Upgrade to remove ads
Only $35.99/year

audit- test 2

Terms in this set (58)

what are some sources of independence rules?
code of professional conduct (AICPA)
SEC rules
Independence standards board
PCAOB
Sarbanes-oxley act (by congress)
firm policies (firms can make themselves policies)
In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors...
the 2nd general standard of independence
covered person, immediate family, close family
who are implications of not being independent in fact...
engagement team, chain of command, partners from lead office,
covered person?
spouse, spouse equiv, dependents
who are immediate family?
spouse, spouse equiv, parent, dependent, nondependent child, sibling
who are close family?
the firm, covered person, or immediate family:
-have direct or material indirect fin interest in client
-are trustees/trust of an estate containing client securities
-invests in entities in which an audit client has a material investment (ex. have a trust fund)
-loan to or from audit client except for collateralized loans obtained under normal lending procedures (ex. get a car loan and have the car as collat)
-have bank/brokerage account that are not gov issued
-have credit card accounts with balances over $10,000. 5000 for PCAOB
-partners/prof in the firm control an audit client or own 5% of the clients equity securities
examples of proscribed financial relationships?
direct or material indirect
how do you know if you have a financial relationship with financial interest?...
-current partner or prof is employed by the audit client or sits on the board of directors
-a close fam member has an acctg or fin reporting role at the audit client
-former partner in an acctg role UNLESS:
--no influence on firm
--no cap balance
--has no fin agreements with the firm other than retirement plan
--not been part of clients audit team within the last year
examples of proscribed employment relationships?
10,000
5,000 for PCAOB
what is the limit on credit card accounts to have fin interest
1. covered person did not know of circumstances
2. covered persons lack of independence is corrected promptly
3. firm has an adequate quality control system
firm independence will NOT be impaired solely because a covered person is not independent of:
-audit committee must pre approve audit and nonaudit services
- disclose audit, audit related, tax, and other fees
-audit partners: 5 year rotation
-1 yr cooling off period for audit team for client's fin reporting
-study mandatory rotation
sox independence effects:
-contingent fees for tax services
-planning advice for IRS listed or abusive shelters
-tax services for fin reporting officers of the client

specifically allow:
-tax return prep
-tax compliance services
-general tax planning and advice
-other (minor) services
PCAOB rules: not independent if:
and
specifically allow:
1. consented to the use of his name in written document
2. submits to his client or others fin stmts that he has prepared or assisted in preparing... FS remain managers responsibility
when is an accountant associated with FS?
audited or unaudited
an accountant may be associated with _ or _ fin stmts
a report is necessary when an accountant is associated with FS.... "will the public associate my name with the FS... credibility, public may assume you are giving reasonable assurance when you are not"
why is determining association with FS important?
express an opinion
the immediate objective of the audit is to ___
1. title
2. addressee (shareholders and board of directors)
3. opinion on the fin stmt (name of company audited, statement on fin stmts, dates of each fin stmt, opinion)
4. basis for opinion
5. critical audit matters
6. signature, tenure, location, date
organization of the audit report under PCAOB standards
"Report of Independent Registered Public Accounting Firm"
what is the title for pcaob reports
1. statements on mgmt responsibility & regarding aud responsibility
2. stmts describing the audit, that the audit provides a reasonable basis for opinion, and that auditor is registered with the PCAOB
what are the 2 sections of the basis for opinion part of PCAOB report
firms name signed by the engagement partner
what is the signature on the PCAOB report?
engagement partner office
what city and state go on PCAOB report?
date as end of field work... sufficient, appropriate evidence to support opinion.. it is important bc the auditor isnt required to make inquiries or perform procedures after this date.
what date goes on the report? why would the date differ?
Form AP... disclose the audit partner name, specific firms completing more than 5% of the total audit hours, and aggregate other firms completing less than 5% total hours
instead of disclosing participants in audit report, the PCAOB adopted ____ to disclose information about the firms.... this allows auditors to make disclosures in the report (if they want to)....
FS presented fairly
no mat missmts or scope limitations...
unqualified
mat misstmt that is not pervasive but rest is presented fairly... not affecting so many things that it renders FS as a whole
scope limitation that is not pervasive
requires explanatory p after the opinion and "except for" lang in opinion paragraph.. explains the problem (except for _)
qualified
mat msstmt that is pervasive
so FS not presented fairly
requires explanatory p
adverse
pervasive scope limitation
auditor not independent
no scope p
disclaimer
any matter arising from the audit that was communicated to the audit committee that relates to material FS accounts/disclosures and involved especially challenging, subjective, or complex auditor judgement
what are critical audit matters?
more likely to be a CAM if higher risk....
in identifying CAMs, auditors should recognize that its more likely to be a CAM if its ___
1. identify the CAM
2. describe the principal considerations that led to IDing the cam
3. describe how the cam was addressed during the audit
4. refer to relevant fs accounts/disclosures
how do you treat/present cams?
-must not include lang that could be view as disclaiming or restricting the auditors responsibility for the cam or the opinion on the fin stmts... could increase auditor legal liability
-should not provide info about the company that has not been made public unless necessary
2 things to watch out for when presenting cams
critical audit matter
what is a cam?
-reliance on other auditors
-going conern
-change in acctg principle
when would explanatory lang be required?
-optional... gaap doesnt require
-draws attention to important events
-may come after basis of op paragraph.. no exact location
tell about emphasis paragraphs
-ASB requires paragraph headings and changes the content of each paragraph.. their headings tell the reader the opinion and what is holds without actually reading the paragraph
-have a basis of modification paragraph
-modifies auditors responsibility paragraph to indicate that the audit provides basis for modification
differences in ASB and PCAOB reports?
emphasis matters p and adds other matters p
what 2 paragraphs are not in PCAOB but are in ASB standards
no "Standard report"
unmodified opinion instead of unqualified
emphasis of matter paragraph instead of explanatory p
"other communications" is explanatory lang
terminology changes from PCAOB to ASB?
an event occuring after the BS date
what is a subsequent event?
type 1- provides evidence about conditions existing at BS date (could effect FS)
type 2- does not provide evidence about conditions at the BS date (not likely to effect fs, footnote disc)
2 types of sub events?
-type 1 event occurs after og report date but before FS issued
-sub event is disc in footnotes
-FS adj is required

