Chapter 2
Corporate Governance,
Serving Client and Public
Interests, and Audit
Professionalism
Corporate Governance:
Serving Client and Public
Interests
Roles of Interested Parties
•Objective of financial reporting
•Corporate governance
•Management functions
Who is the Audit Client?
The board of directors and its audit
committee.
What is an Audit Committee?
Subcommittee of the board of directors.
Oversight responsibility for the outside reporting of the
company; risk monitoring and control processes; and both
internal and external audit functions.
Acts as an independent check on management.
Also, advocate for outside users of financial
statements.
Serving the Public’s Interests
A profession hold itself out as having higher
standards of conduct than society at large.
An audit opinion has value only if third parties
believe that the auditor is competent, uses due
care, and acts independently.
A professional must earn trust every day.
A profession is no better than what it can do in
the future; it cannot rest on what it has done in
the past.
Assuring Quality
Users need the assurance that publicly
available information is timely and accurate.
Why are CPA’s better at providing this
assurance?
The answer: Professionalism
Framework for Quality
Three components comprise the framework for
assuring quality:
•Standards
•Ethics
•Internal and external quality reviews
Maintaining Professionalism:
Standards
Need for Professional Standards
AICPA standards for attestation services:
•General or individual standards
•Fieldwork standards
•Reporting standards
Generally Accepted Auditing
Standards
10 Generally Accepted Auditing Standards
•General Standards (three)
•Criteria guiding auditor qualifications
•Fieldwork Standards (three)
•Guiding the audit process
•Reporting Standards (four)
•Clarifying the communication process
General Standards
1.
The examination is to be performed by a person or
persons having adequate technical training
and proficiency.
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 examination and the preparation
of the report.
Standards of Fieldwork
1.
The work shall be adequately planned and
assistants, if any, shall be properly supervised.
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.
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 examination.
Standards of Reporting
1.
The report shall state whether the financial statements are presented in
accordance with 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.
3.
Informative disclosures in the financial statements are to be regarded as
reasonably adequate unless otherwise stated in the report.
4.
The report shall contain either an expression of opinion regarding the
financial statements, taken as a whole, or 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 in which
an auditor’s name is associated with financial statements, the report
should contain a clear-cut indication of the character of the auditor’s
examination, if any, and the degree of responsibility the auditor is
taking.
Standards for Other Audit
Engagements
Attestation Standards
•Very similar to GAAS with the exception of:
•Assertions are specific to the area on which the
attestation is performed.
•On specific provisions related to evaluating internal
control.
•The attestor’s competence is related to the specific
area.
•The report provides assurance related to the specific
assertion.
Governmental Auditing
Standards
The standards are applicable to audits of governmental
organizations, programs, activities,and functions.
May apply to audits of:
•State, city, county,and Indian tribal governments.
•Real estate joint ventures or partnerships that receive financial
assistance from HUD.
•Finance companies with federally insured mortgages.
•Manufacturing companies selling to the government.
•Universities with student loans guaranteed by the federal
government.
Maintaining Professionalism:
Ethical Framework
Importance of Ethical Conduct
AICPA Code of Professional Conduct
•Four Components
•Principles
•Rules of conduct
•Interpretations of the Rules
•Ethical Rulings
AICPA Principles of
Professional Conduct
•Responsibilities
•Public Interest
•Integrity
•Objectivity and independence
•Due care
•Scope and nature of services
AICPA Rules of Conduct
Rule 101: Independence
Rule 102: Integrity and Objectivity
Rule 201: General Standards
Rule 202: Compliance with Standards
Rule 203: Accounting Principles
Rule 301: Confidential Client Information
Rule 302: Contingent Fees
AICPA Rules of Conduct
(continued)
Rule 501: Acts Discreditable
Rule 502: Advertising and Other Forms of Solicitation
Rule 503: Commissions and Referral Fees
Rule 505: Form of Organization and Name
Enforcement of the Code
Compliance depends primarily on the voluntary
cooperation of the AICPA members and:
•public opinion
•reinforcement by peers
•ultimately on disciplinary proceeding by the Joint
Ethics Enforcement Program (JEEP), sponsored by
the AICPA and state CPA societies.
Ethical Theories: Resolving
Issues that are not Black or White
•Ethical Problems
•Ethical Dilemmas
•Utilitarian theory
•Rights theory
An Ethical Framework
•Identify the ethical issue(s).
•Determine the affected parties and identify their rights.
•Determine the most important rights.
•Determine alternative courses of action.
•Assess the possible consequences of each action.
•Decide on the appropriate course of action.
Maintaining Professionalism:
Ensuring Quality
WHO AUDITS THE AUDITORS?
•External peer reviews
•Concurring partner reviews
•Interoffice reviews
Quality Control Standards and
External Peer Reviews
Sound quality controls
•independence, integrity, and objectivity
•personnel management
•acceptance and continuance of clients and
engagements
•engagement performance
•monitoring
Internal Peer Review
Programs
•Concurring partner review
•Interoffice review