Overall Audit Report Quality Control System

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Overall Audit ReportQuality Control System

• Professional Standards
  (Chapter 2)
• Professional
  Legal Liability
• Ethics (Chapter 4)
• (Chapter 3)
• Competition

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Sources of Professional Standards Rules

• Public Company Accounting Oversight Board
• Auditing, Attestation, Quality Control,
  Independence, and Ethical Standards for Audits of
  Public (issuer)Companies
• American Institute of Certified Public
  Accountants
• Auditing, Attestation, Quality Control,
  Independence, Ethical, and Accounting and Review
  Standards (and more) for Engagements at Nonpublic
  Companies.
• State Boards of Accountancy
• License CPAs and CPA firms to practice in their
  jurisdictions.

3
AICPA Auditing Standards

• There are 5 Broad Principles that Define
  Generally Accepted Auditing Standards (GAAS).
  (Minimum Expectations)
• Statements on Auditing Standards (SAS) are Issued
  to provide detail to the Broad GAAS.
  Interpretations are also issued.
• Codified in AICPAs Professional Standards
  Section AU.
• SASs are Frequently Issued to Better Satisfy F.S.
  User Expectations.

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Underlying Principles

• Purpose of an audit
• Premise of an audit
• Personal responsibilities of the auditor
• Auditor actions in performing the audit
• Reporting results of an audit

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Underlying Principles (cont)

• Purpose of an AuditProvide an opinion on whether
  financial statements are materially 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.

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Underlying Principles (cont)

• Premise of an AuditManagement (and those charged
  with governance) have responsibility to
• Prepare fairly presented financial statements in
  accordance with applicable financial reporting
  framework.
• Design, implement and maintain internal controls
  that achieve the above with F.S. that are free of
  material misstatements.
• Provide the auditor with needed/requested
  information and unrestricted access to those in
  the entity.

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Underlying Principles (cont)

• Personal Responsibility of the Auditor (team)
• Have appropriate competence capabilities to
  perform audit in accordance with standards,
  including maintaining professional skepticism and
  exercising professional judgment throughout the
  audit.
• Professional SkepticismA questioning mind and a
  critical assessment of audit evidence.

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Underlying Principles (cont)

• Auditor Actions in Performing the Audit
• To express an opinion, the auditor obtains
  reasonable assurance about whether financial
  statements are free from material error or fraud.
• To obtain reasonable assurance, the auditor
• Plans the work and properly supervises
  assistants.
• Determines appropriate materiality levels.
• Identifies assesses risks of a material
  misstatement based on an understanding of the
  entity its environment, including internal
  controls.
• Obtains sufficient appropriate audit evidence.

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Underlying Principles (cont)

• Auditor Actions in Performing the Audit
• 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.

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Underlying Principles (cont)

• Reporting the Results of an AuditExpress in a
  written report an opinion on F.S. (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.

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PCAOB GAASGeneral Standards

1. The audit must be performed by a person or
   persons having adequate technical training and
   proficiency as an auditor.
2. In all matters relating to the assignment, an
   independence in mental attitude is to be
   maintained by the auditor or auditors.
3. Due professional care is to be exercised in the
   performance of the audit and the preparation of
   the report.

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PCAOB GAASStandards of Field Work

1. The work is to be adequately planned and
   assistants, if any, are to be properly supervise.
   
2. A sufficient understanding of internal control
   is to be obtained to plan the audit and to
   determine the nature, timing, and extent of tests
   to be performed.

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PCAOB GAASStandards of Field Work (cont)

1. Sufficient competent evidential matter is to be
   obtained through inspection, observation,
   inquiries, and confirmations to afford a
   reasonable basis for an opinion regarding the
   financial statements under audit.

