Professional Standards

Chapter 2 Professional Standards

Authority of Organizations • Public Company Accounting Oversight Board • Auditing, Attestation, Quality Control, Independence, Ethical Standards for audits of public companies • American Institute of Certified Public Accountants • 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

Generally Accepted Auditing Standards--General Standards • Adequate technical training and proficiency • Independence in mental attitude is to be maintained • Due professional care is to be exercised

Generally Accepted Auditing Standards--Standards of Field Work • 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

Generally Accepted Auditing Standards--Standards of Reporting • 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

Terminology in Auditing Standards (Figure 2.2)

The GAAS Hierarchy (Figure 2.3)

Auditor Responsibility for the Detection of Errors and Fraud • 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 • Assess the risk of errors and fraud that may cause the financial statements to contain a material misstatement. • 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 those procedures required by SAS No. 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.

Auditor Responsibility for the Detection of Illegal Acts • Those that could have a direct and material effect on financial statement amounts--same as for errors and fraud. An audit obtains reasonable assurance of detecting these types of illegal acts. • Those with an indirect effect on financial statement amounts: • Be aware of possible occurrence. • If information comes to the auditor’s attention, apply audit procedures directed at determining whether an illegal act has occurred. An audit does not provide assurance that indirect-effect illegal acts will be detected.

The Standard Auditors’ Report for Nonpublic Companies • Title • Addressee • Content • Introductory Paragraph • Scope Paragraph • Opinion Paragraph • Signature • Date

The Standard Auditors’ Report--Introductory Paragraph We have audited the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

The Standard Auditors’ Report—Scope Paragraph We conducted our audit 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

The Standard Auditors’ Report--Opinion Paragraph In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Company as of December 31, 20XX, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

The GAAP Hierarchy • Authoritative Body Pronouncements • Pronouncements of Bodies Composed of Expert Accountants, That Are Exposed for Public Comment • Pronouncements of Bodies of Expert Accountants That Are Not Exposed for Public Comment • Widely Recognized Practices and Pronouncements • Other Accounting Literature

Public Company Audit Report • Title is “Report of Registered Independent Public Accounting Firm” • Refers to standards of the PCAOB rather than GAAS • Includes a fourth paragraph that refers to report on internal control • City and State (or Country) of audit firm must be included

Applicability of SSAEs

Elements of Quality Control • Independence, Integrity, and Objectivity • Personnel Management • Acceptance and Continuance of Clients and Engagements • Engagement Performance • Monitoring

Regulation of the Public Accounting Profession • Public Companies • Public Company Accounting Oversight Board & the SEC • 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

International Audit Report • Contains expanded description of management’s 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 country’s relevant statutes or laws • Must include city of the auditors’ office • May be signed using the personal name of the auditor or the audit firm or both

Professional Standards