CPA Audit Audit Standards and Planning Audit Standards and Planning What are the responsibilities of the auditor and of management? © 2012 HOCK international The only responsibility of the auditor is to express an opinion on the financial statements All of the other work that is performed during the audit is done with the goal of expressing the opinion Client management's responsibilities include: 1) Establishing and maintaining an internal control system, 2) Compliance with laws and regulations, 3) Assuring that all financial records are at the auditor's disposal, and 4) Adjusting these records to account for any material misstatements that are discovered during the audit CPA Audit Audit Standards and Planning What are the three main types of audits? © 2012 HOCK international The three types of audits are: 1) A financial statement audit is the audit that we most often think of when we use the term audit This is the examination of financial statements for the purpose of expressing an opinion 2) A compliance audit is one that is undertaken to find out if a company is in compliance with a regulation, loan covenant or some other agreement or standard This type of audit is performed so that a measurement can be made against a certain standard It is also performed in the auditing of a governmental body 3) An operational audit is often done by a company's internal auditors, and it is a measurement of the effectiveness and/or efficiency of something The goal may be to establish the period of time required to complete a certain action, conduct a financial audit or produce a productivity audit CPA Audit Audit Standards and Planning What are the four different types of auditors? © 2012 HOCK international The four different types of auditors are: 1) Independent auditors: external auditors that perform financial statement audits 2) Internal auditors: individuals who work for and perform audits within that company Their work may be similar to what external auditors do, but internal auditors focus more on the effectiveness and efficiency of the company rather than on the financial statements 3) Governmental auditors usually work for either the Governmental Accounting Office or the Internal Revenue Service (the IRS is the tax body of the U.S Government) 4) Audit Committees are groups within the client company that are in charge of the external audit and maintaining the relationship with the external auditor CPA Audit Audit Standards and Planning What are the shared auditing characteristics that all auditors have? © 2012 HOCK international 1) Independence – All auditors must be independent in both fact and appearance from the company being audited 2) Materiality – There are some things that are important and some that are not The auditor will focus his attention on important items 3) Selective testing – Because of the vast number of transactions in a company, it would be impossible for an auditor to check every transaction Therefore, the auditor will test some of the transactions (called sampling), then draw a conclusion about the entire population based on the tested items 4) Audit risk – No matter how much work an auditor does and no matter how many tests are performed, there is always a risk that the final opinion or conclusion will be incorrect 5) Overall audit opinion – Whenever performing work and testing, the auditor will draw a conclusion and state an opinion CPA Audit Audit Standards and Planning What Generally Accepted Auditing Standards (GAAS) relate to? © 2012 HOCK international Generally Accepted Auditing Standards, or GAAS, deals with the: 1) Quality of the audit performance, and 2) Objectives of the audit While the objectives of an audit are basically the same in every audit, the procedures will be different However, all of the procedures are carried out with the quality and objectives of the audit as their goal Materiality and audit risk are the foundation of the application of GAAS SSTS defines the CPA's administrative and review responsibilities when finalizing the tax return for submission to the IRS The CPA: 1) Should make a reasonable effort to determine that the taxpayer maintains adequate supporting documentation, as defined by tax law, to support an expense deduction 2) May rely, in good faith and without verification, on the information that the taxpayer provides if he has a reasonable basis for this reliance 3) Should not ignore situations that appear incorrect or incomplete In such cases the CPA should make a reasonable effort to resolve such situations through inquiry and gathering further information from other sources 4) May refer to the tax return of another taxpayer to research and resolve open questions as long as client confidentiality is maintained CPA Audit Accountant Responsibilities What are the professional responsibility requirements of the CPA as defined in SSTS regarding use of estimates when preparing tax returns for clients? © 2012 HOCK international 310 SSTS defines the CPA's responsibilities when using the tax payer's estimates for the tax return The CPA must make a good faith reasonable effort to validate the estimates used by taxpayers in their tax returns However the CPA may use the taxpayers estimates if: 1) The CPA determines that the estimate is reasonable 2) It is not practical to obtain precise information 3) The use of the estimate is allowed by professional or legal requirements 4) The estimate does not create the impression of more accuracy than actually exists The use of estimates does not have to be disclosed to the IRS except when it is necessary to avoid misleading the IRS regarding the reliability of the estimated amounts CPA Audit Accountant Responsibilities What are the professional responsibility requirements of the CPA as defined in SSTS regarding the departure from a tax position that was reviewed