Chapter 2
Professional
Standards
2-2
Authority of Organizations
Public Company Accounting Oversight Board
American Institute of Certified Public
Accountants
Auditing, Attestation, Quality Control, Independence,
Ethical Standards for audits of public companies
Auditing, Attestation, Quality Control, Independence
Ethical, Accounting and Review Standards for
engagements involving nonpublic companies
State Boards of Accountancy
License CPAs and CPA firms to practice in
jurisdictions
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2-3
Generally Accepted Auditing
Standards--General Standards
Adequate technical training and
proficiency
Independence in mental attitude is
to be maintained
Due professional care is to be
exercised
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Generally Accepted Auditing
Standards--Standards of Field
Work
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Auditor must adequately plan and
properly supervise work
Auditor must obtain a sufficient
understanding of entity, and its
environment, including internal
control to assess risk of material
misstatement and to design further
audit procedures
Auditor must obtain sufficient
appropriate audit evidence to afford
a reasonable basis for the opinion
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Generally Accepted Auditing
Standards--Standards of
Reporting
2-5
State whether the financial statements are
presented in accordance with GAAP
Identify circumstances in which such
principles have not been consistently applied
Informative disclosures are adequate unless
otherwise stated in the report
Report should clearly state the degree of
responsibility being assumed by the auditors
by expressing an opinion or stating that one
cannot be expressed, and the reason
therefor
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Terminology in Auditing Standards
(Figure 2.2)
Responsibilit
y
Level
Meaning
Words Used to
Indicate
Responsibility
Unconditional
Responsibility
Auditor must fulfill responsibilities
Must
Is required
Shall (PCAOB only)
Presumptively
Mandatory
Auditor must comply with requirements
unless auditor demonstrates and
documents that alternative actions were
sufficient to achieve the objectives of the
standards
Should
Responsibility
to Consider
Auditor should consider; whether the
auditor complies with the requirements
depends on the exercise of professional
judgment in the circumstances
Might
Could
Other phrases indicating
a responsibilities to
consider
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The GAAS Hierarchy (Figure
2.3)
Category
Status
Audit
Guidance
1. Standards
Auditors should be prepared to
justify departures from these
standards.
2. Interpretative
Publications
Recommendations on the
application of the SASs. If not
followed, the auditors should be
prepared to explain how they
complied with the SAS provisions
addressed.
3. Other Auditing
Publications
No authoritative status, but may
help the auditor understand and
apply the standards
The 10 GAAS
SASs
Other standards for
PCAOB, govt. audits, etc.
Appendices to SASs
Interpretation of SASs
Auditing guidance in
AICPA
Audit and accounting
Guides
AICPA auditing
Statements of
Position
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Auditing articles
Continuing education
programs
Textbooks
Guidebooks
Audit programs
Checklists
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the
Detection of Errors and
Fraud
Obtain information to assess the inherent risks and fraud risks
2-8
Information about the company and its environment
Discussion among audit team members
Inquiries of management and others
Planning analytical procedures, including those involving revenue
Assess the risk of errors and fraud that may cause the financial
statements to contain a material misstatement.
Based on that assessment, plan and perform the audit to
obtain reasonable assurance that material misstatements,
whether caused by errors or fraud, will be detected (including
those procedures required by SAS No. 99.
Exercise due care in planning, performing and evaluating the
results of audit procedures, and the proper degree of
professional skepticism to achieve reasonable assurance that
material misstatements due to error or fraud will be detected.
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Auditor Responsibility for the
Detection of Illegal Acts
Those that could have a direct and
material effect on financial statement
amounts--same as for errors and fraud. An
audit obtains reasonable assurance of
detecting these types of illegal acts.
Those with an indirect effect on financial
statement amounts:
Be aware of possible occurrence.
If information comes to the auditors attention,
apply audit procedures directed at determining
whether an illegal act has occurred. An audit
does not provide assurance that indirect-effect
illegal acts will be detected.
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The Standard Auditors
Report for Nonpublic
Companies
Title
Addressee
Content
2-10
Introductory Paragraph
Scope Paragraph
Opinion Paragraph
Signature
Date
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The Standard Auditors Report-Introductory Paragraph
We have audited the accompanying balance sheet
of XYZ Company as of December 31, 20XX, and the
related statements of income, retained earnings, and
cash flows for the year then ended. These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an
opinion on these financial statements based on our
audit.
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The Standard Auditors Report
Scope Paragraph
We conducted our audit in accordance with auditing
standards generally accepted in the United States of
America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing
the accounting principles used and significant estimates
made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
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The Standard Auditors Report-Opinion Paragraph
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of XYZ Company as of December 31, 20XX, and the results
of its operations and its cash flows for the year then ended
in conformity with accounting principles generally accepted
in the United States of America.
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2-14
The GAAP Hierarchy
Authoritative Body Pronouncements
Pronouncements of Bodies Composed of
Expert Accountants, That Are Exposed
for Public Comment
Pronouncements of Bodies of Expert
Accountants That Are Not Exposed for
Public Comment
Widely Recognized Practices and
Pronouncements
Other Accounting Literature
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Public Company Audit
Report
Title is Report of Registered
Independent Public Accounting Firm
Refers to standards of the PCAOB
rather than GAAS
Includes a fourth paragraph that
refers to report on internal control
City and State (or Country) of audit
firm must be included
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Applicability of SSAEs
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Elements of Quality
Control
2-17
Independence, Integrity, and
Objectivity
Personnel Management
Acceptance and Continuance of
Clients and Engagements
Engagement Performance
Monitoring
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Regulation of the Public
Accounting Profession
Public Companies
Public Company Accounting Oversight
Board & the SEC
Registration of public accounting firms that
audit public companies
Conduct inspections of public company practice
of registered public accounting firms
Nonpublic Companies
AICPA & State Boards of Accountancy
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Peer review for nonpublic practice segments
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International Audit
Report
2-19
Contains expanded description of
managements responsibility
Contains an enhanced explanation of the
audit process
May state present fairly, in all material
respects or give a true and fair view
Report may indicate that the financial
statements comply with the provisions of the
countrys relevant statutes or laws
Must include city of the auditors office
May be signed using the personal name of
the auditor or the audit firm or both
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