● Group members Lương Thị Hải Anh Lưu Thanh Nga Phạm Diệu Linh Tô Anh Thư Triệu Khánh Linh ● Due date 11/12/2023 I Chapter 1 Q1 1 When the Securities and Exchange Commission suggested the formation of[.]
● Group members: - Lương Thị Hải Anh - Lưu Thanh Nga - Phạm Diệu Linh - Tô Anh Thư - Triệu Khánh Linh ● Due date: 11/12/2023 I Chapter Q1-1: When the Securities and Exchange Commission suggested the formation of the Panel on Audit Effectiveness The group of judges was in charge of looking into and examining how independent audits of financial statements are conducted It also assesses audits concerning public interest In December 2001, Enron filed for bankruptcy after admitting to accounting errors Furthermore, it was followed by the WorldCom hoax, in which the business exaggerated its income As a result, several corporations revised their financial statements Finally, the Securities and Exchange Commission requested an inquiry into several corporations' accounting methods, creating investor concern and shaking up an already shaky financial market in late 2001 and early 2002 It resulted in a credibility issue for the accounting profession Q1-2: 1/27 - Assurance services are professional services that improve the accuracy of information or the context in which it is used for the decision-making process - Two distinct types of assurance services: + Those that increase the reliability of information + Those that involve putting information in a form or context that facilitates decision-making + Q1-3: - The most typical sort of attest engagement is a financial statement audit - The most common assumption made by management is that the financial statements adhere to generally recognized accounting principles Q1-4: - A big organization with securities listed on a stock exchange must abide by the stock exchange's regulations and the Securities and Exchange Commission's guidelines to submit an audit report together with its yearly financial statements to its investors It must also hire auditors to offer a view of its internal controls A big listed firm realizes, nevertheless, that it has to preserve investor trust in the credibility of its financial statements and internal control over financial reporting if it wants to keep on to be able to raise financing from the public The report by a recognized public accounting firm lends credibility to the corporation's financial accounts - When a small family-owned business decides to have an audit, the goal is typically to utilize the auditors' report to back up a bank loan proposal Q1-5: A report by an independent public accountant concerning the fairness of a company's 2/27 financial statements is commonly required in the following situations: (1) Application for a bank loan (2) Establishing credit for purchase of merchandise, equipment, or other assets (3) Reporting operating results, financial position, and cash flows to absentee owners (stockholders or partners) Q1-6: To add credibility to financial statements is to increase the likelihood that they have been prepared following the appropriate criteria, usually generally accepted accounting principles As such, an increase in credibility results in financial statements that can be believed and relied upon by third parties Q1-7: Business risk is the risk that the investment will be impaired because a company invested in is unable to meet its financial obligations due to economic conditions or poor management decisions Information risk is the risk that the information used to assess business risk is not accurate Auditors can directly reduce information risk, but have only limited effect on business risk Q1-10: An operational audit is conducted in order to assess business operations In this audit, an Auditor checks the efficiency and effectiveness of the operations and suggests the areas and manners in which the efficiency or effectiveness could be enhanced It focuses on the entity's internal processes and procedures and internal controls The focus is mostly on improving the efficiency and effectiveness of the operation in the audit findings An operational audit also 3/27 attempts to find the weaknesses in operations and to reduce the related issues and problems Operational audits involve more subjective judgments than compliance audits This is so because, in a compliance audit, the auditor has to check whether or not certain laws have been complied with A company may either comply with the specific requirements or may not comply; therefore, there is limited scope for making judgments In financial audits as well, the auditor has to check whether or not the applicable accounting standards have been complied with or not There may be, however, various options within the accounting standards between two or more methods or treatments, and as a result, the auditor needs to judge whether or not the selected option is fair and most appropriate However, the level of subjectivity is lower in comparison with an operational audit In an operational audit, the auditor has to assess the quality of operations, and therefore the overall process and underlying activities are more subject to judgment Therefore, an operational audit involves more subjective judgments than a compliance or a financial audit After completion of the audit, the report is generally addressed to the management or the Governance board so that the recommendations for improvements could be implemented by the company Q1-11: - A compliance audit is an audit to determine whether financial reports or other assertions are in compliance with established criteria - An operational audit, on the other hand, is a review of a