already by the tax authorities? © 2012 HOCK international 311 SSTS defines the CPA's responsibilities when proposing a tax treatment of an activity that has already been reviewed by the tax authorities (IRS, tax courts, etc) In this case the CPA may propose a treatment that is different versus the tax authorities previous decisions as long as the tax authorities did not require the usage of their interpretation as part of a specific settlement decision related to the taxpayer In addition, the CPA's alternative treatment must respect SSTS #1 requirements regarding tax positions A treatment that conflicts with previous tax authority decisions could be possible when: 1) New information becomes available that supports the taxpayer 2) The tax authorities have made decisions for a different taxpayer that are relevant to support the tax position 3) Laws have changed in the current period that support the taxpayers interpretation CPA Audit Accountant Responsibilities What are the professional responsibility requirements of the CPA as defined in SSTS regarding the knowledge of errors in a tax return? © 2012 HOCK international 312 SSTS defines the CPA's responsibilities when he becomes aware of an error in a taxpayers tax return In such cases the CPA is not obligated to report errors to the IRS without the taxpayer´s agreement except when required by law However the CPA must: 1) Inform the taxpayer immediately and recommend a solution to correct the error The recommendation can be made in oral or written format 2) Consider discontinuing working with a taxpayer who does not agree to disclose known errors to the IRS CPA Audit Accountant Responsibilities What are the professional responsibility requirements of the CPA as defined in SSTS regarding the knowledge of errors and administrative proceedings with the tax authorities? © 2012 HOCK international 313 SSTS defines the CPA's responsibilities when he is representing the taxpayer in official proceedings with tax authorities and he becomes aware of an error in the tax return In such cases the CPA is not obligated to report errors to the IRS without the taxpayer's agreement except when required by law However the CPA must: 1) Inform the taxpayer immediately and recommend a solution to correct the error The recommendation can be made in oral or written format 2) Consider special procedures when the CPA is working for a legal counsel that is representing the taxpayer 3) Consider discontinuing working with a taxpayer who does not agree to disclose known errors to the IRS CPA Audit Accountant Responsibilities What are the professional responsibility requirements of the CPA as defined in SSTS regarding the form and content of tax advice to taxpayers? © 2012 HOCK international 314 SSTS defines the CPA's responsibilities when communicating tax advice to the taxpayer The CPA: 1) Must use good professional judgment to provide advice to the taxpayer that fulfills their needs 2) Should assume that the taxpayer will use the advice 3) Should provide their advice in writing when the advice relates to material issues A written response is not, however, a requirement since there is no standard format for tax advice required by SSTS 4) Is not obliged to inform the taxpayer about changes to the tax law that affect previous advice given to the taxpayer unless the CPA has a special contractual obligation in this regard CPA Audit Accountant Responsibilities What are the primary professional and governmental organizations who can discipline a CPA for violation of professional standards? © 2012 HOCK international 315 There are a number of different bodies, both professional and governmental, that may be in a position to discipline a member Professional organizations include: 1) State CPA Societies 2) American Institute of CPAs (AICPA) Governmental organizations include: 1) State Boards of Accountancy: may revoke the license of the CPA 2) Securities and Exchange Commission (SEC): may prevent the CPA from practicing before the SEC or working as a certifying auditor for documents submitted to the SEC 3) Public Company Accounting Oversight Board (PCAOB): may fine or penalize CPA´s who not follow published auditing standards 4) Internal Revenue Service (IRS): may prevent the CPA from practicing before the IRS CPA Audit Accountant Responsibilities List and define the main types of civil liability that a CPA has to this clients © 2012 HOCK international 316 1) Contractual liability: Generally, an accountant's contractual liability is the result of the violation of a contractual duty that he owes to the client This contractual duty may be either expressed (written out in the contract) or implied (these duties exist in every contract even if they are not specifically stated in the contract) 2) Liability for negligence: Generally, an accountant may incur liability for negligence if he failed to exercise reasonable care (or due care) under the circumstances of the engagement The accountant is usually liable for negligence only to the client and known, or expected, third party users However, in cases of gross negligence, the CPA will be held liable to all third parties, even ones that he or she did not know about 3) Liability for fraud: both actual and constructive fraud ... financial audit or produce a productivity audit CPA Audit Audit Standards and Planning What are the four different types of auditors? © 2012 HOCK international The four different types of auditors... Government) 4) Audit Committees are groups within the client company that are in charge of the external audit and maintaining the relationship with the external auditor CPA Audit Audit Standards... Overall audit opinion – Whenever performing work and testing, the auditor will draw a conclusion and state an opinion CPA Audit Audit Standards and Planning What Generally Accepted Auditing