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Three sets of auditing standards
 AICPA (Auditing Standards Board) for nonpublic
companies in US.
 PCAOB for public companies in US
 International Auditing Standards with differing
levels of authority in the various countries
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
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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
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
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Purpose of an audit
Premise of an audit
Personal responsibilities of the auditor
Auditor actions in performing the audit
Reporting results of an audit
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
Purpose of an audit—Provide an opinion on
financial statements are 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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
Premise of an audit—Management (and those
charged with governance) have responsibility
to:


Prepare financial statements in accordance with
applicable financial reporting framework.
Provide auditor with needed information and
unrestricted access to those in the entity.
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
Personal responsibility of the auditor—
Appropriate competence and 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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
Auditor actions in performing the audit


Obtain reasonable assurance about whether financial
statements are free from error or fraud.
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.
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
Reporting the results of an audit—Express in
a written report an opinion on findings (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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


General Standards
Standards of Field Work
Reporting Standards
NOTE: These standards only apply to audits
conducted according to PCAOB standards.
The preceding “Principles” replaced the 10
GAAS standards for nonpublic company
audits.
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


Adequate technical training and proficiency
Independence in mental attitude is to be
maintained
Due professional care is to be exercised
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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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


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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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

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
 Risk assessment analytical procedures, including
those involving revenue
Assess the risk of errors and fraud that may cause
the financial statements to contain a material
misstatement.
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

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.
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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

Noncompliance with laws that could have a direct
and material effect on financial statement amounts
and disclosures—same as for errors and fraud. An
audit obtains reasonable assurance of detecting
noncompliance with these laws.
Other Laws (no direct effect on financial statement
amounts):

Specific procedures:
 Inquire of management as to compliance
 Inspect correspondence with licensing or regulatory authorities


Be aware of possible occurrence.
If information comes to the auditor’s attention, apply
audit procedures directed at determining whether
noncompliance with a law has occurred. An audit does
not provide assurance that noncompliance with these
laws will be detected.
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


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
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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.
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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.
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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.
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 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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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.
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
FASB issues GAAP for nongovernmental
entities
Authoritative: FASB Codification and Accounting
Standards Updates
 Nonauthoritative Pronouncements:







Widely recognized practices
FASB concepts Statements
AICPA Issues Papers
International Financial Reporting Standards
Various others
Other sources of GAAP


GASB--State and local governments
FASAB--Federal government
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
Standard unmodified report (unqualified per PCAOB standards)


Financial statements follow GAAP and auditor does not add
additional commentary for any issue
Other reports
 Unmodified with emphasis of matter (or other emphasis)
 Example: A lack of consistency in application of accounting
principles

Qualified opinion
 Scope limitation or departure from GAAP

Adverse opinion
 Departure from GAAP so significant that financial statements as a
whole are misleading

Disclaimer of opinion
 Unable to arrive at an opinion due to a very significant scope
limitation
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



Title is “Report of Registered Independent
Public Accounting Firm.”
Refers to standards of the PCAOB rather than
GAAS.
Includes a paragraph that refers to report on
internal control.
Somewhat more brief than the nonpublic
company report.
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
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Leadership responsibilities for quality
within the firm (“tone at the top”)
Relevant ethical requirements
Acceptance and continuance of clients and
engagements
Human Resources
Engagement performance
Monitoring
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
Firm’s internal culture recognizes that quality
is essential in performing engagements and
recognizes the need to



perform work that complies with professional
standards and regulatory and legal requirements
and
issue reports that are appropriate in the
circumstances.
Example: Assign management responsibilities
so that commercial considerations do not
override the quality of work performed.
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

Firm and its personnel comply with relevant
ethical requirements.
Example: At least annually, the firm should
obtain written confirmation of compliance with
its independence policies and procedures from
all firm personnel who are required to be
independent.
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
Firm will undertake to continue relationships
and engagements only where the firm:
1. Has considered client integrity.
2. Is competent to perform the engagement.
3. Can comply with legal and ethical requirements.

Example: Background information is gathered on all
prospective audit clients, including the attitude of
principal owners, key management, and those charged
with governance on matters such as aggressive
accounting and internal control over financial
reporting.
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
Firm has personnel with the capabilities, competence,
and commitment to ethical principles to:
1. Perform engagements in accordance with professional
standards and regulatory and legal requirements.
2. Enable the firm to issue reports that are appropriate in the
circumstances.

Example: Design effective recruitment processes and
procedures to help the firm select individuals meeting
minimum academic requirements established by the
firm, and maturity, integrity and leadership.
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
Firm’s engagements are consistently performed in
accordance with professional standards and regulatory
and legal requirements, with policies and procedures
addressing:
1.
2.
3.

Engagement performance.
Supervision responsibilities.
Review responsibilities.
Example: Design policies and procedures that address
the tracking of progress of each engagement.
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

Firm’s policies and procedures established for
each of the elements are suitably designed and
effectively applied.
Example: Working papers, reports, and client
financial statements are reviewed to assess
compliance with the firm’s quality control
policies and procedures.
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


Depend on size of firm, number of offices and
nature of firm’s practices.
Every CPA firm should have quality control
procedures applicable to every aspect of its
practice.
Establish controls to provide assurance that the
CPA firm meets its responsibilities to clients
and public.
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
Public Companies

Public Company Accounting Oversight Board
 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
 Peer review for nonpublic practice segments
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


Composed of 5 members – only two may be
CPAs
Members appointed by SEC and may serve no
more than two five-year terms
All accounting firms that audit SEC registrants
must register with PCAOB


Pledge to cooperate with PCAOB inquiries
PCAOB can impose monetary damages, suspend
firms or make referrals to Justice Department
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


Members of AICPA
Conducted by CPAs or other CPA firms
Two types of peer reviews

System review
 Study of CPA firms’ system of quality control
 Select sample of firms’ engagements and examine related
working paper files

Engagement review
 Sample of CPA work including reports to evaluate
appropriateness
 Less in scope than system review

Report: pass, pass with deficiencies, or fail
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

Conducted by PCAOB staff
Focus



Primarily evaluating performance of sample of
individual audit and review engagements; a risk
based approach to selection and inspection is used.
Selected quality control and management issues
only. This differs from a peer review.
Report

Written report to SEC, part of which is made public
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
International Financial Reporting Standards
(IFRS)
Developed by International Accounting Standards
Board (IASB)
 SEC accepts IFRS for foreign companies that issue
securities in US markets

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



Contains expanded description of management’s
responsibility and explanation of the audit process
similar to the nonpublic company audit report
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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