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Chapter 2Chapter 2The Financial The Financial StatementStatement
Auditing EnvironmentAuditing Environment
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“The interest of [businessmen] is always in some respects different from, and even opposite to, that of the public ... The proposal of any new law or regulation of commerce which comes from this order ... ought never to be adopted, till after having been long and carefully examined ... with the most suspicious attention. It comes from an order of men ... who have generally an interest to deceive and even oppress the public” –Adam Smith
Types of AuditorsTypes of Auditors
External Auditors Internal Auditors
Government Auditors
Forensic Auditors
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2-2
Types of Audits and Auditors Types of Audits and Auditors Financial (External Auditors/CPAs)Financial (External Auditors/CPAs)
• Ensure that financial statements are reliableEnsure that financial statements are reliable Operational (Internal and Governmental Operational (Internal and Governmental
Auditors/CIAs)Auditors/CIAs)• Improve operational Improve operational economyeconomy• Improve operational Improve operational efficiencyefficiency
Compliance (Internal and Governmental Compliance (Internal and Governmental Auditors)Auditors)• Ensure compliance with company and/or Ensure compliance with company and/or
governmental rules and regulationsgovernmental rules and regulations Forensic (Fraud Auditors/CFEs)Forensic (Fraud Auditors/CFEs)
• Designed to investigate a crime and will often involve Designed to investigate a crime and will often involve gathering evidence designed to convict a fraudstergathering evidence designed to convict a fraudster
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External vs. Internal AuditingExternal vs. Internal Auditing
External auditing is often called External auditing is often called independent auditing because it is done by independent auditing because it is done by certified public accountants who are certified public accountants who are independent of the organization being independent of the organization being audited.audited.
External auditors represent the interests of External auditors represent the interests of third-party stakeholders in the organization, third-party stakeholders in the organization, such as stockholders, creditors, and such as stockholders, creditors, and government agencies.government agencies.
Because the focus of external audit is on Because the focus of external audit is on financial statements, this type of audit is financial statements, this type of audit is called financial auditcalled financial audit
Financial, Internal Control, Financial, Internal Control, Compliance, Operational, ForensicCompliance, Operational, Forensic
a. Evaluate the policies and procedures of the Food a. Evaluate the policies and procedures of the Food and Drug Administration in terms of bringing new and Drug Administration in terms of bringing new drugs to market.drugs to market.
Operational- Government AuditorOperational- Government Auditor
b. Determine the fair presentation of Ajax Chemical’s b. Determine the fair presentation of Ajax Chemical’s balance sheet, income statement, and statement of balance sheet, income statement, and statement of cash flows.cash flows.
Financial- ExternalFinancial- External
c. Review the payment procedures of the accounts c. Review the payment procedures of the accounts payable department for a large manufacturer.payable department for a large manufacturer.
Operational or I/C or Compliance- Internal Operational or I/C or Compliance- Internal or Externalor External
Financial, Internal Control, Financial, Internal Control, Compliance, Operational, ForensicCompliance, Operational, Forensic
d. Examine the financial records of a division of a d. Examine the financial records of a division of a corporation to determine if any accounting irregularities corporation to determine if any accounting irregularities have occurred.have occurred.
Forensic- Internal, External, or ForensicForensic- Internal, External, or Forensic
e. Evaluate the feasibility of forecasted rental income e. Evaluate the feasibility of forecasted rental income for a planned low income public housing project.for a planned low income public housing project.
Operational- Government, External, or Operational- Government, External, or InternalInternal
f. Evaluate a company’s computer services department f. Evaluate a company’s computer services department in terms of the efficient and effective use of corporate in terms of the efficient and effective use of corporate resources.resources.
Operational- Internal or ExternalOperational- Internal or External
Financial, Internal Control, Financial, Internal Control, Compliance, Operational, ForensicCompliance, Operational, Forensic
g. Audit the partnership tax return of a real g. Audit the partnership tax return of a real estate development company.estate development company.
