Audit Exam 1

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Audit Exam 1
2011-02-08 05:47:31
Audit standards ethics fraud

First 3 chapters of book
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  1. GAAS
    General Standards (3)
    • 1. auditor umst have adequate technical training and proficiency to perform the audit
    • 2. auditor must maintain independence in mental attitude in all matters relating to the audit
    • 3. the auditor must exercise due professional care in the performance of the audit and the preparation of the report
  2. GAAS
    Standards of Field Work (3)
    • 1. auditor mst adquately plan the work and properly supervise any assistants
    • 2. auditor must obtain sufficient understanding of the entity and its environment, including it internal control to assess the risk of material misstatement, whether due to erro or fraud, and to design the nature, timing, and extent of further audit procedures.
    • 3. Auditor must obtain sufficient appropriate evidence by perforing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.
  3. GAAS
    Standards of Reporting (4)
    • 1. must state in auditors report whether financial statements are presented in accordance with GAAP
    • 2. must identify in auditor's report those circumstances in which such principles have not been consistently observed in current period in relation to preceding period.
    • 3. when auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in auditor's report
    • 4. must express either an opinion regarding the financial statements, taken as a whole, or state that opinion cannot be expresse (and state why). Auditor should indicate character of work, if any, and the degree of responsibility the auditor is taking.
  4. Basic Tenets of Ethical Conduct
    • 1. Due care
    • 2. Responsibilities
    • 3. Integrity
    • 4. Public interest
    • 5. Objectivity
    • 6. Scope and Nature of services
  5. Independence shall be considered to be impaired if:
    • During an engagement:
    • a covered member acquired financial interest in client, was administor of an estate, hada loan to or from client,

    partner owned more than 5% of client's outstanding stock

    a partner or professional employee was associated to client as a director, officer, employee, promotor, underwriter, or voting trustee
  6. Integrity and Objectivity
    • 1. CPA's must remain freee of conflicts of interest
    • 2. don't knowingly misrepresent facts
    • 3. Don't subordinate judgement to others
    • 4. Don't make false or misleading entries in an entity's financial records
  7. General Standards of Ethics
    • 1. Prefessional Competence
    • 2. Due professional care
    • 3. Planning and supervision
    • 4. Sufficient relevant data
  8. Write up services are allowed if...(3+exception)
    • 1. client understand and accepts the statements as their own
    • 2. auditor doesn't assume a role of employee or management
    • 3. no other relationship that impairs integrity or objectivity
    • EXCEPTION: Cannot do write up services for SEC Clients
  9. A cpa cannot disclose confidential information without client's consent.
    Except: (4)
    • 1. to remain in compliance with standards
    • 2. if work papers are subpoenaed by court
    • 3. as part of a PCAOB peer or quality review of practice
    • 4. as part of an ethics violation for state board of accountancy investigation
  10. Contingent Fees Rule
    A member in public practic shall not...
    • Perform for a contingent fee any professional service for, or receive such a fee from a client for whom the member or the member's firm performs:
    • a. audit or review of financial statements
    • b. compilation of a financial audit
    • c. examination of prospective financial information

    Prepare a tax return or claim for tax refund for a contingent fee
  11. Prohibited Commissions
    A member shall not...
    • for a commission recommend or refer to a client any product or service, or ofr a commision recommend or refer any product or service to be supplied by a client, or receive a commission, when the member or the member's firm also performs for that client..
    • a. an audit or review of a financial statement
    • b. a compilation of a financial statents
    • c. an examination of prospective financial information
  12. PCAOB Management Assertions
    • Valuation: trx are recorded @ correct amount in proper period
    • Existence: assets included in accounts exists and events that give rise to trx have taken place
    • Presentation and disclosure: accounts are presented in appropriate place and all information required has been disclosed in statements and footnotes
    • Completeness: all trx have been recorded
    • Obligations and Rights: entity has legal claim on all assets and revenues reported and has responsibility for all liabilities and expenses
  13. Management Assertions (SAS 106)
    • Completeness and cutoffs: all trx have been recorde and are recorded in appropriate period
    • Accuracy: trx are recorded at correct amount
    • Classification: trx are posted to proper account
    • Occurence: events giving rise to trx have taken place
  14. Management Assertions (SAS 106)
    • Completeness: balances include all items
    • Existence: balances included only assets that exist
    • Accuracy and valuation: balances include items recorded in proper period @ proper amount
    • Rights and Obligations: entity has legal claim and legal responsibility
  15. Management Assertions (SAS 106)
    Presentation and Disclosure
    • Occurence and rights and obligations: items presented include information regarding ownership
    • Completeness: all acounts are included
    • Classifications and understandability: all accounts are properly grouped and users can comprehend statements and disclosures
    • Accuracy and valuation: statements included proper measurements
  16. Responsibilities Principle
    • 1. Competence and Capabilities
    • 2. Independence (in face and appearance)
    • 3. Due Care
    • 4. Professional Skepticism and Judgement
  17. Performance Principle
    • 1. Supervision and Planning
    • 2. Materiality
    • 3. Risk Assessment
    • 4. Audit Evidence (sufficient and appropriate)
  18. Reporting Principle
    Express an opinion or indicate an opinion cannot be expressed on an entity's financial statements.

