Overall Audit Report
Quality Control System
Professional Standards (Chapter 2)
Professional
Liability
Ethics
(Chapter 3)
Legal
(Chapter 4)
Competition
Slide 2-1
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Sources of Professional
Standards & Rules
Public Company Accounting Oversight Board
• Auditing, Attestation, Quality Control, Independence, and
Ethical Standards for Audits of Public (issuer)Companies
American Institute of Certified Public Accountants
• Auditing, Attestation, Quality Control, Independence,
Ethical, and Accounting and Review Standards (and
more) for Engagements at Nonpublic Companies.
State Boards of Accountancy
•
License CPAs and CPA firms to practice in their
jurisdictions.
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AICPA Auditing Standards

There are 5 Broad Principles that Define
Generally Accepted Auditing Standards
(GAAS). (Minimum Expectations)

Statements on Auditing Standards (SAS)
are Issued to provide detail to the Broad
GAAS. Interpretations are also issued.

Codified in AICPA’s Professional Standards
Section AU.

SASs are Frequently Issued to Better
Satisfy F.S. User Expectations.
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Underlying Principles
1.
Purpose of an audit
2.
Premise of an audit
3.
Personal responsibilities of the auditor
4.
Auditor actions in performing the audit
5.
Reporting results of an audit
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Underlying Principles (con’t)

Purpose of an Audit—Provide an opinion
on whether financial statements are
materially in accordance with the
applicable financial reporting framework.
The framework is ordinarily GAAP.
The applicable framework corresponds to
the “suitable criteria” of an attest
engagement.
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Underlying Principles (con’t)
Premise of an Audit—Management (and those
charged with governance) have responsibility to:
 Prepare fairly presented financial statements in
accordance with applicable financial reporting
framework.
 Design, implement and maintain internal controls
that achieve the above with F.S. that are free of
material misstatements.
 Provide the auditor with needed/requested
information and unrestricted access to those in the
entity.
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Underlying Principles (con’t)
Personal Responsibility of the Auditor (team)
 Have appropriate competence &
capabilities to perform audit in accordance
with standards, including maintaining
professional skepticism and exercising
professional judgment throughout the
audit.

Professional Skepticism—A questioning mind
and a critical assessment of audit evidence.
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Underlying Principles (con’t)
Auditor Actions in Performing the Audit

To express an opinion, the auditor obtains
reasonable assurance about whether financial
statements are free from material error or fraud.

To obtain reasonable assurance, the auditor:
 Plans the work and properly supervises assistants.
 Determines appropriate materiality levels.
 Identifies & assesses risks of a material misstatement
based on an understanding of the entity & its
environment, including internal controls.
 Obtains sufficient & appropriate audit evidence.
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Underlying Principles (con’t)
Auditor Actions in Performing the Audit

The auditor is unable to obtain absolute
assurance due to:
– Nature of financial reporting.
– Nature of audit procedures.
– Need to conduct audit within a reasonable period of
time.
Slide 2-9
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Underlying Principles (con’t)
Reporting the Results of an Audit—Express
in a written report an opinion on F.S. (or
statement that opinion cannot be
expressed).
» The opinion is on whether the financial
statements are in accordance, in all material
respects, with the applicable financial
reporting framework.
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PCAOB GAAS
General Standards
1. The audit must be performed by a person or
persons having adequate technical training
and proficiency as an auditor.
2. In all matters relating to the assignment, an
independence in mental attitude is to be
maintained by the auditor or auditors.
3. Due professional care is to be exercised in
the performance of the audit and the
preparation of the report.
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PCAOB GAAS
Standards of Field Work
1. The work is to be adequately planned and
assistants, if any, are to be properly
supervise.
2. A sufficient understanding of internal
control is to be obtained to plan the audit
and to determine the nature, timing, and
extent of tests to be performed.
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PCAOB GAAS
Standards of Field Work (con’t)
3. Sufficient competent evidential matter is to
be obtained through inspection, observation,
inquiries, and confirmations to afford a
reasonable basis for an opinion regarding
the financial statements under audit.
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PCAOB GAAS
Standards of Reporting
1. The report shall state whether the financial
statements are presented in accordance with
generally accepted accounting principles (GAAP).
2. The report shall identify those circumstances in
which such principles have not been
consistently observed in the current period in
relation to the preceding period. (Exception only)
3. Informative disclosures in the financial
statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
(Exception only)
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PCAOB GAAS
Standards of Reporting (con’t)
4. The report shall contain either
(1) an expression of opinion regarding the
financial statements, taken as a whole, or
(2) an assertion to the effect that an
opinion cannot be expressed.
When an overall opinion cannot be expressed,
the reasons therefore should be stated.
In all cases where an auditor’s name is
associated with financial statements, the report
should contain a clear-cut indication of the
character of the auditor’s work, if any, and the
degree of responsibility the auditor is taking.
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AICPA Terminology Defined
Responsibility
Level
Unconditional
Responsibility
Meaning
Auditor must fulfill responsibilities
Words Used to
Indicate
Responsibility
“Must”
“Is required”
(PCAOB only)
“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.
“May”
“Might”
“Could”
(Plus other
phrases indicating
a responsibility to
consider.)
The GAAS (AICPA) Hierarchy
Category
1. Standards
2. Interpretative
Publications
3. Other Auditing
Publications
Status
Audit Guidance
Auditors should apply at the
levels on the previous slide in
accordance with the pertinent
auditing standards.

