2. Professional Standards
Chapter 2
Professional Standards
“All my growth and development led me to believe that if you really do the right thing, and if you play by the rules, and if you’ve got good enough, solid judgment and common sense, that you’re going to be able to do whatever you want to do with your life….”
– Barbara Jordan, first African-American woman from the South ever elected to the U.S. House of Representatives
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

3. 2-3
Chapter 2 Objectives
Name the various practice standards for internal, governmental, and independent auditors and accounting firms and identify their sources.
List and explain the 10 AICPA generally accepted auditing standards (GAAS) and explain how GAAS was or was not followed in specific fact situations.
Describe how the audit examination is affected by auditors’ responsibility for general standards and the standards of field work.
List the standards of reporting and identify how these standards are reflected in the content of the auditors’ report.
Identify the need for general attestation standards and explain how attestation standards differ from generally accepted auditing standards.
List and explain important quality control standards for an accounting firm.

4. Practice Standards 2-4 Client Public Entities Private Governmental
Foreign
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

5. Generally Accepted Auditing Standards
2-5
Generally Accepted Auditing Standards
Measures of the quality of auditors’ performance
Same from audit to audit
Auditing standards versus auditing procedures

6. Exhibit 2.1 Generally Accepted Auditing Standards
2-6
Exhibit 2.1 Generally Accepted Auditing Standards

7. Engagement Overview and GAAS
2-7
Engagement Overview and GAAS
OBTAIN
(OR RETAIN)
CLIENT
ENGAGEMENT
PLANNING
RISK
ASSESSMENT
SUBSTANTIVE
PROCEDURES
ISSUE
REPORT
General Standards (Due Professional Care)
Standards of Field Work
Standards of
Reporting

8. General Standards Affect all phases of audit Training and proficiency
2-8
General Standards
Affect all phases of audit
Training and proficiency
Experience and expertise
Independence
Independence in fact vs. independence in appearance
Financial and managerial relationships
Due professional care
Observe standards of field work and standards of reporting.

9. Standards of Field Work
2-9
Standards of Field Work
Affect conduct of the audit
Planning and supervision
Use of audit program
Interim and year-end work
Understanding of entity and environment (including I/C)
Assess risk of material misstatement
Determine effectiveness of substantive procedures
Sufficient appropriate evidence
Sufficient = quantity
Appropriate = quality (relevance, reliability)

10. 2-10
Sufficient evidence
Related to quantity (number of transactions or components examined)
Influenced by effectiveness of entity’s internal control
Effective internal control
Lower level of control risk
Reduced effectiveness of substantive procedures
Ineffective internal control
Higher level of control risk
Increased effectiveness of substantive procedures

11. Appropriate Evidence Relates to the quality of evidence
2-11
Appropriate Evidence
Relates to the quality of evidence
Reliability (from highest to lowest)
Auditors’ direct personal knowledge
External documentary evidence
External-internal evidence
Internal documentary evidence
Verbal and written representations

12. Examples of Evidence Auditors’ direct personal knowledge
2-12
Examples of Evidence
Auditors’ direct personal knowledge
Observe PPE, inventories
External documentary evidence
A/R confirmations, bank confirmations
External-internal evidence
Vendor invoices for purchases
Internal documentary evidence
Client sales invoices
Verbal and written representations
Management representations (SAS 85)

13. Standards of Reporting
2-13
Standards of Reporting
Identify contents of auditors’ reports
Are F/S in conformity with GAAP?
Have GAAP been consistently applied (implicit reporting)?
Are disclosures adequate (implicit reporting)?
Report must express or disclaim an opinion

14. Report of Independent Registered Public Accounting Firm
2-14
Independent Auditors’ Report (AS 5)
Report Title
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
APOLLO SHOES, INC.
We have audited the accompanying balance sheets of APOLLO SHOES, INC. as of December 31, 2008 and 2007, and the related statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, These financial statements are the responsibility of the APOLLO SHOES, INC.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of APOLLO SHOES, INC. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), APOLLO SHOES INC.’S' internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated January 29, 2009 expressed an unqualified opinion on the effective operation of internal control over financial reporting.
    Smith & Smith, CPAs
January 29, 2009
Report Address
Introductory
Paragraph
Scope
Paragraph
Opinion
Paragraph
Internal Control
Paragraph (AS 5)
Signature
Report Date

15. Types of Audit Opinions
2-15
Types of Audit Opinions
Unqualified
F/S are in conformity with GAAP
Qualified
Except for one (limited) item, F/S are in conformity with GAAP
Can issue for GAAP departure and scope limitation
Adverse
F/S are not in conformity with GAAP
Can issue for GAAP departure (more serious)
Disclaimer
Auditors do not express an opinion
Can issue for scope limitation (more serious)

16. Attestation Standards
2-16
Attestation Standards
Cover a broader range of engagements than GAAS
Differences from GAAS
Subject matter must be evaluated against reasonable criteria
No requirement to assess risk of material misstatement (unless attestation engagement involves risk of material misstatement)
May have limited distribution of report

17. Quality Control Standards for Accounting Firms
2-17
Quality Control Standards for Accounting Firms
Guide the performance of firm-wide services
Categories
Independence, integrity, objectivity
Personnel management
Acceptance and continuance of clients
Engagement performance
Monitoring

18. The Public Company Accounting Oversight Board (PCAOB)
2-18
The Public Company Accounting Oversight Board (PCAOB)
Establishes standards (Auditing Standards)
Auditors’ reports (AS 1)
Audit documentation (AS 3)
Material weaknesses in internal control (AS 4)
Audits of internal control over financial reporting (AS 5)
Standards must be approved by SEC
ASB and AICPA standards prior to April 16, 2003 are Interim Auditing Standards
May be modified or amended by Auditing Standards

19. The Public Company Accounting Oversight Board (PCAOB)
2-19
The Public Company Accounting Oversight Board (PCAOB)
Monitors accounting firms through inspections
Firms auditing > 100 public entities: annual
Firms auditing < 100 public entities: every 3 years
Inspection reports list deficiencies in audits conducted by registered firms (