department or other unit of a business or governmental organization to measure the effectiveness and efficiency of operations Q1-12: Internal auditors must be independent of the department heads and other line executives 4/27 whose work they review However, internal auditors are not independent in the same sense as a public accounting firm The public accounting firm serves many clients and the revenue obtained from any one client is only a small part of the revenue of the firm Internal auditors, on the other hand, are employees of one company, and are subject to the restraints inherent in the employer-¬employee relationship Internal auditors can achieve a great deal of independence by reporting to the audit committee of the board of directors, but they cannot achieve the same degree of independence as is possessed by the external public accounting firm Q1-13: The internal auditors are employees of Spacecraft, Inc., and may be influenced by corporate management The public accounting firm is independent of the company and is in a better position to take positions as opposed to those of company management The work of the internal audit staff emphasizes the measurement of the efficiency and effectiveness of various operating units of the company and compliance with all types of controls, whereas the public accounting firm is primarily concerned with determining the fairness of Spacecraft's financial statements Q1-16: A peer review is a critical review of a public accounting firm's practices by another public accounting firm (or other CPAs functioning as a peer review team) The purpose of a peer review is to encourage adherence to quality control standards established by the accounting firm and the profession Q1-22: 5/27 The various levels of accounting personnel in a large public accounting firm are staff assistants, senior auditors, managers or supervisors, and partners (and principals) The staff assistant performs audit procedures such as the observation of physical inventories and confirmation of receivables under the supervision of a senior The senior auditor plans and coordinates the audit and drafts the audit report The senior also reviews working papers, controls the allocation of audit time, and trains assistants on the job The manager or supervisor usually is responsible for supervising and reviewing several audit engagements concurrently and resolving significant problems with the client The partners maintain contacts with clients, develop new business, establish policies of the firm, review the adequacy of audit work, and sign audit reports The engagement partner is responsible for the performance of the audit in accordance with professional standards A partner also devotes time to the recruitment and development of staff, to AICPA and other professional group activities, to educational and other civic activities, and generally to promoting an environment in which the firm can prosper The position of principal, which is often held by top-ranking consulting personnel who not hold the CPA certificate, has responsibilities similar to those of a partner Q1-23: The most significant responsibilities of a partner in a public accounting firm include (only three required: • Assume ultimate responsibility for the audits assigned to him or her • Sign audit reports • Review the audit work for compliance with firm and professional standards • Maintain relations with audit clients • Establish firm policies 6/27 • Staff recruitment and development Q1-24: -Associations are separate legal entities that are designed to help their member firms to increase the availability of services and resources they provide -sharing at least one of the following -common brand name -common control -profits -common business strat -significant professional resources -common quality control policies and procedures Q1-25: The International Auditing and Assurance Standards Board establishes International Standards on Auditing (ISAs) International Standards on Quality Control (ISQC) and standards for other assurance and related services Its pronouncements are meant to foster the development of consistent worldwide professional standards Its standards not override the national auditing standards of its members II Chapter Q2-1: The oversight of diverse corporate entities is entrusted to the American Institute of Certified Public Accountants (AICPA) and the Public Company Accounting Oversight Board (PCAOB) For instance, the AICPA assumes the regulatory role for non-public entities, while 7/27 the PCAOB is designated to supervise public corporations Initially, the PCAOB adopted the auditing standards delineated by the AICPA, but subsequently, it developed its own set of standards Distinctive attributes between the PCAOB and AICPA are explicated as follows: - Public Company Accounting Oversight Board (PCAOB): The PCAOB is tasked with formulating standards governing auditing, quality control, and ethical conduct specifically applicable to public companies It is responsible for the registration of CPA firms authorized to audit public corporations, wielding the authority to rescind or preclude a CPA's involvement in audits Possessing federal authority bestowed through legislative channels, the PCAOB conducts inspections of auditing practices employed by registered firms for public companies - American Institute of Certified Public Accountants (AICPA): The AICPA assumes the responsibility of setting standards encompassing attestation, accounting and review, quality control, independence, and ethical conduct tailored for nonpublic enterprises CPA firms are afforded the voluntary option to join the AICPA