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PCAOB GAASStandards of Reporting

1. The report shall state whether the financial
   statements are presented in accordance with
   generally accepted accounting principles (GAAP).
2. The report shall identify those circumstances in
   which such principles have not been consistently
   observed in the current period in relation to the
   preceding period. (Exception only)
3. Informative disclosures in the financial
   statements are to be regarded as reasonably
   adequate unless otherwise stated in the report.
   (Exception only)

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PCAOB GAASStandards of Reporting (cont)

• The report shall contain either
• (1) an expression of opinion regarding the
  financial statements, taken as a whole, or
• (2) an assertion to the effect that an opinion
  cannot be expressed.
• When an overall opinion cannot be expressed, the
  reasons therefore should be stated.
• In all cases where an auditors name is
  associated with financial statements, the report
  should contain a clear-cut indication of the
  character of the auditors work, if any, and the
  degree of responsibility the auditor is taking.

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AICPA Terminology Defined
Responsibility Level Meaning Words Used to Indicate Responsibility
Unconditional Responsibility Auditor must fulfill responsibilities Must Is required (PCAOB only) Shall (PCAOB only)
Presumptively Mandatory Auditor must comply with requirements unless auditor demonstrates and documents that alternative actions were sufficient to achieve the objectives of the standards. Should
Responsibility to Consider Auditor should consider whether the auditor complies with the requirements depends on the exercise of professional judgment in the circumstances. May Might Could (Plus other phrases indicating a responsibility to consider.)
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The GAAS (AICPA) Hierarchy
Category Status Audit Guidance
1. Standards Auditors should apply at the levels on the previous slide in accordance with the pertinent auditing standards. The 5 principles SASs (AU and AU-C) Other standards for PCAOB, govt. audits, etc.
2. Interpretative Publications Recommendations on the application of the SASs. If not followed, the auditors should be prepared to explain how they complied with the SAS provisions addressed. Appendices to SASs Interpretation of SASs Auditing guidance in AICPA Audit and Accounting Guides AICPA auditing Statements of Position
3. Other Auditing Publications No authoritative status, but may help the auditor understand and apply the standards. Auditing articles Continuing education programs Textbooks Guidebooks Audit programs Checklists
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Unique PCAOB Auditing Standards
AS 1 References in Auditors Reports to the Standards of the Public Company Accounting Oversight Board
AS 2 Superseded by AS 5
AS 3 Audit Documentation
AS 4 Reporting on Whether a Previously Reported Material Weakness Continues to Exist
AS 5 An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements
AS 6 Evaluating Consistency of Financial Statements
AS 7 Engagement Quality Review
AS 8 Audit Risk
AS 9 Audit Planning
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Unique PCAOB Auditing Standards (cont)
AS 10 Supervision of the Audit Engagement
AS 11 Consideration of Materiality in Planning and Performing an Audit
AS 12 Identifying and Assessing Risks of Material Misstatement
AS 13 The Auditor's Responses to the Risks of Material Misstatement
AS 14 Evaluating Audit Results
AS 15 Audit Evidence
AS 16 Communications with Audit Committees



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The Standard Auditors Report(Non-Public Client)

• Title
• Addressee
• Content Sections (paragraphs)
• Introductory (We have audited)
• Managements responsibility
• Auditors Responsibility
• Opinion Paragraph
• Signature (firm name)
• City and state of office issuing audit report
• Date (Last Day of Field Work or . . .)

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The Standard Auditors Report Introductory
Paragraph
We have audited the accompanying consolidated
balance sheets of ABC Company and its
subsidiaries, as of December 31, 20X1 and 20X0,
and the related consolidated statements of
income, retained earnings, and cash flows for the
years then ended.
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The Standard Auditors Report Mgmt Responsibility
Paragraph
Management is responsible for the preparation
and fair presentation of these consolidated
financial statements in accordance with
accounting principles generally accepted in the
United States of America this includes the
design, implementation, and maintenance of
internal control relevant to the preparation and
fair presentation of consolidated financial
statements that are free from material
misstatement, whether due to fraud or error.
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The Standard Auditors Report Auditors
Responsibility Paragraphs

• Our responsibility is to express an opinion on
  these consolidated financial statements based on
  our audits.
• We conducted our audits 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
  consolidated financial statements are free of
  material misstatement.
•  

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What is Reasonable Assurance?

