Chapter 02 Professional Standards McGraw-Hill/IrwinCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Three sets of auditing standards  AICPA (Auditing Standards Board) for nonpublic companies in US.  PCAOB for public companies in US  International Auditing Standards with differing authorities in various countries Three Sets of Auditing Standards 2-2

Principles Underling a GAAS Audit 1/6  Purpose of an audit  Premise of an audit  Personal responsibilities of the auditor  Auditor actions in performing the audit  Reporting results of an audit 2-3

Principles Underling a GAAS Audit 2/6  Purpose of an audit—Provide an opinion on financial statements are in accordance with the applicable financial reporting framework. The framework is ordinarily GAAP. The applicable framework corresponds to the “suitable criteria” of an attest engagement. 2-4

Principles Underling a GAAS Audit 3/6  Premise of an audit—Management (and those charged with governance) have responsibility to: Prepare financial statements in accordance with applicable financial reporting framework. Provide auditor with needed information and unrestricted access to those in the entity. 2-5

Principles Underling a GAAS Audit 4/6  Personal responsibility of the auditor— Appropriate competence and capabilities to perform audit in accordance with standards, including maintaining professional skepticism and exercising professional judgment throughout the audit. Professional skepticism—A questioning mind and a critical assessment of audit evidence. 2-6

Principles Underling a GAAS Audit 5/6  Auditor actions in performing the audit Obtain reasonable assurance about whether financial statements are free from error or fraud. The auditor is unable to obtain absolute assurance due to: Nature of financial reporting. Nature of audit procedures. Need to conduct audit within a reasonable period of time. 2-7

Principles Underling a GAAS Audit 6/6  Reporting the results of an audit— Express in a written report an opinion on findings (or statement that opinion cannot be expressed). The opinion is on whether the financial statements are in accordance, in all material respects, with the applicable financial reporting framework. 2-8

The 10 Generally Accepted Auditing Standards  General Standards  Standards of Field Work  Reporting Standards NOTE: These standards only apply to audits conducted according to PCAOB standards. The preceding “Principles” replaced the 10 GAAS standards for nonpublic company audits. 2-9

Auditor Responsibility for the Detection of Errors and Fraud (1 of 2)  Obtain information to assess the inherent risks and fraud risks Information about the company and its environment Discussion among audit team members Inquiries of management and others Risk assessment analytical procedures, including those involving revenue  Assess the risk of errors and fraud that may cause the financial statements to contain a material misstatement. 2-10

Auditor Responsibility for the Detection of Errors and Fraud ( 2 of 2)  Based on that assessment, plan and perform the audit to obtain reasonable assurance that material misstatements, whether caused by errors or fraud, will be detected.  Exercise due care in planning, performing and evaluating the results of audit procedures, and the proper degree of professional skepticism to achieve reasonable assurance that material misstatements due to error or fraud will be detected. 2-11

Auditor Responsibility for Client Identifying Noncompliance with Laws  Noncompliance with laws that could have a direct and material effect on financial statement amounts and disclosures--same as for errors and fraud. An audit obtains reasonable assurance of detecting noncompliance with these laws.  Other Laws (no direct effect on financial statement amounts): Specific procedures: Inquire of management as to compliance Inspect correspondence with licensing or regulatory authorities Be aware of possible occurrence. If information comes to the auditor’s attention, apply audit procedures directed at determining whether noncompliance with a law has occurred. An audit does not provide assurance that noncompliance with these laws will be detected. 2-12

The Standard Auditors’ Report for Nonpublic Companies  Title  Addressee  Content Sections (paragraphs) Introductory (“We have audited”) Management’s responsibility Auditor’s Responsibility Opinion Paragraph  Signature (firm name)  City and state of office issuing audit report  Date 2-13

Other Types of Auditors’ Reports  Standard unmodified report (unqualified per PCAOB standards) Financial statements follow GAAP and auditor does not add additional commentary for any issue  Other reports Unmodified with emphasis of matter (or other emphasis) Example: A lack of consistency in application of accounting principles Qualified opinion Scope limitation or departure from GAAP Adverse opinion Departure from GAAP so significant that financial statements as a whole are misleading Disclaimer of opinion Unable to arrive at an opinion due to a very significant scope limitation 2-14

Public Company Audit Report  Title is “Report of Registered Independent Public Accounting Firm.”  Refers to standards of the PCAOB rather than GAAS.  Includes a paragraph that refers to report on internal control.  Somewhat more brief than the nonpublic company report. 2-15

Applicability of SSAEs 2-16

Elements of Quality Control  Leadership responsibilities for quality within the firm (“tone at the top”)  Relevant ethical requirements  Acceptance and continuance of clients and engagements  Human Resources  Engagement performance  Monitoring 2-17

Regulation of the Public Accounting Profession  Public Companies Public Company Accounting Oversight Board Registration of public accounting firms that audit public companies Conduct inspections of public company practice of registered public accounting firms  Nonpublic Companies AICPA & State Boards of Accountancy Peer review for nonpublic practice segments 2-18

International Accounting Standards  International Financial Reporting Standards (IFRS) Developed by International Accounting Standards Board (IASB) SEC accepts IFRS for foreign companies that issue securities in US markets 2-19