Chapter 2 ACCT 4400

The Financial Statement Auditing Environment
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Terms in this set (...)

4 types of auditors
1. External Auditors
2. Internal Auditors
3. Government Auditors
4. Forensic Auditors
Internal Control Audits, Compliance Audits, Operational Audits, Forensic Audits are all types of what kind of service?
Audit Services
Reporting on nature and quantity of inventory stored in a client's warehouse so that the client can obtain a bank loan are all types of what kind of service?
Attest Services
Auditing is a specialized form of assurance service are all types of what kind of service?
Assurance Services
Tax Preparation and Planning Services, Management Advisory Services, Compilation and Review Services are all types of what kind of service?
Non-assurance services
4 Types of Public Accounting Firms
1. Big 4
2. Mid-Tier
3. Regional
4. Local
4 companies in the Big 4
1. PwC
2. EY
3. Deloitte
4. KPMG
3 companies in Mid-Tier
1. Grant Thornton
2. BDO Seidman
3. RSM McGladrey
4 Audit team members
1. Partner
2. Manager
3. Senior/In-Charge
4. Associate/Staff
Which audit team member has the following duties:

-Reaching agreement with the client on the scope of the services to be required
-Ensuring that the audit is properly planned
-Ensuring that the audit team has the required skills and experience
-Supervising the audit team and reviewing the working papers
-Concluding on the adequacy of audit evidence and signing the audit report
Partner
Which audit team member has the following duties:

-Ensuring that the audit is properly planned, including scheduling of team members
-Supervising the preparation of and approving the audit program
-Reviewing the working papers, financial statements and audit report
-Dealing with invoicing and ensuring collection of payment for services
-Informing the partner about any auditing or accounting problems encountered
Manager
Which audit team member has the following duties:

-Assisting in the development of the audit plan
-Preparing budgets
-Assigning audit tasks to associates and directing the day-to-day performance of the audit
-Supervising and reviewing the work of the associates
-Informing the manager about any auditing or accounting problems encountered
Senior/In-Charge
Which audit team member has the following duties:

-Performing the audit procedures assigned to them
-Preparing the adequate and appropriate documentation of completed work
-Informing the senior about any auditing or accounting problems encountered
Associate/Staff
In 2002, Congress passed what?
Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act
In 2010 Congress passed what?
The Dodd-Frank Wall Street Reform and Consumer Protection Act.
The auditor has a responsibility to plan and perform the audit to obtain ____________ about whether the financial statements are free of material misstatement, whether caused by error or fraud.
reasonable assurance
Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain _________, but not ________, assurance that material misstatements are detected.
reasonable; absolute
The primary context with which an auditor is concerned is the __________ or __________ of his or her audit client.
Industry; Business
What is a primary component of the environment in which financial statement auditing is conducted?
The context provided by the client's business
Why do business organizations exist?
to create value for their stakeholders
Due to the way resources are invested and managed in the modern business world, a system of _________ is necessary, through which managers are overseen and supervised
Corporate Governance
What 5 things do you have in "a model of business"?
1. Objectives
2. Strategies
3. Controls
4. Transactions
5. Processes
Five components of a model of business processes
1. Financing
2. Purchasing
3. Inventory Management
4. Revenue
5. Human Resouce Management
6 Organizations that affect the public accounting profession
1. Securities Exchange Commission (SEC)
2. Financial Accounting Standards Board (FASB)
3. International Auditing and Assurance Standards Board (IAASB)
4. Public Company Accounting Oversight Board (PCAOB)
5. American Institute of Certified Public Accountants (AICPA)
6. International Accounting Standards Board (IASB)
What serve as guidelines for and measures of the quality of the auditor's performance?
Auditing Standards
Who does the PCAOB deal with?
Public Companies
Who does the Auditing Standards Board deal with?
Nonpublic companies, PCAOB, and IAASB
Who does the IAASB deal with?
Over 100 countries and Auditing Standards Board
Top 10 Generally Accepted Auditing Standards were made by who?
PCAOB
3 categories of GAAS
1. General
2. Fieldwork
3. Reporting
Which standards of GAAS are the following?

1. The auditor must have adequate technical training & proficiency to perform the audit.

2. The auditor must maintain independence (in fact and appearance) in mental attitude in all matters related to the audit.

3. The auditor must exercise due professional care during the performance of the audit and the preparation of the report. The auditor must diligently perform the audit and report any misleading statements in the report.
General Standards
Which standards of GAAS are the following?

1. The auditor must adequately plan the work and must properly supervise any assistants.

2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures.

3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.
Standards of Field Work
Which standards of GAAS are the following?

1. The auditor must state in the auditor's report whether the financial statements are presented in accordance with generally accepted accounting principles.

