsistency with Financial Statements
(1) Add emphasis-of-matter paragraph to auditors report describing inconsistency
(2) Withdraw from engagement
(3) Withhold use of auditors report with other information
If Accountant Believes Modification of Standard is not Adequate to Indicate Deficiencies Accountant Should:
Withdraw from the compilation or review engagement.
May wish to consult with legal counsel
Qualified or Adverse Opinion Based on Illegal Acts Should be Expressed When:
Illegal act has material effect on statements and hasn’t been properly accounted for or disclosed
Qualified or Disclaimer of Opinion Based on Illegal Acts Should Expressed
If precluded by the client from obtaining sufficient appropriate audit evidence to evaluate whether an illegal act that could be material has occured
