Becker AUD 1.2 - Professional Standards Flashcards Preview

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Flashcards in Becker AUD 1.2 - Professional Standards Deck (32):

Diference between issuer and nonissuer companies.

Issuer company = public traded company on stock exchanges (submits 10-Ks, 10-Qs, 8-Ks) to SEC. Auditors follow PCAOB standards to audit these companies.

Nonissuer company = private, non-public traded company. Auditors follow Auditing Standards Board (ASB) standards to audit these, but can choose PCAOB as well but does not have to.


Most authoritative guidance for an auditor to audit nonissuer companies

Use General guidance by Statements on Auditing Standards (SAS) on nonissuer companies (i.e. Accounting standards board standards)


True or false

(1) Auditor is required to follow SAS guidance and justify any departures from SAS.

(2) The Auditor, auditing a non-issuer company (private company / non-public company) can only follow ASB or PCAOB, but not both.

(1) True. Auditor is required to follow SAS guidance and justify any departures from SAS.

(2) False.
Auditor is only required to use ASB standards to audit non-issuer (private) companies.

But, the Auditor does have a choice to use BOTH ASB and PCAOB standards to audit non-issuer companies.


Unaccepted reasons to not follow SAS guidelines in doing an audit

Unaccepted reasons: 1) Not familiear with a certain SAS section so not follow it.
2) Depart from SAS because it's too expense to do so.

FYI - Auditors must have sufficient knowlege of SAS and be able to identify thesoe in the a given audit engagement.


Ultimate goal of the financial statements as far as follow GAAP goes?

Ultimate goal of financial statements is to present F/S fairly.


When financial statement contain depature from GAAAP becuase due to unsual circumstnace, the statements would otherwise be mesleading, therefore give what opinion type?

Unmodified opinion

This because: Financial statements' ultimate goal is to represent fairly not follow strictly to GAAP rules. Therefore, it is okay to depart from GAAP so the F/S is not misleading.


Need to have this attitude in doing an audit on client company

Professional skepticmen

This includes need to have a "Questioningmind" and need to "crtiically assess audit evidence and recognze cirucmstnaces exisit to cuase material misstatement (material mistake) on F/S.


Are objective (judgement), independence, integrity, impartiality a mental attitude to perform an audit?

No, because these are all Ethical Characteristics and professional qualities inside "applicable ethical requirements" in audit profession


Examples o professional skeptcism

Create more audit procedures to get more audit evidence to support a financial statement assertion. Use 3rd party to confirm a management's reported data. Obtain corroborating evidence via specialist to prove management's explanation


Is using past year's engagement teams' experience an example of professional skepticism?

No, because past year's information not relevant to current audit engagement. This because things can change from past year to current year where past year's audit engagement's knowledge. A fraud may exist no matter what happened in past year's engagement with the client company.


Auditor on nonissuer company (nonpublic company) MUST conduct audit using what standard?

Must use ASB standards

but can choose to use PCAOB standards


Auditor wanting to audit issuer (public company) must do what first before auditing the issuer company?

Must register with Public Company Accounting Oversight board (PCAOB)
Must use PCAOB standards in performing the audit


An auditor need to have what in order to do audit competently and with the knowledge to do so?

Is auditor required to have background in different disciplines in order to do an audit?

Auditor must have Technical training, adequate to meet requirements to be a professional auditor to do a competent job in auditing F/S

Auditor not required to have background in different disciplines.


CPA Firm comply with AICPA's quality controls standards by:

Establishing policies to ensure audit work meets applicable professional standards, and comply with appropriate legal and regulatory requirements and any reports issued are appropriate in circumstances.


AICPA's code of professional conduct is?

Guidelines for behavior on auditor's conduct in their professional affairs.
Provides assurance to the public that high standards are being placed on auditors to comply with.
Applies to all services performed in the practice of public accounting.


Where is AICPA's code of professional conduct located in AICPA's Professional Standards?

Section ET of AICPA's Professional Standards


PCAOB standards that says auditor could perform a specific procedure: what does the auditor do in doing this "could" procedure?

Auditor must use due professional judgement in circumstances to decide whether to use the PCAOB's "could" procedure.