• High Level of Assurance, But Not Absolute
• Audit Evidence More Likely Persuasive Rather than
  Convincing or Conclusive
• Nature of Audit Testing - Not 100 and Involves
  Use of Professional Judgment
• Nature of Audit Evidence (e.g., Accounting
  Estimates)
• Characteristic of Fraud, Including Concealment

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The Standard Auditors Report Auditors
Responsibility Paragraphs (cont)

• An audit involves performing procedures to
  obtain audit evidence about the amounts and
  disclosures in the consolidated financial
  statements. The procedures selected depend on the
  auditor's judgment, including the assessment of
  the risks of material misstatement of the
  consolidated financial statements, whether due to
  fraud or error. In making those risk assessments,
  the auditor considers internal control relevant
  to the entity's preparation and fair presentation
  of the consolidated financial statements in order
  to design audit procedures that are appropriate
  in the circumstances, but not for the purpose of
  expressing an opinion on the effectiveness of the
  entity's internal control.

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The Standard Auditors Report Auditors
Responsibility Paragraphs (cont)
An audit also includes evaluating the
appropriateness of accounting policies used and
the reasonableness of significant accounting
estimates made by management, as well as
evaluating the overall presentation of the
consolidated financial statements.   We believe
that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for
our audit opinion.
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The Standard Auditors Report Opinion Paragraph
In our opinion, the consolidated financial
statements referred to above present fairly, in
all material respects, the financial position of
ABC Company and its subsidiaries as of December
31, 20X1 and 20X0, and the results of their
operations and their cash flows for the years
then ended in accordance with accounting
principles generally accepted in the United
States of America.
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Audit Report Public Company

• Title is Report of Registered Independent Public
  Accounting Firm rather than Independent
  Auditors Report.
• Refers to PCAOB standards rather than GAAS.
• Includes a that refers to report on internal
  control.
• Includes City and State (or Country) of audit
  firm.

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Old GAAP Hierarchy

1. Authoritative Body Pronouncements
2. Pronouncements of Bodies Composed of Expert
   Accountants, That Are Exposed for Public Comment
3. Pronouncements of Bodies of Expert Accountants
   That Are Not Exposed for Public Comment
4. Widely Recognized Practices and Pronouncements
5. Other Accounting Literature (e.g., Text Books)

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Current GAAP Hierarchy(Non-Govt)

• Authoritative FASB Accounting Standards
  Codification (ASC) plus Rules and Interpretive
  releases of the SEC under authority of federal
  securities laws for SEC registrants.
• ASC updated via Accounting Standards Updates
  (ASU).
• Non-Authoritative All other sources.

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Errors/Mistakes vs. Fraud

• In the Auditing Standards
• Errors Unintentional F.S. Misstatements or
  Omissions of Amounts or Disclosures
• Fraud Intentional Acts That Cause a F.S.
  Misstatement Which Result From
• 1. Fraudulent Financial Reporting
• or
• 2. Theft of Assets (also called Defalcation)
• Source SAS 99, 113

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Auditor Responsibility for the Detection of
Errors and Fraud

• Assess the risk of errors and fraud that may
  cause the financial statements to contain a
  material misstatement.
• 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
• Planning analytical procedures, including those
  involving revenue
• 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 (including specific
  steps required by SAS 99).
• 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.

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Professional Skepticism?

• Toughest attribute for some auditors.
• Basically means that we must have support for our
  conclusions that is
• Convincing (consider competency/reliability)
• Corroborated (consistent evidence)
• Verified or Tested by the auditor

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Auditor Responsibility for the Detection of
Noncompliances w/ Laws Regulations

• For those laws regulations that are generally
  recognized as having a direct and material effect
  on financial statement amounts
  disclosures--same as for errors fraud
• Assess the risk of illegal acts that may have
  caused the financial statements to contain a
  material misstatement.
• Based on that assessment, plan and perform the
  audit to obtain reasonable assurance that
  misstatements caused by illegal acts will be
  detected if direct material impact.
• 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 illegal acts will be
  detected.