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.

No authoritative status, but may
help the auditor understand and
apply the standards.











The 5 principles
SASs (AU and AU-C)
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
Auditing articles
Continuing education
programs
Textbooks
Guidebooks
Audit programs
Checklists
Unique PCAOB Auditing Standards
AS 1 References in Auditors’ Reports to the Standards of the Public
Company Accounting Oversight Board
AS 2 Superseded by AS 5
AS 3 Audit Documentation
AS 4 Reporting on Whether a Previously Reported Material Weakness
Continues to Exist
AS 5 An Audit of Internal Control Over Financial Reporting That Is
Integrated with An Audit of Financial Statements
AS 6 Evaluating Consistency of Financial Statements
AS 7 Engagement Quality Review
AS 8 Audit Risk
AS 9 Audit Planning
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Unique PCAOB Auditing Standards (con’t)
AS 10 Supervision of the Audit Engagement
AS 11 Consideration of Materiality in Planning and Performing an Audit
AS 12 Identifying and Assessing Risks of Material Misstatement
AS 13 The Auditor's Responses to the Risks of Material Misstatement
AS 14 Evaluating Audit Results
AS 15 Audit Evidence
AS 16 Communications with Audit Committees
Slide 2-19
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The Standard Auditors’ Report
(Non-Public Client)
Title
Addressee
Content Sections (paragraphs)
Introductory (“We have audited”)
Management’s responsibility
Auditor’s Responsibility
Opinion Paragraph
Signature (firm name)
City and state of office issuing audit report
Date (Last Day of Field Work or . . .)
Slide 2-20
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The Standard Auditors’ Report
Introductory Paragraph
We have audited the accompanying
consolidated balance sheets of ABC
Company and its subsidiaries, as of
December 31, 20X1 and 20X0, and the
related consolidated statements of income,
retained earnings, and cash flows for the
years then ended.
Slide 2-21
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The Standard Auditors’ Report
Mgmt Responsibility Paragraph
Management is responsible for the preparation and fair
presentation of these consolidated financial statements
in accordance with accounting principles generally
accepted in the United States of America; this includes
the design, implementation, and maintenance of
internal control relevant to the preparation and fair
presentation of consolidated financial statements that
are free from material misstatement, whether due to
fraud or error.
Slide 2-22
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The Standard Auditors’ Report
Auditors’ Responsibility Paragraphs
Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits 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 consolidated financial statements are free
of material misstatement.
Slide 2-23
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What is Reasonable Assurance?
•High Level of Assurance, But Not Absolute
•Audit Evidence More Likely Persuasive Rather
than Convincing or Conclusive:
Nature of Audit Testing - Not 100% and Involves
Use of Professional Judgment
Nature of Audit Evidence (e.g., Accounting Estimates)
Characteristic of Fraud, Including Concealment
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The Standard Auditors’ Report
Auditors’ Responsibility Paragraphs (con’t)
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected
depend on the auditor's judgment, including the assessment
of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In
making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and fair
presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control.
Slide 2-25
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The Standard Auditors’ Report
Auditors’ Responsibility Paragraphs (con’t)
An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of
significant accounting estimates made by management,
as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our
audit opinion.
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The Standard Auditors’ Report
Opinion Paragraph
In our opinion, the consolidated financial
statements referred to above present fairly, in
all material respects, the financial position of
ABC Company and its subsidiaries as of
December 31, 20X1 and 20X0, and the results
of their operations and their cash flows for the
years then ended in accordance with
accounting principles generally accepted in the
United States of America.
Slide 2-27
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Audit Report – Public Company
• Title is “Report of Registered Independent
Public Accounting Firm” rather than
“Independent Auditors’ Report”.
• Refers to PCAOB standards rather than
GAAS.
• Includes a that refers to report on internal
control.
• Includes City and State (or Country) of
audit firm.
Slide 2-28
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Old GAAP Hierarchy
1. Authoritative
Body Pronouncements
2. Pronouncements
of Bodies Composed of
Expert Accountants, That Are Exposed for
Public Comment
3. Pronouncements
of Bodies of Expert
Accountants That Are Not Exposed for Public
Comment
4. Widely
Recognized Practices and
Pronouncements
5. Other
Slide 2-29
Accounting Literature (e.g., Text Books)
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Current GAAP Hierarchy
(Non-Gov’t)
• Authoritative: FASB Accounting
Standards Codification (ASC) plus Rules
and Interpretive releases of the SEC
under authority of federal securities laws
for SEC registrants.
• ASC updated via Accounting Standards
Updates (ASU).
• Non-Authoritative: All other sources.
Slide 2-30
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Errors/Mistakes vs. Fraud
In the Auditing Standards:
Errors = Unintentional F.S. Misstatements
or Omissions of Amounts or Disclosures
Fraud = Intentional Acts That Cause a F.S.
Misstatement Which Result From:
1. Fraudulent Financial Reporting
or
2. Theft of Assets (also called Defalcation)
Source: SAS 99, 113
Slide 2-31
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Auditor Responsibility for the
Detection of Errors and Fraud

