Ch 2Professional Standards

1
Ch 2--Professional Standards
2
Professional Standards

• All professions have professional standards
• Medical
• Law
• Public Accounting (CPA profession)
• Standards measure the quality of performance of
  members of the profession.
• Standards for public accounting have been
  promulgated by the AICPA.
• Enacted by each state with state statutes
• State Accounting Boards enforce rules, statutes,
  issue and revoke CPA licenses, etc.

3
Professional Standards

• Conduct of members
• AICPA Code of Ethics
• Technical performance of members/AICPA
• GAAS standards issued 1947
• Statements on Auditing Standards (SAS)
• Standards have been codified per PCAOB Statement
  1.
• Additional oversight of CPAs who audit Public
  Companies (PCAOB)

4
Authority of Regulatory Bodies(Figure 2.1 Text)
5
Authority of Regulatory Bodies (cont.)

• State Board of Accountancy
• Administers uniform CPA exam for each state
• License CPAs/revoke licenses as appropriate
• Rule on CPAs violations of technical and ethical
  standards
• Governs both public company and non-public
  company CPA practices

6
Generally Accepted Auditing Standards--General
Standards

• Adequate technical training and proficiency
• Independence in mental attitude is to be
  maintained
• Due professional care is to be exercised

7
Generally Accepted Auditing Standards--Standards
of Field Work

• Work is to be adequately planned and properly
  supervised
• Sufficient understanding of internal control is
  to be obtained
• Sufficient competent evidential matter is to be
  obtained to afford a reasonable basis for the
  opinion

8
Generally Accepted Auditing Standards--Standards
of Reporting

• State whether the financial statements are
  presented in accordance with GAAP
• Identify circumstances where principles have not
  been consistently applied
• Informative disclosures are adequate unless
  otherwise stated in the report
• Report should clearly state the degree of
  responsibility being assumed by the auditor

9
Auditor Responsibility for Detection of Errors
and Fraud (SAS 99)

• Assess risk of material misstatements that may
  cause financial statements to contain a material
  misstatement.
• Plan and perform audit to obtain reasonable
  assurance that material misstatements will be
  detected.
• Errors--unintentional
• Fraudintentional
• Fraud relates to intentional acts that cause
  misstatements in F/S
• Fraudulent fin. reporting
• Misappropriation of assets

10
Auditor Responsibility for the Detection of
Illegal Acts (SAS 54)

• Audit should obtain reasonable assurance of
  detecting illegal acts.
• Those with direct and material effect on F/S
• Those with an indirect effect on F/S (unlawful
  acts not changing amounts in F/S)
• Be aware of possible occurrence.
• If information comes to the auditors attention,
  apply necessary audit procedures.
• Audit does not provide assurance that
  indirect-effect illegal acts will be detected.

11
The Standard Auditors Report--Overview

• F/S Notes are managements responsibility
• Auditors responsibility is to report results of
  the auditors audit in a report
• See Sample Annual Report

12
The Standard Auditors Report--Format

• Title
• AddresseeAudit Committee BOD S/H
• Content
• Introductory Paragraph
• Scope Paragraph
• Opinion Paragraph
• Internal Control (public)
• Signature
• Office
• Date

13
The Standard Auditors Report Format

• Non-public compliance (AICPA)
• Public compliance (PCAOB)

14
Non-Public Companies Auditors Report (AICPA)

• Independent Auditors Report
• To the Board of Directors and Stockholders, XYZ
  Company
• We have audited the accompanying balance sheet
  of XYZ Company as of December 31, 20XX and
  related statements of income, retained earnings,
  and cash flows for the year then ended. These
  financial statements are the responsibility of
  the Companys management. Our responsibility is
  to express an opinion on these financial
  statements based on our audit.
• We conducted our audit in accordance with
  auditing standards generally accepted in the
  United States of America. 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 audit provides 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 XYZ Company
  as of December 31, 20XX, and the results of its
  operations and its cash flows for the year then
  ended in conformity with accounting principles
  generally accepted in the United States of
  America.
• Los Angeles, California
• Blue Gray and Company
• Certified Public Accountants
• February 26, 20XY

15
Public Companies Auditors Report (PCAOB)

• Report of Independent Registered Public
  Accounting Firm
• To the Board of Directors and Stockholders, XYZ
  Company
• We have audited the accompanying balance sheet
  of XYZ Company as of December 31, 20XX and
  related statements of income, retained earnings,
  and cash flows for the year then ended. These
  financial statements are the responsibility of
  the Companys management. Our responsibility is
  to express an opinion on these financial
  statements based on our audit.
• We conducted our audit in accordance with
  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 audit provides 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 XYZ Company
  as of December 31, 20XX, and the results of its
  operations and its cash flows for the year then
  ended in conformity with accounting principles
  generally accepted in the United States of
  America.
• We have also audited, in accordance with the
  standards of the Public Company Accounting
  Oversight Board (United States), the
  effectiveness of XYZ Companys internal control
  over financial reporting as of December 31, 20XX,
  based on Internal ControlIntegrated Framework
  issued by the Committee of Sponsoring
  Organizations of the Treadway Commission (COSO)
  and our report dated February 26, 20XX, expressed
  an unqualified opinion thereon.
• Los Angeles, California
• Blue Gray and Company
• Certified Public Accountants
• February 26, 20XY

16
Authoritative Body of Pronouncements GAAP
(figure 2.3 Text)

• Nongovernmental Entities
• FASB Statements and Interpretations
• APB Opinions
• AICPA Accounting Research Bulletins

• State and Local Governments
• GASB Statements and Interpretations
• FASB and AICPA pronouncements made applicable by
  a GASB Statement of Interpretation

• Federal Government
• FASAB Statements and Interpretations
• AICPA, FASB, and GASB pronouncements made
  applicable by a FASAB statement or interpretation

Public, non-public not for-profit
17
Types of Audit Reports

• Standard unqualified opinion
• Qualified opinion
• Disclaimer
• Adverse opinion
• We will review in more detail in Ch. 17

18
The Attestation Standards

Attestation Standards
Financial Forecasts and Projections (Prospective
Information)
Reporting on Pro Forma Information (SSAE)
Reporting on Internal Control (SSAE)
Reporting on Compliance With Laws
and Regulations (SSAE)
Auditing Standards (SAS)
Statements on Standards for Accounting and
Review Services (SSARS)
19
Quality Control in CPA Firms

• Statement of Quality Control Standards
• Independence, Integrity, and Objectivity
• Personnel Management
• Acceptance and Continuance of Clients and
  Engagements
• Engagement Performance
• Monitoring

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Overview of CPA Firms

• AICPA Peer review of non-public company CPA
  practices
• PCAOB- Inspection of public company CPA practices
• Inspection every year - Firms with gt100 public
  company audits
• Inspection every three years-Firms with 100 or
  fewer public company audits.

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International Accounting Auditing Standards

• Accounting Standards--IASB--London
• Auditing Standards--IFAC --New York
• International Auditing and Assurances Standards
  Board (IAASB) issues international standards of
  auditing
• International Audit Report--under international
  accounting auditing standards
• Similar to US and UK Audit Reports
• Not nearly as widely accepted as US or UK reports
  at this time
• Required by EU effective year 2005