SAS and PCAOB's standards:
1) The terms "must" or "is required" mean?

2) The term "should" means?

3) The term "may" "might" or "could mean?"

1) "Must" or "is required" to mean: unconditional requirement which the SAS and PCAOB standard must be used at all times where requirement is relevant

2) Should mean: a presumptively mandatory requirement must be followed in all cases, but in rare circumstances can depart as long you have appropriate justification

3) May, might, could mean: explantarly material that does NOT impose a professional requirement for performance. Auditor can follow, but requires professional judgment if "could, may, might"


PCOAB when it started?
How many members it has?

PCAOB started by Sarbanes Oxley Act of 2002 (SOX)
It has 5 full-time, financially literature members
- 2 members: CPAs
- 3 members: not CPAS
- 1 CPA = board chair with 5 years not do accouting work

PCAOB not allowed to receive payments from public accoutning firms


What are the inherent limitations of an audit?

1) Have to get into the heads of management's judgement on determing the following items:
a) intangibles
b) impairment (when an item is impaired)
c) asset/life and salvage (estimate)
d) Bad debts (% uncollectible)
e) Warranties (% product defects returned)
f) lawsuits (potential losses on lawsuits)

2) Nature of audit procedures where the auditor does not get all the information from the managements. Also, fraud still exists no matter what audit procedures is used.


In performing an audit is to obtain reasonable assurance or absolute assurance?

Obtain reasonable assurance because it's cost too much to check every transaction only . So, it's better to obtain reasonable assurance to show that Financial statements are free from material misstatements due to Fraud or error.

This done to express opinion on financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework"


US Auditing standards vs International Auditing Standards:

ISA has only 1 category of professional requirements that require the auditor to do what?

One category where auditor must comply with requirements when relevant, except in rare circumstances.

This is similar to "Presumptively mandatory" (should) requirement under US Auditing standards.


Overall objective of auditor on the audit

To obtain reasonable assurance
To report on financial staements and communicate as requried by GAAP on auidtor's indings


IF auditor cannot get reasonable assurance and not able to present a qualified opinion in auditor's report, then?

Auditor disclaim an opinion or withdraw from audit engagement.


In the conduct of audit, to perform professional skepticism, the auditor should be alert for what 4 things?

1) Audit evidence contracts other audit evidence obtained (done via matching, reconcile, trace to source docs)
2) Checking and questioning of source documents' reliability and responses to inquires to that maybe used as audit evidence
3) Conditions that indicate fraud, such as Pressure (to do do a good job or out beat competition) done via Opportunity to cut corners or override internal controls with Rationalization to justify such unethical conduct
4) Circumstances to perform additional audit procedures


Examples of Ethical requirements and rules

Hint: agencies and organizations

AICPA code of professional conduct, state board rules, and applicable regulatory agencies


Ethical requirement includes auditor to maintain independence in fact and apperance in accordance with GAAS except

GAAS provides otherwise
Auditor is required by law or regulation to accept the engagement and report on financial statements even when auditor is not independent of client entity


Professional judgement is needed in auditors to do?

to plan and perform the audit and decide on
Materiality (%),
Audit risk,
Nature, extent, timing of audit procedures (what type of procedures, how much, and when to do it)
Evaluate whether sufficient, appropriate evidence has been obtained
Evaluate management's judgement in applying applicable financial reporting framework and justify departure so F/S are presented fairly
Draw conclusions based on audit evidence obtained


Sufficient audit evidence is needed in order to do what to audit level?

Reduce audit level.


Weak internal controls NOT mean give adverse opinion, why?

Weak internal controls mean the records are not that strong but its data is still correct in having the F/S presented fairly. Therefore, do more substantive tests to see if dollar amounts on intenral contorls (docs) are orrect and give an honest audit opinion that the F/S are presented fairly or not..


Compliance with GAAS: say in report that Auditors did in fact comply evertyhig with GAAS, but if not then?

Modify the opinion or withdraw from engagement


GAAS does not override laws or regulations that governs auditing financial statements.

Auditor may conduct an audit in accordance with GAAS and what else?

PCAOB issued auditing standards
International Standards on Auditing (ISA)
Governmental auditing standards (GAGAS)
Specific industry or specific country auditing standards