AUDITING

AUDITING Audit Reports Audited financial statements: The basics Professional standards Reports on audited financial statements Reports on comparative financial statements 42 Events occurring after year-end 46 Reporting on other information 51 Professional responsibilities 60 AppendiX: Licensing and disciplinary systems within the profession 85 Task-based simulations 89 10 Class questions , , , "., """""""""""""""' ,."""" ' '" , , """"., , , 12 ,' , , , " 93 Becker Professional Education Auditing I CPA Exam Review NOTES Al-2 © 2010 D~VryJB~ck~r Educational Dev~lopm~nt Corp All rights reserved Becker Professional Education I CPA Exam Review Auditing AUDITED FINANCIAL STATEMENTS The Basics I THE INDEPENDENT AUDIT FUNCTION A What is an Audit? An audit consists of a methodical review and objective examination of an enterprise's financial statements The objective of the auditor's examination is to express an opinion on the financial statements This expression takes the form of an audit report B Responsibilities The financial statements of an enterprise are prepared by the management of the enterprise, not by the independent auditor Further, the financial statements are the product and property of the enterprise; the independent auditor merely audits and expresses an opinion on them The expression of an opinion by the independent auditor is known as the "audit function." C Company's Management =Financial Statements Auditors =Expression of Opinion Audit Function Adds "Credibility" The auditor's report gives credibility to the financial statements The auditors, as a group independent of management, have an objective view and can report on a company's activities without bias or conflict of interest Without a report from an independent auditor, a company's financial statements would be meaningless, because the public would have little faith in financial statements issued by the inherently biased company D An Examination is Made of a Company's Financial Statements The auditor carries out this examination by following the ten Generally Accepted AUditing Standards (GMS) and all of the official pronouncements that explain and interpret GMS The auditor must be: a Independent b Expert (1) As to accounting (knOWledge of GMP) (2) As to auditing (knowledge of GMS) (3) As to industry (particular business) The audit should be planned and performed with an attitude of "professional skepticism," whereby the auditor neither assumes management is dishonest nor assumes unquestioned honesty © 2010 DeVry!Becker Educational Development Corp All rights reserved Al-3 Auditing E Becker Professional Education Auditor Must Then Report His or Her Findings Based Upon the Evidence Examined Al-4 I CPA Exam Review The primary assertion is whether the statements are "presented fairly" in accordance with GAAP (Generally Accepted Accounting Principles) a This decision as to fair presentation is a judgment call by the auditor The American Institute of Certified Public Accountants (AI CPA) defines fair presentation as follows: the financial statements reflect the underlying transactions of the company in a manner that represents the financial statements within a range of acceptable limits b GAAP sources are further discussed in Appendix Most audits are performed not only for the primary benefit of the stockholders but also for any other interested outside parties ©2010 DeVry!Becker Educational Development Corp_ All rights re.erved Becker Professional Education I CPA Exam Review Auditing PROFESSIONAL STANDARDS I AUDITING STANDARDS A [iUil Generally Accepted Auditing Standards The auditor is responsible for the performance of a properly planned and executed audit The criteria for such an audit are the ten generally accepted aUditing standards (GAAS) Statements on AUditing Standards (SASs) are interpretations of GAAS issued by the Auditing Standards Board (ASB) of the AICPA Note that compliance with GAAS is mandatory on all audit engagements The ASB's Statements on Auditing Standards are outlined in Section AU of the AICPA Professional Standards These standards apply to all audits of nonissuers (nonpublic entities) and to the audits of issuers (public companies) to the extent not superseded by PCAOB Auditing Standards (see beiow) B Generally Accepted Government Auditing Standards IJilMMI Audits of government organizations, programs, activities, and of entities that receive government funds shoUld be conducted in accordance with generally accepted government auditing standards (GAGAS), as covered later in the course C Public Company Accounting Oversight Board ['*"'' ' The Public Company Accounting Oversight Board (PCAOB) was established pursuant to the Sarbanes-Oxley Act of 2002 The PCAOB establishes auditing and related professional practice standards to be used in the preparation and issuance of audit reports for "issuers." "Issuers" consist of entities subject to the rules of the SEC (primarily public companies) The PCAOB is comprised of five full-time, financially literate members a Two members must be (or have been) CPAs, and the other three must not be (or must not have been) CPAs b A CPA can only act as the Chair of the Board If he or she has not practiced as a CPA for the past five years c No members of the Board can receive payments from a public accounting firm (other than fixed continuing payments, such as retirement payments) Public accounting firms must register with the PCAOB in order to audit a public company Registered firms are subject to Board inspection, disciplinary proceedings, and sanctions PCAOB Auditing Standards (AS) a The PCAOB adopted, on an initiai, interim basis, ASB standards, but continues to review each standard to evaluate whether it should be mOdified, repealed, replaced, or permanently adopted The PCAOB has issued several of its own Auditing Standards (AS), which replace ASB Standards for audits of issuers These Auditing Standards will be covered throughout the course I I Be sure to visit the Becker webs~e for possible updates to this area (,=\ © 2010 OeVry/Becker Educational Development Corp All rights reserved Al-5 Auditing Becker Professional Education b D I CPA Exam Review Note that the ASB retains the authority to