AUDITING: A RISK ANALYSIS APPROACH

1
AUDITING A RISK ANALYSIS APPROACH
5th edition
Larry F. Konrath
Electronic Presentation
by Harold O. Wilson
2
CHAPTER 2
PROFESSIONAL RESPONSIBILITY
Quality Standards Ethics
3
GAASmust be followed

• Statements on Auditing Standards (SASs)
• Interpretations of GAAS

• Auditing procedures
• Means of attaining quality required by standards

4
GAAS GENERAL STANDARDS

• 1 The examination is to be performed by a person
  or persons having adequate technical training and
  proficiency as an auditor.

5
GAAS GENERAL STANDARDS

• 2 In all matters relating to the assignment, an
  independence in mental attitude is to maintained
  by the auditor or auditors.

6
INDEPENDENCE
An intellectually honest state of mind and
impartiality which creates trust and respect
among ones peers, colleagues and clients.
7
GAAS GENERAL STANDARDS

• 3 Due professional care is to be exercised in
  the performance of the examination and the
  preparation of the report.

8
GAAS GENERAL STANDARDS SUMMARIZED

• Auditors must possess the skills they declare
  to have (e.g., clients industry, computer
  knowledge).
• Auditors must be independent in fact, and not
  even appear to lack independence.
• An auditors judgment, prudence, and vigilance
  must be conscientious.
• Be sharp!

9
GAAS STANDARDS of FIELD WORK

• 1 The work is to be adequately planned, and
  assistants, if any, are to be properly supervised.

10
GAAS STANDARDS of FIELD WORK

• 2 A sufficient understanding of the internal
  control structure is to be obtained to plan the
  audit and to determine the nature, timing, and
  extent of tests to be performed.

11
GAAS STANDARDS of FIELD WORK

• 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.

12
GAAS STANDARDS of FIELD WORK SUMMARIZED

• Planning encompasses arrangements with clients,
  scheduling, assessing risk, developing audit
  programs time budgets.
• Supervisors follow a pyramid of oversight, each
  becoming responsible for all subordinates work.
  
• Internal controls and sampling--in light of
  experience and circumstances--influence the
  extent and type of evidence for auditors.

13
GAAS STANDARDS of REPORTING

• 1 The report shall state whether the financial
  statements are presented in accordance with
  generally accepted accounting principles.

14
GAAS STANDARDS of REPORTING

• 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.

15
GAAS STANDARDS of REPORTING

• 3 Informative disclosures in the financial
  statements are to be regarded as reasonably
  adequate unless otherwise stated in the report.

16
GAAS STANDARDS of REPORTING

• 4 The report shall either contain an opinion
  regarding the financial statements, taken as a
  whole, or ...

17
GAAS STANDARDS of REPORTING

• 4 an assertion to the effect that an opinion
  cannot be expressed. When an overall opinion
  cannot be expressed, the reasons therefor should
  be stated.

18
GAAS STANDARDS of REPORTING

• 4 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
  examination, if any, and the degree of
  responsibility taken.

19
GAAS STANDARDS of REPORTING SUMMARIZED

• Formal reports become the finished artworks of
  accounting systems and of
  auditors in their function of
  attesting.
• If possible and practical, auditors are to form
  opinions good news or bad news however,
  restrictions by clients or lack of independence
  may preclude such.

20
ATTESTATION STANDARDS

• Non-audit services (e.g., compliance with
  contracts) involve opinions.
• There are 11 Attestations Standards promulgated
  by the AICPA.
• Periodically, interpretations are also issued as
  Statements on Standards for Attestation
  Engagements.

21
LEVELS OF SERVICE ON FINANCIAL STATEMENTS

• Audits of Financial Statements (the highest level
  of CPA services).
• Reviews of Financial Statements (no overall
  opinion is rendered) negative assurance is
  stated, mainly based on inquiry analytical
  procedures.
• Compilations of Financial Statements no
  assurance is stated.

22
STATEMENTS ON STANDARDS FOR ACCOUNTING REVIEW
SERVICES (SSARS)

• The AICPA has established what is and is not
  acceptable practice for both compilation and
  review engagements.
• Objective of pronouncements Avoid any public
  confusion on levels of service.

23
STATEMENTS ON STANDARDS FOR CONSULTING SERVICES

• The AICPA has established what is and is not
  acceptable practice for CPA-Consultants, (e.g.,
  analyzing merger proposals, providing CPE
  seminars, computer systems programming).
• Independence must not be compromised.

24
STATEMENTS ON RESPONSIBLITIES IN TAX PRACTICE

• The AICPA has provided guidance in
• tax planning compliance
• representing clients before the IRS
• technical administrative matters

25
ETHICS THE CODE OF PROFESSIONAL CONDUCT

• ETHICS Moral principles based on
  characteristics such as honesty, integrity,
  reliability, accountability, and the
  distinguishing of right and wrong behavior.
• There is an aspect of personal values and duties
  in relationships--personally and professionally
  both the spirit and the letter of ethics are
  vital!

26
ETHICAL ISSUES for CPAs

• Necessity for independence
• Third-party reliance
• Value-added functions
• Professional stature
• Absence of fraud or bad faith

27
ETHICS CHALLENGED!

• Questioned independence
• Third-party losses (undetected
  fraud)
• Professional integrity lapses
• Impact of the Treadway Report
• Currently scrutinized by SEC

28
ETHICS GOOD NEWS!

• Independence Standards Board established
  functioning!
• Professional Skepticism, Competence,
  Independence re-emphasized!
• CPA firms reduce/eliminate consulting
  engagements for audit clients!
• New pronouncements on CPAs responsibilities
  to detect fraud!

29
ETHICS IN ACTION

• Accept engagements only in areas of
  competence.
• Remain independent of clients managers.
• Promote public trust before personal gain.
• Consult with colleagues before accepting
  another CPAs clients, offering jobs.
• Avoid conflicts of interest, appearance of
  bribes.

30
CODE OF PROFESSIONAL CONDUCT

• Principles
• Rules of Conduct
• Interpretations
• Ethics Rulings

31
ETHICS IN ACTION Rules 101

• Take confidentiality and independence in fact
  vs. advocacy very seriously!
• Consider collusion as a possible, but poor,
  defense!
• Be careful of advice vs. consulting!

32
ETHICS IN ACTION Rule 203

• Be weary of unusual circumstances and
  departures from GAAP. Note The latter
  might be advisable in cases where GAAP might
  mislead--but is very rare.

33
ETHICS IN ACTIONRule 302

• Contingent fee arrangements are likely violations
  of ethics many exceptions, e.g., complexity,
  expertise needed, non-attest engagements
  cases.

34
ETHICS IN ACTION Rule 501

• To commit acts discreditable to the profession is
  unethical.

Would a CPA filing his or her tax return (with
taxes due) after deadlines be an act
discreditable to the profession?
35
ETHICS IN ACTION Rule 502

• Advertising should be professional, and in
  good taste, designed to serve the public
  interest (e.g., be informative).
• AICPA cant prohibit undignified advertising,
  or even advertising
• that might be misleading.

36
ETHICS IN ACTION

• Educate your clients!
• CPAs are not infallible as to knowledge or
  judgment
• they are just accountants,
• not magicians!

37
End of Chapter 2