in either or both of its sections: the Private Companies Practice Section (PCPS) and the Center for Public Company Audit Firms The AICPA's authority emanates from its broad acceptance by state boards of accountancy, other legislative bodies, and the judicial system The AICPA Center for Public Company Audit Firms administers a peer review program, scrutinizing the nonpublic practices of firms whose auditing practices for public companies fall under the purview of PCAOB inspection Q2-3: 8/27 The formulation of corporate financial statements is regulated by Generally Accepted Accounting Principles (GAAP), whereas the auditing of financial statements is governed by Generally Accepted Auditing Standards (GAAS) GAAS delineates overarching responsibilities and delineates their applications in a comprehensive manner Generally Accepted Accounting Principles Generally Accepted Auditing Standards (GAAP) (GAAS) These constitute accounting standards These represent auditing standards aimed designed to assist companies in the at ensuring a transparent and impartial preparation of financial statements GAAP audit process GAAS safeguards the encompasses standards, conventions, and accuracy, uniformity, and verifiability of regulations adhered to by accountants financial statements through a set of during the process of financial statement guidelines that auditors employ in their preparation practices Q2-3: The financial reporting framework delineates the principles and guidelines employed for the preparation of financial statements within the United States The utilization of generally accepted accounting principles is integral to the financial reporting framework It is imperative for an auditor to verify adherence to the financial reporting framework and ensure the absence of material misstatements resulting from irregularities in the financial statements This framework assumes significance in the audit process, as the auditor's report attests to the 9/27 conformity of financial statements with said framework An audit conducted in accordance with generally accepted auditing standards is predicated on the understanding that management or the responsible party bears responsibilities, including: Preparing and presenting financial statements in accordance with a financial reporting framework that encompasses the formulation, implementation, and maintenance of internal control pertinent to the preparation of financial statements, and ensuring the absence of material misstatements Furnishing the auditor with records, documentation, and other pertinent materials essential to the preparation and presentation of financial statements Q2-4: The relationship between generally accepted auditing standards (GAAS) and statements on auditing standards (SAS) can be elucidated in the following manner: - GAAS is comprised of 10 comprehensive standards that establish a framework, which is open to interpretation by the AICPA In meticulous detail, SAS interprets these 10 GAAS standards and stands as the foremost authoritative reference for auditors - When undertaking audits of financial statements, auditors strictly adhere to both GAAS and SAS - GAAS and SAS collectively serve as guiding principles for the audit of financial statements Q2-5: Professional skepticism is an outlook encompassing a questioning mindset, vigilance toward 10/27 though the financial statement may be created and printed in the auditor's office Management is accountable for preparation and fair presentation of the financial statement according to generally accepted accounting principles This encompasses the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements Financial statements must be free of material misstatement, whether due to fraud or error As a financial statement is considered a statement of the company and not of the auditors, an auditor has no right to make changes in the financial statement Even if the auditor disagrees with some of the financial entries in the account books, the auditor will first discuss it with management If management tends to disagree with the opinion, an auditor cannot change the entries in the account books, but can qualify entries in his or her report For example: Auditors believe that the balance in the allowance for uncollectible accounts is not sufficient to cover the probable collection losses in the accounts receivable The auditors will first discuss this problem with management and let them know why they think the allowance is inadequate If management agrees to increase the allowance then they need to adjust the entry; but if management thinks otherwise or is not persuaded by the auditor's argument, the auditors will probably qualify their opinion and show this in their report Q2-10: There is either a problem with GAAP or GAAS so much that you could not issue a standard unmodified or unqualified opinion Q2-11: 12/27 In the opinion paragraph of the auditor's standard report the auditors make representations as to the following: (1) The fairness of the financial statements, in all material respects (2) Application of generally accepted accounting principles (3) By implication consistent application of generally accepted accounting principles (4) By implication adequate disclosure Q 2-12: While the specific wording may vary depending on the auditing standards and regulations applicable, a nonpublic company audit report generally addresses the risk of not detecting a material misstatement resulting from fraud versus one resulting from error in the following ways: - Acknowledges the higher risk of fraud: The report will typically state that the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error