Chapter 2
Professional Standards
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1. Basis of Auditing
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Objectives of auditing
Responsible parties involved in auditing
Similarities with other disciplines
Limitations of auditing
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2. Practice Standards
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AICPA standards
Citation Methods
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SAS Number
AU Section Number (AU-C)
Professional Standards, Vol. I and II (and III)
Sources of Auditing Standards
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Statements on Auditing Procedures — SAPs (1-54)
Statements on Auditing Stds — SASs — AU (1-129)
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2. Practice Standards (continued)
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Sources of other Standards
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Statements on Stds for Attestation
Engagements — SSAEs — AT
Statements on Stds for Accounting and Review
Services — SSARSs — AR
Consulting Standards — CS
Quality Control Standards — QC
Peer Review Standards — PR
Tax Practice Standards — TX
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2. Practice Standards (continued)
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Sources
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Personal Financial Planning Standards — PFP
Code of Ethics Standards — ET
AICPA Bylaws Standards — BL
Continuing Education Standards — CPE
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2. Practice Standards (continued)
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Clarity Project
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Purpose:
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Project started in 2004
AU sections renumbered to ISA numbers
New format for standards
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to make standards easier to read, understand, and apply
to converge US GAAS with ISAs issued by IAASB
introduction, objective, definitions, requirements, application and other
explanatory material
Effective for audits of financial statements for years ending on or
after December 15, 2012
Primarily was issued as one SAS – SAS 122
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2. Practice Standards (continued)
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International Standards
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International Auditing and Assurance Standards Board — IAASB
(Part of IFAC)
International Auditing Standards (ISAs)
International Standards on Assurance Engagement (ISAE)
IFAC Code of Ethics
(International Financial Reporting Standards — IASB)
PCAOB Standards
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2003 adopted 101 existing SASs
Auditing Standards – AS
Ethics and Independence Standards – IT
Quality Control Standards – QC
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2. Practice Standards Terminology in auditing standards
Responsibility
Level
Meaning
Words 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
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2. Practice Standards (continued)
Summary of Practice Standards
Client
Public
Entities
(Issuers)
Private
Entities
(Nonissuers)
Governmental
Entities
Foreign
Entities
Rulemaking
body
Public Company
Accounting
Oversight Board
(PCAOB)
AICPA Auditing
Standards Board
(ASB)
U.S.
Government
Accountability
Office (GAO)
IFAC
International
Auditing and
Assurance
Standards Board
(IAASB)
Standards
Auditing
Standards (AS)
Statements on
Auditing
Standards
(SASs) (AU-C)
Government
Auditing
Standards (The
“Yellow Book”)
International
Standards on
Auditing (ISAs)
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3. GAAS and Principles
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General standards (responsibilities principle)
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Fieldwork standards (performance principle)
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adequate technical training
independence
due professional care
adequately planned & supervised
internal control
sufficient appropriate evidence
Reporting standards (reporting principle)
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GAAP
consistency
adequate disclosure
opinion
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3. GAAS and Principles
Comparison of AICPA GAAS to Principles: Responsibilities
Addresses whether auditor should accept engagement
General Standards
1.
2.
Responsibilities Principle
Training and proficiency
Auditors are responsible for:
•Competence and capabilities
Independence in mental attitude
3.
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Due professional care
•Ethical requirements
•Professional skepticism and professional
judgment
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3. GAAS and Principles
Comparison of AICPA GAAS to Principles: Performance
Provides guidance on conducting the audit
Standards of Field Work
1.
3.
Performance Principle
Planning and supervision
To obtain reasonable assurance the auditor
must:
2. Understanding of entity and its
environment, including its internal control,
sufficient to assess risk of material
misstatement
•Plan work and supervise assistants
Obtain sufficient appropriate evidence
•Determine and apply appropriate materiality
levels
•Identify and assess risks of material
misstatement based on understanding of
business and internal control
•Obtain sufficient appropriate evidence
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3. GAAS and Principles
Comparison of AICPA GAAS to Principles: Reporting
Provides guidance on issuing audit report
Standards of Reporting
1.
2.
3.
Reporting Principle
Financial statements in accordance with
GAAP
The report:
GAAP applied consistently (only report if
not consistent)
Adequacy of disclosures (only report if not
adequate)
4.
• Must express an opinion or state that an
opinion cannot be expressed
• Opinion must be based on conformity of the
financial statements with the applicable
financial reporting framework
Express or disclaim an opinion
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4. Evidence
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SAS 122
3rd Standard of Field Work:
The auditor must obtain sufficient appropriate
audit evidence by performing audit procedures…
Definition
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All the information used by the auditor in arriving at
the conclusions on which the audit opinion is based
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4. Evidence (continued)
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Sufficiency and Appropriateness
 Interrelated
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Sufficiency – quantity (affected by RMM and quality of evidence)
Appropriateness – quality (affected by its relevance and reliability)
Limitations (cost, persuasiveness)
Generalizations about reliability
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Source – knowledge, location, reliability of ICS, direct/indirect, directly by
auditor
Nature – documentary form, originals, reliability of form (e.g., ability to
be altered, certainty of sender), document experts
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4. Evidence (continued)
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Types of Evidence
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Underlying Accounting Data
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Corroborating Information
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journals, general and subsidiary ledgers, accounting manuals,
work sheets, spreadsheets, cost allocations, reconciliations, etc.
auditor’s direct personal knowledge
documentary evidence
 created outside and transmitted directly to auditor
 created outside and held by client
 created by and held by client
client representations
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4. Evidence (continued)
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Types of Evidence (continued)
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Physical evidence
Mathematical evidence
Oral evidence
Confirmations
Written representations
Analytical procedures
Electronic evidence
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5. Attestation Standards
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Apply to attest services
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affirm to be genuine
when a CPA expresses a conclusion about
the reliability of subject matter or an
assertion that is the responsibility of another
party
includes financial and nonfinancial services
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5. Attestation Standards
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SSAEs apply to
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forecasts and projections
pro forma information
internal control
compliance with laws, regs, contracts
MD & A
agreed-upon procedures
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6. Quality Control for Firms
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AICPA
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National Peer Review Committee (formerly known as
the Center for Public Company Audit Firms)
Private Companies Practice Section (PCPS)
PCAOB registration
PCAOB inspections
State level peer review
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Quality Enhancement Program in Nebraska
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6. Quality Control for Firms
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An audit firm must establish a system of QC to
provide it reasonable assurance that the firm will
comply with professional, regulatory, and legal
requirements
QC standards apply to all firms and all services
provided
Specific QC policies and procedures vary by firm
size
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6. Quality Control for Firms
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AICPA Elements of Quality Control
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leadership responsibilities
ethical requirements
acceptance and continuance of clients and
engagements
human resources
engagement performance
monitoring
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Review Questions for Discussion
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Chapter 2
2.1
2.2
2.7
2.8
2.12
2.15
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2.16
2.17
2.19
2.21
2.25
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