The Financial Statement Auditing Environment Chapter 2 The Financial Statement Auditing Environment

Types of Auditors External Auditors Internal Auditors Assurance Attestations / Audits Internal Auditors Effectiveness Efficiency Government Auditors Any of the above Forensic Auditors Fraud Investigations

Types of Audit, Attest, and Assurance Services Audit Services (Independence required): Attest Services (Independence required): Assurance Services (Independence required): Nonaudit Services (Independence NOT required): F/S Audits, Internal Control Audits, Compliance Audits, Operational Audits, Forensic Audits Reporting on the quantity of inventory in a company’s warehouse (to obtain a bank loan), Reporting on specific compliance with a bank loan’s debt covenant, Reviews Awards, Lotteries, Improving the quality of given information Tax Preparation and Planning Services, Management Advisory Services, Compilation and Bookkeeping Services

Public Accounting Firms Public accounting firms range in size from a single proprietor to thousands of owners (or “partners”) and thousands of professional and administrative staff employees. Big 4 PwC E&Y Deloitte KPMG Mid-Tier 3 Grant Thornton BDO Seidman RSM McGladrey Regionals Locals Right click on firms for hyperlinks

Typical Audit Teams And Interns!

A Time of Challenge and Change During the economic boom of the late 1990s and the early 2000s, accounting firms aggressively sought opportunities to market a variety of high-margin (very profitable) nonaudit services to their auditees. Sadly there was also an explosion of scandals. Public Accounting Firms Stock Exchanges Mutual Fund Managers Brokerage Firms Corporate Giants

Government Regulation In 2002, Congress passed the Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act (a.k.a. SOX). Partners must rotate off every 5 years and auditees must have an integrated audit (an audit on the effectiveness of their internal controls over financial reporting as well as the F/S). In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. It amended SOX by exempting firms with under $75 Million from having audits on their internal controls as well as giving the PCAOB authority to inspect foreign audit firms that practice in the U.S or have U.S. auditees.

Context of F/S Auditing The context provided by the entity’s industry or business impacts the auditor and the audit, and is thus a primary component of the environment in which F/S auditing is conducted. Thought Question: How would your concerns about the inventory account differ for a Computer Hardware Manufacturer versus a Jewelry Store or a Christmas Tree farm or a Gas & Oil firm?

A Model of Business 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. Board of Directors Objectives Strategies Audit Committee

Human Resource Management Process Inventory Management Process Business Processes (Cycles): 5 Components to Implement the Objectives and Strategies Revenue Process Purchasing Process Human Resource Management Process Inventory Management Process Financing Process 10

Organizations That Affect the Public Accounting Profession Securities and Exchange Commission (SEC) Public Company Accounting Oversight Board (PCAOB) Financial Accounting Standards Board (FASB) American Institute of Certified Public Accountants (AICPA, ASB) International Accounting Standards Board (IASB) International Auditing and Assurance Standards Board (IAASB) Right click on acronyms for hyperlinks

Auditing Standards Board Auditing standards serve as guidelines for performing the audit, defining the minimum standards of performance, and measures of the quality of the auditor’s performance. Public Companies PCAOB Nonpublic Companies Auditing Standards Board > 100 Countries IAASB

The PCAOB’s 10 Generally Accepted Auditing Standards 10 GAAS 3 General 3 Field Work 4 Reporting Think “Tip Sie Acdo”

Adequate Technical Training & Proficiency 3 General Standards Adequate Technical Training & Proficiency Independence Due Professional Care Think “Tip Sie Acdo”

3 Field Work Standards Think “Tip Sie Acdo” Adequate Planning & Supervise Assistants Obtain Sufficient Understanding of Internal Controls Obtain Sufficient Appropriate Evidential Matter Think “Tip Sie Acdo”

4 Reporting Standards Think “Tip Sie Acdo” GAAP Consistency Disclosures Opinion Think “Tip Sie Acdo”

PCAOB’s GAAS Summary General Standards Standards of Field Work The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor. In all matters relating to the assignment an independence in mental attitude is to be maintained by the auditor or auditors Due professional care is to be exercised in the performance of the audit and the preparation of the report. Standards of Field Work The work is to be adequately planned and assistants, if any, are to be properly supervised. A sufficient understanding or internal control is to be obtained to plan the audit and to determine the nature, timing and extent of tests to be performed. Sufficient appropriate evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit. Standards of Reporting The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP). The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. The report shall contain either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.

Principles Underlying Audits - ASB Purpose: Responsibilities: Performance: Reporting: To express an opinion on the F/S prepared by management. It’s management’s responsibility to prepare the F/S 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 F/S 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.

Statements on Auditing Standards (SAS) - Interpretations of GAAS GAAS and SAS are considered to be the minimum standards of auditor performance. PCAOB adopted, on an interim basis, GAAS and SAS existing in 2003. Standards issued by PCAOB are called Auditing Standards (AS). The AICPA’s SAS The PCAOB’s AS Right click for hyperlinks

Statements on Auditing Standards (SAS) - Interpretations of GAAS 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 standards according to topical content. Right-click on the link below and open the hyperlink: The AICPA’s SAS The PCAOB’s AS Right click for hyperlinks

Ethics, Independence, and the Code of Professional Conduct Ethics refers to a system or code of conduct based on moral duties and obligations that indicate how we should behave. Go back one slide and open the hyperlink to the AICPA. In the search engine type in Code of Conduct. You can also see estimates for accounting salaries in different areas of the country. Obviously, bigger offices will provide higher salaries (larger clients, cost of living, etc.)

Interpretations of the Rules Ethics, Independence, and the Code of Professional Conduct Discussed in Depth in Ch. 19! Principles Rules of Conduct Interpretations of the Rules