Auditing
accumulation and evaluation of evidence about information to determine the degree of correspondence between the information and established criteria.
should be done by a competent independent.
to do an audit, there must be verifiable form and some standards.
Evidence
an information used by the auditor to determine if the information are accordance with the established criteria or not.
types of evidence: transaction data, client inquiry, written and electronic communication with outsiders, observation.
Auditing and Accounting
Accounting is the recording, classifying and summarizing of economic event to provide financial information.
Auditing is determining whether the recorded information properly reflects the economic event during accounting period.
Information Risk
Auditing can have a significant effect on information risk.
The cause of information risk:
1. Remoteness of information
2. Biases and motives of providers
3. Voluminous data
4. Complex exchange transactions
Ways to reduce information risks:
1. Users verify information
2. Users share information risk with management
3. Audited financial statements are provided
Assurance Services
an independent professional services that improve quality of information for decision makers.
can be done by Certified Public Accountant (CPA) or other professionals.
Attestation Services
a service types of assurance service in which CPA firm issues a report of an assertion that is made by another party.
categories in attestation services:
1. Audit of historical financial statements
2. Audit of internal control over financial reporting
3. Review of historical financial statements
4. Attestation services on information technology
Types of Audit:
1. Operational audit
information:
number of record processed, cost of the department, and number of errors
criteria:
company standards for efficiency and effectiveness in payroll department
evidence:
error reports, payroll records, and payroll processing costs
2. Compliance audit
information:
company records
criteria:
loan agreement provisions
evidence:
financial statements and calculations by the auditor
3. Financial statement audit
information:
financial statement
criteria:
generally accepted accounting principles
evidence:
documents, records, and outside sources of evidence
Types of auditors
1. Certified Public Accounting Firms
2. Government Accountability Office Auditors
3. Internal Revenue Agents
4. Internal Auditor
Unqualified Opinion
management assertion are fairly presented in the auditor in a audit report
only applies to quality of financial statement, not quality of entity as investment or credit risk
Parts of the Standard Unqualified Audit Report
1. Report title
2. Audit report address
3. Introductory paragraph
4. Scope paragraph
5. Opinion paragraph
6. Name of CA firm
7. Audit report date
Categories of Audit Report
1. Standard unqualified
2. Unqualified with explanatory paragraph or modifies wording
3. Qualified
4. Adverse or disclaimer
Qualified Opinion
resulted from a limitation on the scope of the auditor failure to follow generally accepted accounting principles.
divided by 2:
1. Adverse opinion
used only when the auditor believes that the overall financial statements are so materially misstated
2. Disclaimer of opinion
used when auditor unable to be satisfied with the overall financial statement presented
Materiality
A misstatement in the financial statements can be considered material if knowledge of the misstatement would affect a decision of a reasonable user of the statements.
levels of materiality:
1. amounts are immaterial
2. amounts are material but do not overshadow the financial statements
3. amounts are so materials or so pervasive that overall fairness of statements is in question
Business Failure
occurs when a business is unable to pay its lenders or to meet the expectation of its investor
Audit Failure
occurs when the auditor issues an incorrect audit and failed to comply the standards
Audit Risk
the risk that the auditor issues an incorrect opinion when a material is misstatement exists
Legal Term Affecting CPA Liability
1. Ordinary negligence
2. Gross negligence
3. Constructive fraud
4. Fraud
term related:
1. Contract law
a. breach of contract
b. third party beneficiary
2. Common law
3. Statutory law
4. Joint and several liability
5. Separate and proportionate liability
Four Major Sources of Auditor Legal Liability
1. Liability to clients
2. Liability to third parties
3. Federal securities laws
4. Criminal liability
auditor defenses against client suits:
1. Lack of duty to perform
2. non negligent performance
3. Contributory Negligence
4. Absence of casual connection
Liability auditor to third parties:
1. Ultramares Doctrine
2. Foreseen User
Foreseen user divided by: credit alliance, restatement of torts, foreseeable user
Ethical Principles
1. responsibilities
2. the public interest
3. integrity
4. objectivity
5. due care
6. scope and nature of services
Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence
The SEC adopted rules strengthening auditor independence in January 2003
The Sarbanes-Oxley Act and SEC revised rules further restrict but do not completely eliminate
The PCAOB has also issued additional independence rules related of certain tax services
Audit Committees
is a selected number of a company’s board of directors whose responsibilities include helping auditors remain independent of management
most audit committees are made of three to seven directors who are not a part of company management
Rules of Conduct:
101 — independence
102 — integrity and objectivity
201 — general standards
202 — compliance with standards
203 — accounting principles
301 — confidential client information
302 — contingent fees
501 — acts discreditable
502 — advertising and other forms of solicitation
503 — commissions and referral fees
505 — form of organization and name
Management’s Responsibilities
responsible for adopting sound accounting policies, maintaining adequate internal control, and making fair representation in financial statements
Auditor’s Responsibilities
1. Material versus immaterial statements
2. Reasonable assurance
3. Errors versus fraud
4. Professional skepticism
5. Fraud resulting from fraudulent financial reporting versus misappropriate of assets
Illegal Acts
included:
1. direct effect illegal acts
2. indirect effect illegal acts
3 level of responsibilities for finding illegal acts:
1. evidence accumulation when there is no reason to believe indirect effect illegal acts exist
2. evidence accumulation and other actions when there is reason to believe direct or indirect illegal acts may exist
3. Actions when auditor knows of an illegal acts
Management Assertions
3 categories:
1.Assertions about classes of transactions and events for the period under audit
2. Assertions about account balances at period end
3. Assertions about presentation and disclosure
General Transactions Related Audit Objectives
1. Occurrence
2. Completeness
3. Accuracy
4. Posting and summarization
5. Classification
6. Timing
General Balance Related Audit Objection
1. Existence
2. Completeness
3. Accuracy
4. Classification
5. Cutoff
6. Detail tie in
7. Realizable value
8. Rights and obligations