Compliance- GovernmentCompliance- Government
h. Investigate the possibility of payroll fraud h. Investigate the possibility of payroll fraud in a labor union pension fund.in a labor union pension fund.
Forensic- External or ForensicForensic- External or Forensic
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External vs. Internal AuditingExternal vs. Internal Auditing
Institute of Internal Auditors defines Institute of Internal Auditors defines internal auditinginternal auditing as an as an independent appraisal function independent appraisal function established within an organization to established within an organization to examine and evaluate its activitiesexamine and evaluate its activities
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External vs. Internal AuditingExternal vs. Internal Auditing
Internal auditors perform a wide range Internal auditors perform a wide range of activities on behalf of the of activities on behalf of the organization, including conducting organization, including conducting financial audits, examining an financial audits, examining an operation’s compliance with operation’s compliance with organizational policies, reviewing the organizational policies, reviewing the organization’s compliance with legal organization’s compliance with legal obligations, evaluating operational obligations, evaluating operational efficiency, detecting and pursuing fraud efficiency, detecting and pursuing fraud within the firm, and conducting IT within the firm, and conducting IT audits.audits.
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External vs. Internal AuditingExternal vs. Internal Auditing
While external auditors represent outsiders, While external auditors represent outsiders, internal auditors represent the interests of internal auditors represent the interests of the organization.the organization.
Internal auditors often cooperate with and Internal auditors often cooperate with and assist external auditors in performing assist external auditors in performing financial audits. financial audits.
This is done to achieve audit efficiency and This is done to achieve audit efficiency and reduce audit fees. For example, a team of reduce audit fees. For example, a team of internal auditors can perform tests of internal auditors can perform tests of computer controls under the supervision of a computer controls under the supervision of a single external auditor.single external auditor.
Context of Financial Statement Context of Financial Statement Auditing Auditing
The primary context with which an auditor is concerned is the industry or business of his or her auditee. In other words, the context provided by the entity’s business impacts the auditor and the audit, and is thus a primary
component of the environment in which financial statement auditing is conducted.
LO# 6
Thought Question:
How would your concerns about the inventory account differ for a Computer Hardware Manufacturer versus a Jewelry Store?
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A Model of Business A Model of Business
Board of Directors
Audit Committee
Business organizations exist to create value for their stakeholders. Due to the way resources are invested and
managed in the modern business world, a system of corporate governance is necessary, through which
managers are overseen and supervised.
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A Model of BusinessA Model of Business
Objectives Strategies
Processes (5 broad
categories)
Transactions Reports
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Controls
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A Model of Business Processes: A Model of Business Processes: Five Components Five Components
Financing Process
Purchasing Process
Human Resource
Management Process
Inventory Management
Process
Revenue Process
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Skills and Knowledge Needed Skills and Knowledge Needed for External Auditing Professionfor External Auditing Profession Technical knowledge and expertiseTechnical knowledge and expertise
– Auditors must:Auditors must:Understand accounting and auditing Understand accounting and auditing
authoritative literatureauthoritative literatureDevelop industry and client-specific Develop industry and client-specific
knowledgeknowledgeDevelop and apply computer skillsDevelop and apply computer skillsEvaluate internal controlsEvaluate internal controlsAssess and respond to fraud riskAssess and respond to fraud risk
Skills and Knowledge Needed Skills and Knowledge Needed for External Auditing Professionfor External Auditing Profession Leadership, teamwork, and professional Leadership, teamwork, and professional
skillsskills– Auditors:Auditors:
Make presentations to management and audit committee Make presentations to management and audit committee membersmembers
Exercise logical reasoningExercise logical reasoning Communicate decisions to usersCommunicate decisions to users Manage and supervise by providing meaningful feedbackManage and supervise by providing meaningful feedback Act with integrity and ethics and Interact in a team Act with integrity and ethics and Interact in a team
environmentenvironment Collaborate and maintain a professional personal Collaborate and maintain a professional personal
presencepresence
The Public Accounting The Public Accounting ProfessionProfession
Assurance servicesAssurance services• Financial Statement Audit Financial Statement Audit
engagementsengagements• Assurance engagementsAssurance engagements• Attestation engagementsAttestation engagements• CompilationsCompilations• ReviewsReviews
Tax servicesTax services Consulting and Advisory servicesConsulting and Advisory services
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Public Accounting FirmsPublic Accounting FirmsPublic accounting firms range in size from a single proprietor
to thousands of owners (or “partners”) and thousands of professional and administrative staff employees.