This is because fraud often involves intentional actions, such as: ● Collusion ● Forgery ● Intentional omissions ● Misrepresentations ● Overriding internal controls These actions can make it more difficult for auditors to detect fraud, even when they perform a thorough audit - Discusses the assessment of fraud risk: The report will describe the procedures the auditor performed to assess the risk of material 13/27 misstatement due to fraud These procedures may include: ● Identifying fraud risk factors specific to the company and its industry ● Making inquiries of management and other personnel ● Performing analytical procedures ● Observing physical inventory ● Testing controls related to fraud prevention ● Evaluating the results of previous audits - Describes the response to assessed risks: Based on the assessment of fraud risk, the auditor will: ● Design and perform additional audit procedures to address the identified risks ● Communicate any significant deficiencies in internal controls related to fraud to management and the audit committee - Expresses limitations of assurance: No matter how thorough the audit, there is an inherent risk that some material misstatements, including those resulting from fraud, will not be detected The report will acknowledge this limitation and state that the auditor provides reasonable assurance, but not absolute assurance, that the financial statements are free from material misstatements - May not explicitly quantify the risks: While the report acknowledges the higher risk of fraud, it may not explicitly quantify the risks of material misstatement due to fraud or error This is because quantifying these risks can be difficult and may not be meaningful to users of the financial statements - References relevant auditing standards: The report will reference the relevant auditing standards that address fraud risk, such as: ● PCAOB Auditing Standard No 2401 (AS 2401): Consideration of Fraud in a Financial Statement Audit 14/27 ● ISA 240 (Revised): The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements - May be less detailed than public company reports: Nonpublic companies have less stringent reporting requirements than public companies Therefore, the discussion of fraud risk in a nonpublic company audit report may be less detailed than that in a public company report Q 2-13: It directly expresses an opinion on the financial statements and indirectly expresses an opinion that the accounting records were created within an acceptable financial framework… Q 2-14: Many stakeholders, including creditors, investors, regulators, financial analysts, and others, rely on auditors to correctly depict the company's financial status Auditors' opinions are appreciated since they are expected to comply to well-known auditing standards If an auditor provides false business information, the consequences are severe for all parties concerned As a result, it is critical for an auditor to eliminate or reduce any inaccuracies If an error occurs in the auditor's report, it should not result in misleading information or misrepresentations The auditor assures that there is a relatively low risk for the stakeholders and that if there is a major deviation from the actuals, the auditors will reveal this at a later time This error happens due to the nature of accounting, which compels auditors to depend on their judgment when there is inadequate evidence Q 2-15: Auditors should not provide a report that is merely an opinion and not based on 15/27 facts because auditors not conduct a thorough investigation of all transactions The accounting process has inherent constraints, and the auditors' work culminates in the statement of an opinion due to realistic restrictions of time and expense in executing an audit Q 2-16: Financial statement information that is not entirely correct is referred to as a misrepresentation by auditors You're unlikely to come across a set of financial statements that is totally correct However, whether or not misstatements are substantial is what matters in an audit Example: To put it bluntly, you must assess the possibility of inaccurate information affecting the overall accuracy of the financial accounts When determining whether a misrepresentation is substantial, consider the following factors: ● The relative magnitude of the error: A $10,000 expenditure differential is significant if the entire expense amount is $40,000, but it is insignificant if the total expense amount is $400,000 ● The nature of the omission: Even if the comparative magnitude is irrelevant, the type of misrepresentation may make it meaningful If the omission was misleading in character, $10,000 wrongly removed from income may be substantial even if it is a minor fraction of total revenue Q 2-19: Quality control at a CPA company assures conformity to professional standards, whereas peer review is an external audit of a business's quality control system Quality control in the context of a CPA company refers to the procedures and processes put 16/27 in place to guarantee that the firm's services fulfill recognized professional standards It entails internal systems such as policies, training, and monitoring to maintain and improve the firm's work quality Peer review, on the other hand, is an external examination undertaken by an independent CPA company to analyze another CPA firm's quality control system It entails an examination of the firm's adherence to professional standards, ethical obligations, and established rules and processes Peer review provides an objective evaluation of the firm's quality control methods and aids in the