Assess the risk of errors and fraud that may cause the financial
statements to contain a material misstatement.
Obtain information to assess the inherent risks and fraud risks:




Information about the company and its environment
Discussion among audit team members
Inquiries of management and others
Planning analytical procedures, including those involving revenue

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 specific
steps required by SAS 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.
Slide 2-32
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Professional Skepticism?
• Toughest attribute for some auditors.
• Basically means that we must have
support for our conclusions that is:
1. Convincing (consider competency/reliability)
2. Corroborated (consistent evidence)
3. Verified or Tested by the auditor
Slide 2-33
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Auditor Responsibility for the Detection of
Noncompliances w/ Laws & Regulations
For those laws & regulations that are generally recognized
as having a direct and material effect on financial
statement amounts & disclosures--same as for errors &
fraud:
• Assess the risk of illegal acts that may have caused the
financial statements to contain a material misstatement.
• Based on that assessment, plan and perform the audit to
obtain reasonable assurance that misstatements caused by
illegal acts will be detected if direct & material impact.
• 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 illegal acts will be
detected.
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Auditor Responsibility for the Detection of
Noncompliances w/ Laws & Regulations
Examples of laws & regulations that are generally
recognized as having a direct and material effect
on financial statement amounts & disclosures are
Laws & regulations related to:
 Taxes
 Pensions
 Form
or content of F.S. (SEC)
 Industry-specific
reporting
 Contracts/grants
with the government that could affect
revenue or expense recognition.
Slide 2-35
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Auditor Responsibility for the Detection of
Noncompliances w/ Laws & Regulations (con’t)
For those laws & regulations that are NOT generally
recognized as having a direct effect, but could still have
a material effect, on financial statements (generally
disclosures):
 Inquire of management and, when appropriate, those
charged with governance about whether the entity is
in compliance with such laws and regulations.

Inspect correspondence, if any, with the relevant
licensing or regulatory authorities.
Examples: Related solely to operations (anti-trust) or fines/penalties that
could be levied, terms of a license, regulatory solvency requirements,
workplace or environmental regs.
Slide 2-36
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Auditor Responsibility –
Other Than Detection
For immaterial fraud and noncompliances:
Be aware of possible occurrence.
If information comes to the auditor’s attention,
apply audit procedures directed at determining
whether fraud or noncompliance has occurred
and its potential impact on the financial
statements. (But, an audit does not provide assurance
that such acts will be detected.)
Inform client top management and/or the audit
committee (top mgmt involved or material).
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Reporting Fraud & Law /Reg Noncompliances
Report ANY fraud or noncompliances found by the
auditor to client top management (at least one level
above) and/or to those charged with governance.
Report to those charged with governance if material, top
management involved, intentional, but not if
inconsequential.
No responsibility to report to law enforcement.
If CPA is fired or resigns, there is reporting of the auditor
change & reason for the change to SEC for SECregulated clients.
Under Gov’t Auditing Stds (esp. Single Audit Act), there
may be reporting to certain government officials.
Slide 2-38
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AICPA Quality
Control Standards

CPA firms must establish a system of
quality control designed to provide the firm
with reasonable assurance that the firm and
its personnel comply with professional
standards and applicable regulatory and
legal requirements, and that the firm or
engagement partners issue reports that are
appropriate in the circumstances.

Applicable to the firm’s audit, attestation
and accounting practice and will vary based
on firm size and complexities.
Slide 2-39
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AICPA Elements of
Quality Control
1.
Leadership Responsibilities for quality
within the firm (the "tone at the top")
2.
Relevant Ethical Requirements
3.
Acceptance and Continuance of Client
Relationships and specific engagements
4.
Human Resources
5.
Engagement Performance
6.
Monitoring
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2-13
Regulation of the Public Accounting
Profession—Public Companies
• Public Company Accounting Oversight
Board and the SEC
Registration of public accounting firms that
audit public companies.
Establish or adopt auditing, quality control,
ethics, independence and other standards for
auditors of public companies.
Conduct inspections of registered public
accounting firms.
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2-14
Regulation of the Public Accounting
Profession—Nonpublic Companies
 American Institute of Certified Public
Accountants
 Peer review/inspection program
 Ethics investigations
 State Boards of Accountancy
 Registration of all CPAs and CPA firms
 Investigates complaints against CPAs
 Investigates ethics violations
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International Accounting Standards
International Financial Reporting
Standards (IFRS)

Developed by International Accounting
Standards Board (IASB).

SEC accepts IFRS for foreign companies that
issue securities in US markets.

Topic added to U.S. CPA Exam in 2011.
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International Audit Report
• Contains expanded description of management’s
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 country’s
relevant statutes or laws.
• May be signed using the personal name of the
auditor or the audit firm or both.
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