2. The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.

3. When the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor's report.

4. The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor's report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor's report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report.
Standards of Reporting
What are the 4 Principles Underlying an Audit?
1. Purpose
2. Responsibilities
3. Performance
4. Reporting
To express an opinion on the financial statements prepared by management, whose responsibility is to prepare the financial statements and to provide the auditor with information necessary to conduct the audit
Purpose
Have competence and capability; comply with ethical requirements; maintain professional skepticism; exercise professional judgment
Responsibilities
Sufficient appropriate audit evidence supporting reasonable (not absolute) assurance that the financial statements are free of material misstatement
Performance
Express an opinion, in the form of a written report, based on an evaluation of the audit evidence obtained; or state that an opinion cannot be expressed
Reporting
Who wrote the Principals Underlying an Audit?
ASB
______ and _______ are considered to be minimum standards of performance for auditors.
GAAS and SAAS (Statements on Auditing Standards)
What is SAAS?
Statements on Auditing Standards which are interpretations of GAAS
Who adopted, on an interim basis, GAAS and SAAS in 2003?
PCAOB
Standards issued by PCAOB are called what?
Auditing Standards (AS)
SAAS are classfied by 2 numbering categories. What are they?
1. SAS numbers
2. AU numbers
________ applies to the order in which the standards are issued and are thus chronological
SAS number
________ organizes the SAS according to topical content.
AU codification
Refers to a system or code of conduct based on moral duties and obligations that indicate how we should behave.
Ethics
Refers to the conduct, aims, or qualities that characterize a profession or professional person.
Professionalism
All professions operate under some type of _______ or ________
Code of ethics; Code of conduct
What 3 things do you have under Code of Professional Conduct?
1. Principles
2. Rules of Conduct
3. Interpretations of the Rules
The Public Company Accounting Oversight Board [PCAOB] derives its authority to set and enforce auditing standards for public company audits from

A) The American Institute of Certified Public Accountants [AICPA].
B) The Securities & Exchange Commission.
C) An Act of Congress.
D) A Presidential executive order.
C) An Act of Congress.
Which of the following is generally not considered one of the five business processes or cycles?

A) Information technology.
B) Revenue [or sales].
C) Financing.
D) Inventory management.
A) Information technology.
Which of the following is NOT a typical responsibility for an associate/staff level auditor?

A) Assisting in the development of the audit plan.
B) Performing the audit procedures assigned to them.
C) Preparing adequate and appropriate documentation of completed work.
D) Informing the senior about any auditing or accounting problems encountered.
A) Assisting in the development of the audit plan.
Prior to the Sarbanes-Oxley Act of 2002, the _________ was responsible for creating all new auditing standards in the United States. Today, for publicly-held companies, that responsibility rests with the _____________.

A) Financial Accounting Standards Board (FASB); PCAOB.
B) AICPA Auditing Standards Board (ASB); SEC.
C) AICPA Auditing Standards Board (ASB); PCAOB.
D) Financial Accounting Standards Board (FASB); SEC.
C) AICPA Auditing Standards Board (ASB); PCAOB.
To exercise due professional care, an auditor should

A) Attain the proper balance of professional experience and formal education.
B) Critically review the work performed and judgment exercised by those assisting in the audit.
C) Examine all available corroborating evidence supporting management's assertions.
D) Design the audit to detect all instances of illegal acts.
B) Critically review the work performed and judgment exercised by those assisting in the audit.
What is the essential meaning of the generally accepted auditing standard that requires that the auditor be independent?

A) The auditor must be without bias with respect to the client under audit.
B) The auditor must adopt a critical attitude during the audit.
C) The auditor's sole obligation is to third parties.
D) The auditor may have a direct ownership interest in his client's business if it is not material.
A) The auditor must be without bias with respect to the client under audit.
The principles underlying an audit conducted in accordance with GAAS as developed by the ASB and the IAASB include all of the following except

A) The auditor should maintain professional skepticism and exercise professional judgment throughout the planning and performance of the audit.
B) The auditor should obtain sufficient appropriate audit evidence about whether material misstatements exist in the financial statements.
C) The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement.
D) The auditor should have appropriate competence and capability to perform the audit.
C) The auditor should plan and conduct the audit to obtain assurance that the financial statements are free of any misstatement.
The responsibility for implementing sound accounting practices and principles, maintaining an adequate internal control structure, and making fair representations in the financial statements rests primarily with the

A) Senior management.
B) External auditors.
C) Internal audit department.
D) Shareholders.
A) Senior management.
Which of the following is considered an example of a compliance audit?

A) The examination a company's claims that its product is superior to that of a competitor on specific dimensions.
B) The examination of a school district networked computer system.
C) The examination of a company's adherence to government-mandated safety provisions.
D) The examination of a company's financial statements.
C) The examination of a company's adherence to government-mandated safety provisions.
Which of the following best describes the relationship between management and the board of directors?

A) Management reports to the board of directors.
B) The board of directors reports to management.
C) Neither group is accountable to the other.
D) Both groups report directly to the shareholders.
A) Management reports to the board of directors.
Which of the following best describes the roles of the AICPA and the PCAOB in establishing auditing standards?

A) Auditing standards issued by the AICPA and the PCAOB are considered minimum standards of performance for auditors.
B) The AICPA sets auditing standards for use in audits of non-public entities.
C) The PCAOB sets auditing standards for use in audits of publicly held companies.
D) All of the above.
D) All of the above.
"Mid-tier" firms

A) Audit about 80% of publicly traded companies in the United States.
B) Are national in their practices and have international affiliates.
C) Are generally regional in their practices (such as the west coast).
D) Are generally local in their practices (such as large metropolitan areas).
B) Are national in their practices and have international affiliates.
Which of the following organizations affect the environment that CPAs work in?

A) AICPA.
B) SEC.
C) PCAOB.
D) All of the above.
D) All of the above.
Which of the following primarily shapes the context in which auditing takes place?

A) The American Institute of Certified Public Accountants [AICPA].
B) The Securities & Exchange Commission.
C) The client's business environment.
D) Legislation passed by Congress.
C) The client's business environment.
An "integrated audit" includes

A) A special audit related to management fraud.
B) A financial statement audit and an audit of internal control over financial reporting.
C) A financial statement audit and a special audit related to management fraud.
D) A special audit related to management fraud and an audit of internal control over financial reporting.
B) A financial statement audit and an audit of internal control over financial reporting.