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Auditor Responsibility for the Detection of
Noncompliances w/ Laws Regulations

• Examples of laws regulations that are generally
  recognized as having a direct and material effect
  on financial statement amounts disclosures are
  Laws regulations related to
• Taxes
• Pensions
• Form or content of F.S. (SEC)
• Industry-specific reporting
• Contracts/grants with the government that could
  affect revenue or expense recognition.

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Auditor Responsibility for the Detection of
Noncompliances w/ Laws Regulations (cont)

• For those laws regulations that are NOT
  generally recognized as having a direct effect,
  but could still have a material effect, on
  financial statements (generally disclosures)
• Inquire of management and, when appropriate,
  those charged with governance about whether the
  entity is in compliance with such laws and
  regulations.
• Inspect correspondence, if any, with the relevant
  licensing or regulatory authorities.
• Examples Related solely to operations
  (anti-trust) or fines/penalties that could be
  levied, terms of a license, regulatory solvency
  requirements, workplace or environmental regs.

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Auditor Responsibility Other Than Detection

• For immaterial fraud and noncompliances
• Be aware of possible occurrence.
• If information comes to the auditors attention,
  apply audit procedures directed at determining
  whether fraud or noncompliance has occurred and
  its potential impact on the financial statements.
  (But, an audit does not provide assurance that
  such acts will be detected.)
• Inform client top management and/or the audit
  committee (top mgmt involved or material).

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Reporting Fraud Law /Reg Noncompliances

• Report ANY fraud or noncompliances found by the
  auditor to client top management (at least one
  level above) and/or to those charged with
  governance.
• Report to those charged with governance if
  material, top management involved, intentional,
  but not if inconsequential.
• No responsibility to report to law enforcement.
• If CPA is fired or resigns, there is reporting of
  the auditor change reason for the change to SEC
  for SEC-regulated clients.
• Under Govt Auditing Stds (esp. Single Audit
  Act), there may be reporting to certain
  government officials.

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AICPA QualityControl Standards

• CPA firms must establish a system of quality
  control designed to provide the firm with
  reasonable assurance that the firm and its
  personnel comply with professional standards and
  applicable regulatory and legal requirements, and
  that the firm or engagement partners issue
  reports that are appropriate in the
  circumstances.
• Applicable to the firms audit, attestation and
  accounting practice and will vary based on firm
  size and complexities.

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AICPA Elements ofQuality Control

1. Leadership Responsibilities for quality within
   the firm (the "tone at the top")
2. Relevant Ethical Requirements
3. Acceptance and Continuance of Client
   Relationships and specific engagements
4. Human Resources
5. Engagement Performance
6. Monitoring

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Regulation of the Public Accounting
ProfessionPublic Companies
2-13

• Public Company Accounting Oversight Board and the
  SEC
• Registration of public accounting firms that
  audit public companies.
• Establish or adopt auditing, quality control,
  ethics, independence and other standards for
  auditors of public companies.
• Conduct inspections of registered public
  accounting firms.

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Regulation of the Public Accounting
ProfessionNonpublic Companies
2-14

• American Institute of Certified Public
  Accountants
• Peer review/inspection program
• Ethics investigations
• State Boards of Accountancy
• Registration of all CPAs and CPA firms
• Investigates complaints against CPAs
• Investigates ethics violations

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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.
• Topic added to U.S. CPA Exam in 2011.

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International Audit Report

• Contains expanded description of managements
  responsibility.
• Contains an enhanced explanation of the audit
  process.
• May state present fairly, in all material
  respects or give a true and fair view.
• Report may indicate that the financial statements
  comply with the provisions of the countrys
  relevant statutes or laws.
• May be signed using the personal name of the
  auditor or the audit firm or both.