1. Assurance Services and Auditing Research Chapter 8

2. Learning Objectives The types of assurance and consulting services, and applicable standards The types of assurance and consulting services, and applicable standards The environment for the assurance services standard setting process The environment for the assurance services standard setting process Authoritative auditing support Authoritative auditing support How to utilize the AICPA’s professional standards How to utilize the AICPA’s professional standards

3. Learning Objectives (contd.) Role of auditing in the public sector Role of auditing in the public sector Hierarchy of the AICPA’s Code of Professional Conduct Hierarchy of the AICPA’s Code of Professional Conduct Role of professional judgment in the research process Role of professional judgment in the research process International dimensions of auditing International dimensions of auditing

4. Assurance services “Independent professional services that improve the quality of information, or its context, for decision makers” “Independent professional services that improve the quality of information, or its context, for decision makers” Adds value to the user, not just the report Adds value to the user, not just the report Three party contracts – the client, the assurer, and the third party to whom the accountant is providing assurance Three party contracts – the client, the assurer, and the third party to whom the accountant is providing assurance

5. Consulting services and standards Attestation and audit services are special types of assurance services Attestation and audit services are special types of assurance services In an attest engagement, the CPA reports on the reliability of a written assertion that is managements responsibility In an attest engagement, the CPA reports on the reliability of a written assertion that is managements responsibility Consulting is not part of assurance services Consulting is not part of assurance services Two party contact: client, consultant, accountant Two party contact: client, consultant, accountant CPA develops findings, conclusions, and recommendations CPA develops findings, conclusions, and recommendations

6. Auditing standard-setting environment Audits add credibility to financial information Audits add credibility to financial information Auditor conducts audit in conformity with GAAP and in conjunction with auditing standards Auditor conducts audit in conformity with GAAP and in conjunction with auditing standards Attestation services and standards Attestation services and standards In the past, only audit opinions In the past, only audit opinions Now expanded to include opinions on internal controls Now expanded to include opinions on internal controls

7. Attest engagements and guidelines Audit and attest services – Generally Accepted Audit Standards (GAAS), Statements on Auditing Standards (SAS) – Auditing standard boards (ASB) Audit and attest services – Generally Accepted Audit Standards (GAAS), Statements on Auditing Standards (SAS) – Auditing standard boards (ASB) Accounting and review services – Statements on Standards for Accounting and Review – Accounting and Review Services Committee (ARSC) Accounting and review services – Statements on Standards for Accounting and Review – Accounting and Review Services Committee (ARSC) Accountant’s services on prospective financial information – Statements on Standards for Accountant’s Services on Prospective Financial Information – Auditing Standards Board Accountant’s services on prospective financial information – Statements on Standards for Accountant’s Services on Prospective Financial Information – Auditing Standards Board

8. Attest engagements and guidelines Other attest services – Statements on Standards for Attest Engagement – ASB, ARSC, and the management consulting services executive committee Other attest services – Statements on Standards for Attest Engagement – ASB, ARSC, and the management consulting services executive committee Audit and attest services for public companies – Auditing and Related Professional Practice Standards – Public Company Accounting Oversight Board (PCAOB) Audit and attest services for public companies – Auditing and Related Professional Practice Standards – Public Company Accounting Oversight Board (PCAOB)

9. Attestation standards General Standards General Standards Adequate technical training and proficiency Adequate technical training and proficiency Adequate knowledge Adequate knowledge Services shall be performed only if the subject matter is capable of being evaluated Services shall be performed only if the subject matter is capable of being evaluated Independence in mental attitude Independence in mental attitude Due professional care Due professional care

10. Attestation standards (contd.) Fieldwork Fieldwork Adequately planned, and assistants properly supervised Adequately planned, and assistants properly supervised Sufficient evidence to provide a reasonable basis for conclusion Sufficient evidence to provide a reasonable basis for conclusion

11. Attestation standards (contd.) Standards of Reporting Standards of Reporting Report shall identify subject matter Report shall identify subject matter Conclusion shall be reported Conclusion shall be reported Reservations shall be reported Reservations shall be reported Report shall state the use of the report is restricted to specified parties Report shall state the use of the report is restricted to specified parties

12. Auditing standards Auditing standards provided measures of the quality of performance Auditing standards provided measures of the quality of performance Audit procedures refer to the specific acts or steps to perform in an audit Audit procedures refer to the specific acts or steps to perform in an audit Procedures change, standards remain constant Procedures change, standards remain constant 10 broad requirements referred to as GAAS 10 broad requirements referred to as GAAS In addition, to GAAS, there are Statements of Auditing Standards (SAS) Interpret GAAS by clarify procedures In addition, to GAAS, there are Statements of Auditing Standards (SAS) Interpret GAAS by clarify procedures

13. Generally accepted auditing Standards General standards General standards Adequate technical training Adequate technical training Independence Independence Due professional care Due professional care

14. Generally Accepted Auditing Standards Field work Field work Adequately planned and assistants supervised Adequately planned and assistants supervised Sufficient understanding of the business and internal controls to plan the audit and determine the nature, timing and extent of procedures Sufficient understanding of the business and internal controls to plan the audit and determine the nature, timing and extent of procedures Sufficient competent evident matter to form an opinion Sufficient competent evident matter to form an opinion