    Assess financial statements agains Financial Reporting Framework (GAAP, IFRS, "Yellow Book:)
  19. SOX and PCAOB prohibit professional services firms from providing any one of the following to an audit client
    • 1. book keeping
    • 2. design or implementation of financial Information system
    • 3. appraisal or valuation services
    • 4. Actuarial services
    • 5. internal audit outsourcing
    • 6. management of HR services
    • 7. investment or broker/dealer services
    • 8. legal or expert services (unrelated to audit)
  20. System of Quality Control
    • Provides firm with reasonable assurance that the firm and its personnel
    • a. comply with professinoal standards and regulatory/legal requirments
    • b. issue reports that are appropriate in the circumstances

    • Categories
    • 1. leadership
    • 2. relevant and ethical requirments
    • 3. acceptance and continuance of clients
    • 4. human resources
    • 5. engagement performance
    • 6. monitoring
  21. 4 types of Opinions
    • 1. unqualified: good, not calling anything to attention
    • 2. adverse report: not presented in accordance with GAAP
    • 3. qualified report: contain departures from GAAP or audit examination wasn't conducted in accordance with GAAS
    • 4. Disclaimer: auditors give no opinion and no assurance on the fair presentation of the financial statements
  22. Negative Assurance
    believed to be true because not evidence has proved the contrary
  23. Familiarity Threat
    Long Term Relationship with client
  24. Adverse Interest Threat
    CPA's acting in opposition to clients
  25. Undue Influence Threat
    attempts to coerce or incluence a CPA member (gifts or threats)
  26. Self Review Threat
    CPAs reviewing their own work
  27. Financial self interest threat
    have financial relationship with client
  28. Management Participation threat
    CPA take role of client managment
  29. Advocacy Threat
    CPAs promoting a clients interest or position
  30. Covered Member
    • a. all individuals participating in an engagement
    • b. individual in position to influence the engagement
    • c. partner or manager who provides non-attest services to an attest client
    • d. A partner in the office where engagement partner practices
    • e. the firms benefit plan
    • f. entity that can be controlled by any person considered a member
  31. Peer Review
    • public accounting firms engage other firms to study and report on quality control policies and procedures and whether the quality of the firms audit practice was consistend with its system of quality control
    • Once every 3 years
  32. Assurance Services and examples
    • independent professional services that improve the quality of information, or its context, for decision makers
    • examples
    • consumer reports
    • underwriters labortories
    • CPA Webtrust
    • Assistance with XBRL reporting
  33. 5 major revisions to SOX
    • 1. requirement of CEO/CFO certification of financial statments
    • 2. requirment of auditor examination of company internal controls
    • 3. Creation of PCAOB to serve as auditing "Watchdog"
    • 4. Prohibition of certain client services by firms conducting a client's audit
    • 5. key company officials must certify financial statements
  34. 7 Steps in the Consideration of Fraud Risks
    • 1. Group discussions
    • 2. Obtain information to identify risk
    • 3. Identify and assess risks
    • 4. Respond to risks
    • 5. Evaluate Audit Evidence
    • 6. Communicate Fraud matters
    • 7. Document Fraud Matters
  35. 4 Environmental Conditions that increase user demand for relevant, reliable information.
    • 1. Complexity
    • 2. Remoteness
    • 3. Consequences
    • 4. Time-sensitivity
  36. Attest Engagements
    Engagements in which a practitioner is engaged to issue or does issue a report on subject matter or an assertion about the subject matter that is the responsibility of another party
  37. Differences between auditor's report for public and nonpubic companies
    • Report Title
    • Non-Public: "Independent Auditors Report"
    • Public: "Report of the Independent Registered Public Accounting Firm"

    • Intro
    • Non-Public: 2 years
    • Public: 3 years

    • Scope
    • Non-Public: "auditing stands generally accepted in the USA"
    • Public: "auditing standards of the PCAOB"
    • Opinion
    • Non-Public: "accounting principles generally accepted in the USA"
    • Public: "conformity with GAAP"
    • Quality Control
    • Public Only: "criteria established in IC- Integrated framework issued by COSO of the Treadway Commision"
  38. Management's responsibility for the financial statements is...
    ...explicitly represented in the opening paragraphy of the auditor's standard report
  39. 5 Types of Audit evidence from Most reliable to Least reliable
    • 1. Auditor's direct personal knowledge
    • 2. External evidence
    • 3. External-Internal Evidence
    • 4. Internal Evidence
    • 5. Verbal Evidence
  40. Appropriate Evidence
    • Relevent
    • Reliable
  41. Sufficient Evidence
    Auditor's professional judgement
  42. Reasons Auditors fail to detect fraud (3)
    • 1. Overreliance on client representations
    • 2. Lack of awareness or failure to recognize that an observed condition may indicate a material fraud
    • 3. Personal relationships with clients that impair objectivity and professional skepticism