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Overall Audit Report Quality Control System

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Title: Overall Audit Report Quality Control System


1
Overall Audit Report Quality Control System
  • Professional Standards
    (Chapter 2)
  • Professional
    Legal Liability
  • Ethics (Chapter 4)
  • (Chapter 3)
  • Competition

2
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.

3
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 AICPAs Professional Standards
    Section AU.
  • SASs are Frequently Issued to Better Satisfy F.S.
    User Expectations.

4
Underlying Principles
  • Purpose of an audit
  • Premise of an audit
  • Personal responsibilities of the auditor
  • Auditor actions in performing the audit
  • Reporting results of an audit

5
Underlying Principles (cont)
  • Purpose of an AuditProvide 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.

6
Underlying Principles (cont)
  • Premise of an AuditManagement (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.

7
Underlying Principles (cont)
  • 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 SkepticismA questioning mind and a
    critical assessment of audit evidence.

8
Underlying Principles (cont)
  • 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.

9
Underlying Principles (cont)
  • 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.

10
Underlying Principles (cont)
  • Reporting the Results of an AuditExpress 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.

11
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.

12
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.

13
PCAOB GAAS Standards of Field Work (cont)
  1. 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.

14
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)

15
PCAOB GAAS Standards of Reporting (cont)
  • 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 auditors name is
    associated with financial statements, the report
    should contain a clear-cut indication of the
    character of the auditors work, if any, and the
    degree of responsibility the auditor is taking.

16
AICPA Terminology Defined
Responsibility Level Meaning Words Used to Indicate Responsibility
Unconditional Responsibility Auditor must fulfill responsibilities 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.)
17
The GAAS (AICPA) Hierarchy
Category Status Audit Guidance
1. Standards Auditors should apply at the levels on the previous slide in accordance with the pertinent auditing standards. The 5 principles SASs (AU and AU-C) Other standards for PCAOB, govt. audits, etc.
2. Interpretative Publications 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. Appendices to SASs Interpretation of SASs Auditing guidance in AICPA Audit and Accounting Guides AICPA auditing Statements of Position
3. Other Auditing Publications No authoritative status, but may help the auditor understand and apply the standards. Auditing articles Continuing education programs Textbooks Guidebooks Audit programs Checklists
18
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
19
Unique PCAOB Auditing Standards (cont)
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



20
The Standard Auditors Report (Non-Public Client)
  • Title
  • Addressee
  • Content Sections (paragraphs)
  • Introductory (We have audited)
  • Managements responsibility
  • Auditors Responsibility
  • Opinion Paragraph
  • Signature (firm name)
  • City and state of office issuing audit report
  • Date (Last Day of Field Work or . . .)

21

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.
22

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.
23

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.
  •  

24
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

25

The Standard Auditors Report Auditors
Responsibility Paragraphs (cont)
  • 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.

26

The Standard Auditors Report Auditors
Responsibility Paragraphs (cont)
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.
27

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.
28
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.

29
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 Accounting Literature (e.g., Text Books)

30
Current GAAP Hierarchy (Non-Govt)
  • 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.

31
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

32
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.

33
Professional Skepticism?
  • Toughest attribute for some auditors.
  • Basically means that we must have support for our
    conclusions that is
  • Convincing (consider competency/reliability)
  • Corroborated (consistent evidence)
  • Verified or Tested by the auditor

34
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.

35
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.

36
Auditor Responsibility for the Detection of
Noncompliances w/ Laws Regulations (cont)
  • 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.

37
Auditor Responsibility Other Than Detection
  • For immaterial fraud and noncompliances
  • Be aware of possible occurrence.
  • If information comes to the auditors 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).

38
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 SEC-regulated clients.
  • Under Govt Auditing Stds (esp. Single Audit
    Act), there may be reporting to certain
    government officials.

39
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 firms audit, attestation and
    accounting practice and will vary based on firm
    size and complexities.

40
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

41
Regulation of the Public Accounting
ProfessionPublic Companies
2-13
  • 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.

42
Regulation of the Public Accounting
ProfessionNonpublic Companies
2-14
  • 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

43
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.

44
International Audit Report
  • Contains expanded description of managements
    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 countrys
    relevant statutes or laws.
  • May be signed using the personal name of the
    auditor or the audit firm or both.
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