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Big 4
PwC
EY
Deloitte
KPMG
Mid-Tier
Grant Thornton
BDO Seidman
RSM McGladrey
Regional Local
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Organization of the ProfessionOrganization of the Profession
““Big Four” Accounting FirmsBig Four” Accounting Firms– Deloitte, E&Y, KPMG, PwCDeloitte, E&Y, KPMG, PwC
National National – Grant Thornton, BDO SeidmanGrant Thornton, BDO Seidman
Local/Regional (KY)Local/Regional (KY)– Blue and Co.Blue and Co.– Mountjoy, Chilton, and MedleyMountjoy, Chilton, and Medley– Dean Dorton Allen FordDean Dorton Allen Ford
Sole ProprietorSole Proprietor
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Revenues for the Big Four CPA Revenues for the Big Four CPA FirmsFirms
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Public Accounting Firm OrganizationPublic Accounting Firm Organization
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Audit TeamsAudit Teams
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Audit Team Member Selected Duties
Partner Reach agreement with the auditee on the scope of the service to be provided. Ensure that the audit is properly planned and that the audit is conducted in accordance
with applicable auditing standards. Assemble an audit team that has the required skills and experience. Supervise the audit team and review the working papers. Conclude on the adequacy of audit evidence and sign the audit report
Manager Ensure that the audit is properly planned, including scheduling of team members.
Supervise the preparation of and approving the audit program. Review the working papers, financial statements and audit report. Deal with invoicing and ensure collection of payment for services. Inform the partner about any auditing or accounting problems encountered.
Senior/In-Charge Assist in the development of the audit plan.
Prepare budgets. Assign tasks to associates and direct the day-to-day performance of the audit. Supervise and review the work of associates. Inform the manager about any auditing or accounting problems encountered.
Associate/Staff Perform the audit procedures assigned to them.
Prepare adequate and appropriate documentation of completed work. Inform the senior about and auditing or accounting problems encountered.
Organizational hierarchy of Organizational hierarchy of audit firmsaudit firms
Partners/Owners
Managers
• Responsible for overall conduct of each audit
• Responsible for many audit engagements being conducted simultaneously
• Review audit work of seniors and staff• Responsible for fewer audit engagements
being conducted simultaneously
Seniors
• Responsible for overseeing day-to-day activities on a specific audit
• Oversee performance of auditing procedures
A Time of Challenge and Change A Time of Challenge and Change
1990 2000
During the economic boom of the late 1990s and the early 2000s, accounting firms aggressively sought opportunities
to market a variety of high-margin nonaudit services to their auditees.
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An Explosion of ScandalsAn Explosion of Scandals
Brokerage Firms
Corporate Giants
Stock Exchanges
Public Accounting
Firms
Mutual Fund Managers
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2-25http://www.accounting-degree.org/scandals/
Society’s Expectations and the Society’s Expectations and the Auditor’s Responsibilities Auditor’s Responsibilities
The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether caused by error or
fraud.
Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain
reasonable, but not absolute, assurance that material misstatements are detected.
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Government Regulation Government Regulation
In 2002, Congress passed the Sarbanes-Oxley Public Company Accounting Reform and Investor
Protection Act.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
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Prohibited Professional ServicesProhibited Professional Services In summary, Sarbanes-Oxley prohibits professional service In summary, Sarbanes-Oxley prohibits professional service
firms from performing any client services for audit clients in firms from performing any client services for audit clients in which the auditors may find themselves making management which the auditors may find themselves making management decisions or auditing their own firm’s work.decisions or auditing their own firm’s work.