identification of areas for improvement Peer review is required in the United States for CPA companies that conduct attest services such as audits and reviews Every three years, the American Institute of CPAs (AICPA) requires businesses to undergo a peer review The goal of mandated peer review is to improve quality in the accounting profession and to assure the public that CPA firms maintain high service standards III Chapter Q 3-3: The main purpose of a code of ethics is to guide all managerial decisions, creating a common framework upon which all decisions are founded This can aid in creating a unified understanding of the boundaries within an organization and the standards set for interacting with external stakeholders A formal, well-communicated code of ethics can also assist in shielding a company's status and legal standing in case of a breach of ethics by an individual worker A code of ethics can help the company to show customers that it values integrity, define the terms of ethical behavior at work, and guide decision-making in difficult situations A professional code of ethics sets a standard for which each member of the 17/27 profession can be expected to meet It is a promise to act in a manner that protects the public’s well-being Q 3-4: The AICPA Code of Professional Conduct includes: 1.) Rules govern the performance of the professional services and are more detailed regulations that support the principles 2.) Principles provide an overall framework for the code They are aspirational guidelines and also goal-oriented which address member's responsibilities in the public interest, objectivity, integrity, due care, independence, scope, and the nature of services 3.) Interpretations provide guidelines as to the scope and application of the rules Q 3-8: Due to their business relationship and financial interest, close relatives may also compromise the independence of a certified public accountant (CPA) Nonetheless, the relative ought to hold a significant role within the client Jim Willingham's younger brother is considered a "close relative" in this instance since he fits the definition of a close relative However, he holds no significant role in the company and is merely a purchasing agent Therefore, Jim's independence is unlikely to be compromised Jim shouldn't be a part of the attest engagement team, though, if his younger brother holds a significant position in that company Retaining Jim from the audit is a bad decision So in this case Jim and the firm's independence are not likely to be impaired Q 3-9: 18/27 If Greg Scott did not personally take part in the audit of this client, the independence of the public accounting firm would not be compromised Since Scott's father is a "close relative," he cannot be trusted to be independent and should stay out of the audit Should Scott advance to become a partner in the public accounting firm, the firm's independence will be compromised unless he is relocated to an office that is not involved in this audit Q 3-12: A person who is insured by a certain insurance policy or plan is referred to as a "covered member" in most situations This phrase is frequently used in relation to health insurance, where the term "covered member" designates the person or people who are entitled to benefits under a policy IV Chapter Q 5-1: Detection risk and audit risk are intertwined, influencing the overall risk of an audit While detection risk concerns the auditor's potential to miss material errors in financial statements, audit risk addresses the risk of issuing an incorrect opinion The acceptable level of detection risk depends inversely on inherent and control risks In essence, high inherent and control risks necessitate a lower detection risk to maintain an acceptable overall audit risk Consequently, a low detection risk demands more extensive audit procedures to minimize the risk of missing material misstatements Ultimately, this leads to a rise in audit risk as detection risk decreases due to the increased time and resources required for a thorough audit Q 5-2: 19/27 Risk of Material Misstatement: Before considering the client's internal controls, auditors assess two types of risk: inherent risk and control risk Inherent risk is the potential for an assertion to be materially misstated, regardless of controls For instance, valuation assertions for accounts requiring complex calculations or estimations would have inherently higher risk Control risk, on the other hand, is the risk that the client's internal controls may not detect or correct material misstatements in an assertion For example, if the client doesn't independently review and verify their accounts receivable calculations, the control risk for valuation assertions would be higher Q 5-3: Inherent risk is a fundamental risk that exists regardless of internal controls It's most likely to occur for complex transactions or situations requiring significant judgment in financial estimates This "worst-case scenario" risk assumes all internal controls have failed Examples include supply chain disruptions, unaudited financials, or even unedited social media posts by companies When inherent and control risks are high, auditors can manage overall audit risk by lowering detection risk through targeted audits or larger sample sizes Q5-4: - Routine transactions involve recurring financial activities recorded in the accounting records in the normal course of business Examples include sales transactions, purchase transactions, cash disbursements, cash receipts, and payroll transactions - Nonroutine transactions involve activities that occur only periodically Examples include 20/27