OR
-no adj made but auditor qualifies opinion
audit report date should be altered because of a sub event if:
no- pass/fail, little info regarding risk, accounting quality, audit difficulties, and meaning of tech language....
problems with reporting system today?
audit risk and materiality
what is central to auditing?
the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on fin stmts that are mat misstated
what is audit risk?
audit risk is defined in terms of materiality... the auditor must determine materiality before can assess risk
relationship between audit risk and materiality?
a substantial likelihood that the fact would have been viewed by the reasonable investor as having signficantly altered the total mix of information made available.... mat is based on auditors assessments of the needs of the users
define materiality
-have approp knowledge of business and economic activities and accounting and a willingness to study the info
-understand that materiality is applied when fin stmts are prepared and audited
-recognize that uncertainties are inherent in measurement of amounts based on the use of estimates, judgement, and beliefs about future events
-make appropriate economic decisions based on the fin stmts

assume ppl pay attention and understand the fin smts...
auditors can assume that users:
quantitatively

as a whole.... must be expressed as a specific amount for planning purposes

relative sense
for planing purposes, materiality is determined _____

first, auditors must assess materiality for the FS ___

materiality is determined in a ______
benchmark/basis

consider the needs of reasonable users... what areas of fin stmts do users typically focus on?
the auditor will choose a fin stmt ___ against which to assess materiality...
how is this _ chosen?....
pre tax earnings... why? because investors are generally sensitive to earnings
for most for-profit companies, base materiality assessment on ____... why?
no.. sometimes earnings is not a useful basis
do you always have to base materiality on earnings?
when earnings are volatile... a company suffers losses or if investors/users are likely to focus more on other components of the fin stmts
when do auditors choose bases other than earnings?
-the elements of the fin stmts
-the nature of the entity, where entity is in its life cycle, industry and economic env
-the entitys ownership structure and the way it is financed
-the relative volatility of the benchmark
other bases for assessing materiality?
auditor judgement
choosing the right basis for det materiality is based on _
the maximum amount of misstatement that could exist and the FS still be considered fairly stated... determined by applying an appropriate % to the chosen basis....
define planning materiality
the amount of misstatement the auditor may be aware of without modifying opinion... recognizes that auditors will not detect all misstatements
-typically set to 50-75% of planning materiality..
define tolerable misstatement
typically 5-10% of tolerable error.. misstatements below this threshold are ignored
define threshold for accumulating misstatements
-planning mat
-tolerable misstmt
-threshold for accumulating misstmts
what are the 3 levels of materiality assessments?
Other sets by this creator