Specifically, Sarbanes-Oxley prohibits professional service firms Specifically, Sarbanes-Oxley prohibits professional service firms from providing any of the following services to an audit client: from providing any of the following services to an audit client:
1) bookkeeping and related services2) design or implementation of financial information
systems3) appraisal or valuation services4) actuarial services5) internal audit outsourcing 6) management or human resources services 7) investment or broker/dealer services 8) legal and expert services (unrelated to the audit)
Professional service firms may provide client tax services (with Professional service firms may provide client tax services (with some restrictions) and other non-prohibited services to audit some restrictions) and other non-prohibited services to audit clients if the company’s audit committee has approved them in clients if the company’s audit committee has approved them in advance.advance.
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Organizations That Affect the Organizations That Affect the Public Accounting ProfessionPublic Accounting Profession
Securities and Exchange Commission (SEC)
American Institute of Certified Public
Accountants (AICPA)
Public Company Accounting Oversight
Board (PCAOB)
Financial Accounting Standards Board (FASB)
LO# 9
International Accounting Standards Board (IASB)
International Auditing and Assurance Standards
Board (IAASB)
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Auditing Standards Auditing Standards Auditing standards serve as
guidelines for and measures of the quality of the auditor’s
performance.
Public Companies
PCAOB
Nonpublic Companies
Auditing Standards
Board
> 100 Countries
IAASB
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CongressCongress Due to various failures in auditing profession
during early 2000s Congress passed the Sarbanes-Oxley Act of 2002
This legislation had an impact on audit firms through:– Increasing auditor independence– Enhancing the role and importance of audit committee– Requiring reporting on internal control over financial
reporting– Providing new oversight of external auditing profession
by Public Company Accounting Oversight Board
Public Company Accounting Public Company Accounting Oversight Board (PCAOB)Oversight Board (PCAOB)
Private sector, nonprofit organization Private sector, nonprofit organization Oversees auditors of public Oversees auditors of public
companiescompanies Goal of the PCAOBGoal of the PCAOB
– To protect the interests of investors and To protect the interests of investors and further the public interest in the further the public interest in the preparation of informative, fair, and preparation of informative, fair, and independent audit reportsindependent audit reports
Formation of the PCAOBFormation of the PCAOB
The PCAOB was formed to ensure that audit quality The PCAOB was formed to ensure that audit quality is not compromised and that auditor performance is not compromised and that auditor performance continues to meet public expectations.continues to meet public expectations.
The membership of the board consists of five SEC-The membership of the board consists of five SEC-appointed public members (business executives, appointed public members (business executives, investment analysts) and is supported by fees paid investment analysts) and is supported by fees paid by publicly traded companies. by publicly traded companies.
The Board’s tasks includeThe Board’s tasks include– registering and monitoring accounting firms that prepare registering and monitoring accounting firms that prepare
audit reports for public companies.audit reports for public companies.– establishing rules to govern auditing, quality control, establishing rules to govern auditing, quality control,
ethics, and independence. ethics, and independence.
Public Company Accounting Public Company Accounting Oversight Board (PCAOB)Oversight Board (PCAOB)
Primary responsibilities related to Primary responsibilities related to auditorsauditors– Registration of audit firms that audit public Registration of audit firms that audit public
companiescompanies– Periodic inspections of registered audit firmsPeriodic inspections of registered audit firms– Establishment of auditing and related Establishment of auditing and related
standards for registered audit firmsstandards for registered audit firms– Investigation and discipline of registered Investigation and discipline of registered
audit firms for violations of relevant laws or audit firms for violations of relevant laws or professional standardsprofessional standards
PCAOB: Standard Setting RolePCAOB: Standard Setting Role
Congress has taken the responsibility for creating Congress has taken the responsibility for creating standards for the audits of standards for the audits of publicly traded publicly traded companiescompanies from the Auditing Standards Board from the Auditing Standards Board (ASB) of the AICPA and turned that responsibility (ASB) of the AICPA and turned that responsibility over to the newly created Public Company over to the newly created Public Company Accounting Oversight Board (PCAOB). Accounting Oversight Board (PCAOB).