15. GAAS (contd.) Standards of reporting Standards of reporting Report shall state if in accordance with GAAP Report shall state if in accordance with GAAP Shall report if not consistent Shall report if not consistent Informative financial statement disclosures Informative financial statement disclosures Written expression Written expression

16. Auditing standard-setting process Previously, set by ASB Previously, set by ASB SOX transferred standard setting responsibility to PCAOB for public company audit SOX transferred standard setting responsibility to PCAOB for public company audit

17. Auditing standard-setting process There is a standards hierarchy There is a standards hierarchy Primary support Primary support General application General application Special application to certain entities Special application to certain entities Secondary authoritative support Secondary authoritative support

18. Public Company Accounting Oversight Board (PCAOB) Legal responsibility to establish GAAS, attestation, ethics, and quality control standards for accounting firms who audit public companies Legal responsibility to establish GAAS, attestation, ethics, and quality control standards for accounting firms who audit public companies Non-public companies still follow the AICPA’s mission: Non-public companies still follow the AICPA’s mission: Develop auditing, attestation and quality control standards for non-issuer engagements Develop auditing, attestation and quality control standards for non-issuer engagements Contribute to the development and issuance of high- quality national and international auditing and assurance standards Contribute to the development and issuance of high- quality national and international auditing and assurance standards Respond to the needs for practical guidance in implementing professional standards Respond to the needs for practical guidance in implementing professional standards

19. AICPA reSource database Professional standards, accounting trends and techniques, technical practice aids, auditing and accounting guides, and audit alerts Professional standards, accounting trends and techniques, technical practice aids, auditing and accounting guides, and audit alerts Home tab – lists the literature available in the database Home tab – lists the literature available in the database Once select a certain literature, can query Once select a certain literature, can query Results tab – click on the link to find the result Results tab – click on the link to find the result

20. Code of professional conduct Minimum level of conduct Minimum level of conduct Principles, rules, interpretations, and ethics rulings Principles, rules, interpretations, and ethics rulings Rule 202- compliance with standards Rule 202- compliance with standards Rule 203 – accounting principles Rule 203 – accounting principles AICPA issues a newsletter that lists violators of professional conduct. AICPA issues a newsletter that lists violators of professional conduct.

21. Hierarchy of the AICPA’s Code of Professional Conduct Level 1 – Principles Level 1 – Principles provided framework for development provided framework for development Level 2 – Rules Level 2 – Rules Serve as the enforceable part of the Code Serve as the enforceable part of the Code Level 3 – Interpretations of the Rules of Conduct Level 3 – Interpretations of the Rules of Conduct Have been adopted by the professional ethics division’s ethics committee Have been adopted by the professional ethics division’s ethics committee Provide guidelines as to the scope and application of rules Provide guidelines as to the scope and application of rules Level 4 – Ethics Rulings Level 4 – Ethics Rulings Formal rulings made by the professional ethics division’s executive committee. Formal rulings made by the professional ethics division’s executive committee. Summarize the application of the rules and interpretations to particular factual circumstances Summarize the application of the rules and interpretations to particular factual circumstances

22. Auditing in the public sector GAO – Government Auditing Standards – “Yellow book ” GAO – Government Auditing Standards – “Yellow book ” Applicable to all governmental organizations Applicable to all governmental organizations Measure effectiveness of the expenditures, not just identify the amounts spent Measure effectiveness of the expenditures, not just identify the amounts spent Include compliance auditing Include compliance auditing Three levels of auditing Three levels of auditing GAAS GAAS Government Auditing Standards (aka generally accepted government auditing standards) Government Auditing Standards (aka generally accepted government auditing standards) Federal audit requirements – OMB Circular A-133 Audits of States, Local Governments, and Non-Profit Organizations Federal audit requirements – OMB Circular A-133 Audits of States, Local Governments, and Non-Profit Organizations

23. Accounting Services Compilation – a service presenting, in the form of financial statements, information that is the representation of management without expressing any assurance on the statements. Compilation – a service presenting, in the form of financial statements, information that is the representation of management without expressing any assurance on the statements. Review – a service performing inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance on the statements Review – a service performing inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance on the statements

24. International Auditing International Federation of Accountants (IFAC) International Federation of Accountants (IFAC) International Auditing Practices Committee (IAPC) International Auditing Practices Committee (IAPC) International Standards on Auditing (ISAs) International Standards on Auditing (ISAs) International Practice Statements (IAPs) International Practice Statements (IAPs) International Auditing and Assurance Standards Board (IAASB) International Auditing and Assurance Standards Board (IAASB)

25. Role of judgment in accounting and auditing research Judgment in: substance of transaction, adequacy of disclosure, materiality thresholds Judgment in: substance of transaction, adequacy of disclosure, materiality thresholds Auditor gathers information, evaluates and judges, then expresses an opinion Auditor gathers information, evaluates and judges, then expresses an opinion Many pronouncements provide only guidelines or alternatives, requiring judgment. Many pronouncements provide only guidelines or alternatives, requiring judgment. Critical thinking skills are crucial Critical thinking skills are crucial SAS No. 5 – discusses auditor’s judgment SAS No. 5 – discusses auditor’s judgment