Chapter 02
Professional
Standards
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Three Sets of Auditing
Standards
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
authorities in various countries
2-2
Principles Underling a GAAS Audit
1/6
 Purpose
of an audit
 Premise of an audit
 Personal responsibilities of the auditor
 Auditor actions in performing the audit
 Reporting results of an audit
2-3
Principles Underling a GAAS Audit
2/6
 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.
2-4
Principles Underling a GAAS Audit
3/6
 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.
2-5
Principles Underling a GAAS Audit
4/6
 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.
2-6
Principles Underling a GAAS Audit
 Auditor


5/6
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.
2-7
Principles Underling a GAAS Audit
6/6
 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.
2-8
The 10 Generally Accepted Auditing
Standards
 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.
2-9
Auditor Responsibility for the Detection
of Errors and Fraud (1 of 2)


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.
2-10
Auditor Responsibility for the
Detection of Errors and Fraud (2 of 2)

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.
2-11
Auditor Responsibility for Client Identifying
Noncompliance with Laws

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.
2-12
The Standard Auditors’ Report for
Nonpublic Companies


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
2-13
Other Types of Auditors’ Reports

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
2-14
Public Company Audit Report
 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.
2-15
Applicability of SSAEs
2-16
Elements of Quality Control
 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
2-17
Regulation of the Public Accounting
Profession

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
2-18
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
2-19