Rather than starting from scratch, the PCAOB has Rather than starting from scratch, the PCAOB has declared that, for the time being, the previously declared that, for the time being, the previously created practice standards (e.g., ASB’s created practice standards (e.g., ASB’s SASsSASs) will ) will function as the PCAOB’s function as the PCAOB’s Interim Professional Interim Professional Auditing StandardsAuditing Standards for audits of public for audits of public companies. companies.
PCAOB: Monitoring RolePCAOB: Monitoring Role
The Board’s goal is to ensure that audit quality is The Board’s goal is to ensure that audit quality is not compromised and that auditor performance not compromised and that auditor performance continues to meet public expectations. continues to meet public expectations.
Soon after it began operations in early 2003, the Soon after it began operations in early 2003, the PCAOB began registering professional services PCAOB began registering professional services firms providing auditing services to public firms providing auditing services to public entities. Firms not registered are not allowed to entities. Firms not registered are not allowed to conduct audits of public companies. conduct audits of public companies.
Other Board monitoring activities include Other Board monitoring activities include inspections of registered auditing firms (similar to inspections of registered auditing firms (similar to peer reviews), special investigations, and peer reviews), special investigations, and disciplinary proceedings.disciplinary proceedings.
Securities and Exchange Securities and Exchange Commission (SEC)Commission (SEC)
Governmental body established by Governmental body established by Congress in 1934Congress in 1934
Regulates the capital market systemRegulates the capital market system Has authority to establish GAAP for Has authority to establish GAAP for
companies whose stock is publicly companies whose stock is publicly tradedtraded
Responsible to prosecute public Responsible to prosecute public companies and their auditors for companies and their auditors for violating SEC lawsviolating SEC laws
American Institute of Certified American Institute of Certified Public Accountants (AICPA)Public Accountants (AICPA)
Primary governing organization of the Primary governing organization of the public accounting professionpublic accounting profession
Develops standards for audits of nonpublic Develops standards for audits of nonpublic companiescompanies
Responsible for a peer review program Responsible for a peer review program Provides continuing education programsProvides continuing education programs Prepares and administers the Uniform CPA Prepares and administers the Uniform CPA
Examination - through its Board of Examination - through its Board of Examiners Examiners
International Auditing and Assurance International Auditing and Assurance Standards Board (IAASB)Standards Board (IAASB)
Part of the International Federation Part of the International Federation of Accountants (IFAC)of Accountants (IFAC)– A global organization for the accounting A global organization for the accounting
professionprofession Sets International Standards on Sets International Standards on
Auditing (ISAs)Auditing (ISAs) Facilitates convergence of national Facilitates convergence of national
and international auditing standardsand international auditing standards
Committee of Sponsoring Organizations of Committee of Sponsoring Organizations of the Treadway Commission (COSO)the Treadway Commission (COSO)
Provider of thought leadership and Provider of thought leadership and guidance on:guidance on:– Internal controlInternal control– Enterprise risk managementEnterprise risk management– Fraudulent deterrenceFraudulent deterrence
Provides the internal control Provides the internal control frameworkframework– Serves as benchmark for auditorsServes as benchmark for auditors
Committee of Sponsoring Organizations of Committee of Sponsoring Organizations of the Treadway Commission (COSO)the Treadway Commission (COSO)
Sponsored by the following Sponsored by the following organizations:organizations:– Financial Executives InternationalFinancial Executives International– The American Institute of Certified The American Institute of Certified
Public AccountantsPublic Accountants– The American Accounting Association The American Accounting Association – The Institute of Internal AuditorsThe Institute of Internal Auditors– The Association of Accountants and The Association of Accountants and
Financial Professionals in Business (IMA)Financial Professionals in Business (IMA)
Accounting Standard SettersAccounting Standard Setters
Generally accepted accounting Generally accepted accounting principles principles (GAAP)(GAAP)– Has general acceptance and provides Has general acceptance and provides