set performance and reporting standards for audits of financial statements of nonissuers International Standards on Auditing The International Auditing and Assurance Standards Board (IAASB), a standard selling board of the International Federation of Accountants (IFAC), establishes International Standards on Auditing (ISA) The IFAC is a worldwide organization that establishes and promotes adherence to high-quality professional standards and works toward the international convergence of such standards ISAs issued by the IAASB not override the local laws and regulations or national standards that govern the audits of historical financial statements in particular countries Over 100 countries are using or are in the process of adopting or incorporating the ISAs into their national auditing standards or are using the ISAs as a basis for preparing national auditing standards In the United States, the AUditing Standards Board is working to converge its standards with the standards of the IAASB II STANDARDS FOR ENGAGEMENTS OTHER THAN AUDITS An audit is merely one type of engagement an accountant may be called upon to perform Each type of engagement has a different set of applicable professional standards, and the requirements, responsibilities, and limitations vary with the nature and scope of the engagement Below is an overview of standards for engagements other than audits that will be tested on the AUditing and Attestation section of the CPA exam A IPMI Statements on Standards for Attestation Engagements (SSAE) are issued by the AICPA These standards apply to attest engagements, covered later in the course The SSAEs are outlined in Section AT of the AICPA Professional Standards B II"WII III Statements on Standards for Attestation Engagements Statements on Standards for Accounting and Review Services The Accounting and Review Services Committee was established by the AICPA to establish standards for privately held companies not seeking audited statements Statements on Standards for Accounting and Review Services (SSARS) are issued by this committee, and they are applicable to unaudited financial statements or unaudited financial information of a non public entity SSARS are covered later in the course The SSARS are outlined in Section AR of the AICPA Professional Standards OTHER GUIDELINES A AICPA Code of Professional Conduct The AICPA Code of Professional Conduct provides members with gUidelines for behavior in the conduct of their professional affairs In addition, it provides assurance to the pUblic that the profession intends to maintain high standards and to enforce compliance with these standards by its members The Code of Professional Conduct applies to all services performed in the practice of public accounting The Code of Professional Conduct is outlined in Section ET of the AICPA Professional Standards Al-6 co 2010 DeVry!Se,ker Educational Development Corp All rights reserved Becker Professional Education CPA Exam Review B Auditing Statements on Quality Control Standards The AICPA Code of Professional Conduct requires firms providing auditing, attestation, and accounting and review services to adopt a system of quality control A quality control system consists of policies and procedures designed, implemented, and maintained to ensure that the firm complies with professional standards and appropriate legal and regulatory requirements, and that any reports issued are appropriate in the circumstances Statements on Quality Control Standards (SQCS) are issued by the AUditing Standards Board to provide gUidance with respect to quality control The SQCS are ouliined in Section QC of the AICPA Professional Standards C Securities and Exchange Commission (SEC) D The Securities Acts of 1933 and 1934 have given this U.S governmental commission the authority to set guidelines for U.S pUblicly traded companies a The SEC publishes their regulations in the Accounting Series Reieases and in Regulation S-K b Final standards adopted by the PCAOB not become effective until they are approved by the SEC Sarbanes-Oxley Act of 2002 • In the wake of the collapse of Enron and WorldCom corporations, criminal prosecution of Arthur Andersen for audit irregularities, and the restatement of financial statements of a number of other SEC reporting companies, Congress passed the SarbanesOxley Act of 2002 (hereafter "SOX") The main provisions of SOX will be discussed in detail later in this lecture E IFAC Code of Ethics for Professional Accountants The International Ethics Standards Board for Accountants (IESBA), a standard setting board of the International Federation of Accountants (IFAC), establishes the IFAC Code of Ethics for Accountants The IFAC Code is the foundation for the codes of ethics developed and enforced by member bodies of the IFAC No IFAC member body or firm issuing reports in accordance with International Auditing and Assurance Standards is allowed to apply less stringent ethics standards than those outlined in the IFAC Code of Ethics for Accountants IV AUDITING GUIDANCE: THE GAAS HIERARCHY There are three levels of auditing guidance A AICPA Statements on Auditing Standards (SASs) and PCAOB Auditing Standards In the United States, auditors are required to comply with SASs published by the Auditing Standards Board for audits of nonissuers and PCAOB Auditing Standards for audits of issuers The auditor shouid: a Use professional jUdgment in applying the SASs or PCAOB Auditing Standards to a particular engagement b Be prepared to justify any departures from presumptively mandatory requirements (see below) ©2010 OeVryjBecker EduC AU Section Sacl,on 523· Special Rewts f1XJ Other Type AU Section 800· Compliance Aud.ling > AU Section OOt Compllar\re ~d~lng ConSiderations in Audits of G(roelnme~tal Enll! Professioml Standards> U.S Audiling Siandards [AU! > AU Section))J Section 350· Audit SampJjD.g The Standards ofField Wnrk > AU AlCPA literature) Professional Standards> U.S Auditing Standarns [AU] > AU : Section 5CO The Fourth Standard of Reporting> AU Section 508· Reports on Audited Financial Statements i AU Section 508 - Reports on Audited Financial Statements Introduction 01 This sectoo ~Iies to mllIxs' repJrts issued n (O'YlE!:too wilh