criteria by which to assess the fairness criteria by which to assess the fairness of a financial statement presentationof a financial statement presentation
– GAAP traditionally been set by FASB, GAAP traditionally been set by FASB, with approval by the SEC in the United with approval by the SEC in the United StatesStates
Accounting Standard SettersAccounting Standard Setters
International accounting standards International accounting standards (IFRS -International Financial (IFRS -International Financial Reporting Standards)Reporting Standards)– Set by the IFRS Foundation of IASBSet by the IFRS Foundation of IASB– Their goal is to develop a single set of Their goal is to develop a single set of
international financial reporting standards international financial reporting standards that is:that is:UnderstandableUnderstandableEnforceableEnforceableGlobally acceptedGlobally accepted
Types of Practice StandardsTypes of Practice Standards
ClientPublic
CompaniesPrivate
CompaniesGovernmental
EntitiesForeign
Companies
Rule-making body
Public Company Accounting Oversight Board (PCAOB)
AICPA Auditing Standards Board (ASB)
U.S. Government Accountability Office (GAO)
IFAC International Auditing and Assurance Standards Board (IAASB)
Standards Auditing Standards (ASs)
Statements on Auditing Standards (SASs)
Government Auditing Standards (The “Yellow Book”)
International Standards on Auditing (ISAs)
Web site www.pcaobus.org www.aicpa.org www.gao.gov www.ifac.org
State Boards of AccountancyState Boards of Accountancy
Certified Public Accountants (CPAs)Certified Public Accountants (CPAs)– Licensed by state boards of accountancy Licensed by state boards of accountancy
which are charged with regulating the which are charged with regulating the profession at the state levelprofession at the state level
– Required by all state boards for passage Required by all state boards for passage of Uniform CPA Examination as one of Uniform CPA Examination as one criterion for licensurecriterion for licensure
Become Certified!Become Certified!
EducationEducation ExaminationExamination ExperienceExperience State Certificate and LicenseState Certificate and License
– KY State Board of Accountancy Skills sets and your educationSkills sets and your education
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The CPA ExamThe CPA Exam Four parts: Four parts:
– Auditing and Attestation (AUD)- Auditing and Attestation (AUD)- the entire audit process, other services including compilations, reviews and attestation engagements, and the AICPA Code of Professional Conduct
– Financial Accounting and Reporting (FAR)- Financial Accounting and Reporting (FAR)- financial accounting, differences btwn GAAP and IFRS, fund accounting
– Regulation (REG)- Regulation (REG)- federal taxation and business law
– Business Environment and Concepts (BEC)- Business Environment and Concepts (BEC)- operations and strategic management, economics, financial management and information technology
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CPA ExamCPA Exam
Multiple Choice Questions and Task-Based Multiple Choice Questions and Task-Based SimulationsSimulations
AICPA released Exposure DraftAICPA released Exposure Draft– Changes Proposed for 2017
Other important information:Other important information:– Parts expire after 18 monthsParts expire after 18 months– ExpensiveExpensive– Review course necessaryReview course necessary– Testing windowsTesting windows
The CPA ExamThe CPA Exam
CostCost– AUD- 4.5 HoursAUD- 4.5 Hours $192.03$192.03– BEC- 2.5 HoursBEC- 2.5 Hours $172.51$172.51– FAR- 4 HoursFAR- 4 Hours $192.03$192.03– REG- 3 HoursREG- 3 Hours $172.51$172.51– KY State Board FeesKY State Board Fees $150.00$150.00
$879.08$879.08 Review CourseReview Course $1,200-$3,400$1,200-$3,400
The Court SystemThe Court System
Acts as a quality-control mechanism Acts as a quality-control mechanism for the auditing professionfor the auditing profession
Third parties may sue CPAs under Third parties may sue CPAs under federal securities laws, various state federal securities laws, various state statutes, and common law for statutes, and common law for substandard audit worksubstandard audit work
The 10 Generally Accepted The 10 Generally Accepted Auditing Standards (PCAOB)Auditing Standards (PCAOB)
GAAS
General Field Work Reporting
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Engagement Overview and GAASEngagement Overview and GAAS
OBTAIN (OR RETAIN)
CLIENT
INTERNALCONTROL
EVALUATION
EVIDENCEGATHERING
REPORTINGENGAGEMENT
PLANNING
General Standards
Standards of Fieldwork
ReportingStandards
GAAS is used to measure the quality of the auditor’s performance. They are the same from audit to audit.
Audit procedures are the particular and specialized actions that auditors take to obtain evidence in a specific
audit engagement.
General StandardsGeneral Standards
Adequate Technical Training
& Proficiency
IndependenceDue Professional
Care
LO# 10,11
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General StandardsGeneral Standards
The General Standards affect all phases of The General Standards affect all phases of the audit, including client acceptance or the audit, including client acceptance or retention.retention.
1.1. The audit The audit mustmust be performed by a person or be performed by a person or persons having adequate technical training and persons having adequate technical training and proficiency as an auditor.proficiency as an auditor.
2.2. In all matters relating to the assignment, an In all matters relating to the assignment, an independence in mental attitude is to be independence in mental attitude is to be maintained by the auditor or auditors.maintained by the auditor or auditors.
3.3. Due professional care is to be exercised in the Due professional care is to be exercised in the performance of the audit and the preparation of performance of the audit and the preparation of the report.the report.
Standards of Field Work Standards of Field Work
Adequate Planning & Supervised
Assistants
Obtain Sufficient Appropriate
Evidential Matter
Obtain Sufficient Understanding of Internal Controls
LO# 10,11
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Standards of FieldworkStandards of Fieldwork
The Fieldwork Standards guide the planning, The Fieldwork Standards guide the planning, internal control evaluation, and the evidence internal control evaluation, and the evidence gathering phases of the engagement.gathering phases of the engagement.
1.1. The auditor must adequately plan the work and must The auditor must adequately plan the work and must properly supervise any assistants.properly supervise any assistants.
2.2. The auditor must obtain a sufficient understanding of the The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, entity and its environment, including its internal control, to assess the risk of material misstatement of the to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit design the nature, timing, and extent of further audit procedures. procedures.
3.3. The auditor must obtain sufficient appropriate audit The auditor must obtain sufficient appropriate audit evidence through audit procedures performed to afford a evidence through audit procedures performed to afford a reasonable basis for an opinion regarding the financial reasonable basis for an opinion regarding the financial statements under audit.statements under audit.
Evidence ConsiderationsEvidence Considerations
The auditor must "obtain The auditor must "obtain sufficient, appropriate audit sufficient, appropriate audit evidence” to support evidence” to support opinion. opinion. – Sufficient Evidence
Enough to support opinion Persuasive enough to convince
another person (judge, jury?) Essentially a matter of professional
judgment
– Appropriate Evidence Competent, valid, relevant, reliable
Characteristics of Appropriate EvidenceCharacteristics of Appropriate Evidence
Relevance• Testing what you want to test (e.g.,
direction of testing) Evidence Source
• Generally an externally generated piece of evidence more reliable than an internal (client-generated) piece of evidence
• Evidence Hierarchy Direct personal knowledge External evidence External-internal evidence Internal Evidence Verbal and written
Objective v. Subjective Evidence
Standards of ReportingStandards of Reporting
GAAP Consistency
Disclosures Opinion
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Reporting StandardsReporting Standards
The Reporting Standards guide the reporting phase of the audit The Reporting Standards guide the reporting phase of the audit engagement.engagement.
1.1. The report shall state whether the financial statements are The report shall state whether the financial statements are presented in accordance with GAAP.presented in accordance with GAAP.
2.2. The report shall identify those circumstances in which such The report shall identify those circumstances in which such principles have not been consistently observed in the principles have not been consistently observed in the current period in relation to the preceding period.current period in relation to the preceding period.
3.3. Informative disclosures in the financial statements are to Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise be regarded as reasonably adequate unless otherwise stated in the report. stated in the report.
4.4. The report shall either contain an expression of opinion The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or an regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where the reasons therefore should be stated. In all cases where an auditor's name is associated with financial statements, an auditor's name is associated with financial statements, the report should contain a clear-cut indication of the the report should contain a clear-cut indication of the character of the auditor's work, if any, and the degree of character of the auditor's work, if any, and the degree of responsibility the auditor is taking.responsibility the auditor is taking.
Principles Underlying an Audit - Principles Underlying an Audit - ASBASB
Purpose:
Responsibilities:
Performance:
Reporting:
To express an opinion on the financial statements prepared by management, whose responsibility is to prepare the financial statements and to provide the auditor with information necessary to conduct the audit.
Have competence and capability; comply with ethical requirements; maintain professional skepticism; exercise professional judgment.
Sufficient appropriate audit evidence supporting reasonable (not absolute) assurance that the financial statements are free of material misstatement.
Express an opinion, in the form of a written report, based on an evaluation of the audit evidence obtained; or state that an opinion cannot be expressed.
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Statements on Auditing Standards Statements on Auditing Standards (SAS)—Interpretations of GAAS(SAS)—Interpretations of GAAS
GAAS and SAS are considered to be minimum standards of performance for
auditors.
PCAOB adopted, on an interim basis, GAAS and
SAS existing in 2003. Standards issued by
PCAOB are called Auditing Standards (AS).
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SAS are classified by two numbering categories: SAS and AU numbers. The SAS number applies to the order in which the standards are issued and are thus chronological. The AU codification organizes
the SAS according to topical content.
LO# 12
Statements on Auditing Standards Statements on Auditing Standards (SAS)—Interpretations of GAAS(SAS)—Interpretations of GAAS
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For example, SAS No. 39, “Audit Sampling,” is found under AU 350 because the AU 300s relate
to the standards of fieldwork on evidence collection and evaluation.
LO# 12
Statements on Auditing Standards Statements on Auditing Standards (SAS)—Interpretations of GAAS(SAS)—Interpretations of GAAS
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Ethics, Independence, and the Ethics, Independence, and the Code of Professional ConductCode of Professional Conduct
Ethics refers to a system or code of conduct based on moral duties and obligations that
indicate how we should behave.
Professionalism refers to the conduct, aims, or qualities that characterize a profession or
professional person. All professions operate under some type of code of ethics or code of
conduct.
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IndependenceIndependence
Auditors are required to Auditors are required to independent independent in fact in fact as well as as well as in in
appearance.appearance.
Ethics, Independence, and the Ethics, Independence, and the Code of Professional ConductCode of Professional Conduct
Code of Professional Conduct
Principles
Rules of Conduct
Interpretations of the Rules
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End of Chapter 2End of Chapter 2
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Discussion AssignmentDiscussion Assignment
Articles:Articles:– FraudFraud– Future of AuditingFuture of Auditing– New Hire SkillsNew Hire Skills
Videos:Videos:– Observation and Problem SolvingObservation and Problem Solving
70 minutes to read/watch all70 minutes to read/watch all Written ComponentWritten Component Class DiscussionClass Discussion
What to Think AboutWhat to Think About
Articles:Articles:– Author’s PurposeAuthor’s Purpose– ToneTone– EvidenceEvidence– Your ReactionYour Reaction
Videos:Videos:– How pertains to auditingHow pertains to auditing– How pertains to career How pertains to career
aspirations/life/schoolaspirations/life/school