The SEC has considerable influence in setting generally accepted accounting principles and disclosure requirements for financial statements because of its authority for specifying reporting requirements considered necessary for fair disclosure to investors. In addition, the SEC has power to establish rules for any CPA associated with audited financial statements submitted to the Commission.
The AICPA also conducts research and publishes materials on many different subjects related to accounting, auditing, management advisory services, and taxes.
The organization also prepares and grades the CPA examinations, provides continuing education to its members, and develops specialty designations to help market and assure the quality of services in specialized practice areas. Because existing auditing standards were adopted by the PCAOB as interim auditing standards for public company audits, there is considerable overlap in the two sets of auditing standards.
While the 10 GAAS standards highlighted in Table are no longer referenced as general, fieldwork, and reporting standards, the underlying concepts contained in those continue to be relevant in U. Examples of auditing standards include any of the SASs e. Generally accepted accounting principles are specific rules for accounting for transactions occurring in a business enterprise. Examples may be any of the opinions of the FASB, such as accounting for leases, pensions, or fair value assets.
Auditors can demonstrate their proficiency by becoming licensed to practice as CPAs, which requires successful completion of the Uniform CPA Examination.
The specific requirements for licensure vary from state to state. Many practitioners along with critics of the profession believe the standards should provide more clearly defined guidelines as an aid in determining the extent of evidence to be accumulated. This would eliminate some of the difficult audit decisions and provide a source of defense if the CPA is charged with conducting an inadequate audit. On the other hand, highly specific requirements could turn auditing into mechanical evidence gathering, void of professional judgment.
From the point of view of both the profession and the users of auditing services, there is probably a greater harm from defining authoritative guidelines too specifically than too broadly. The IAASB issues pronouncements on a variety of audit and attest functions and promotes their acceptance worldwide.
As a result of efforts by the Auditing Standards Board to converge U. Quality controls are therefore established for the entire CPA firm as opposed to individual engagements.
The purpose of the requirement is to help assure CPA firms that all new personnel are qualified to perform their work competently. A CPA firm must have competent employees conducting the audits if quality audits are to occur. A mandatory peer review means that such a review is required periodically. AICPA member firms are required to have a peer review every three years. These are different than peer reviews because they are performed by independent inspection teams rather than another CPA firm.
Peer reviews can be beneficial to the profession and to individual firms. By helping firms meet quality control standards, the profession gains if reviews result in practitioners doing higher quality audits. Of course, peer reviews are costly. There is always a trade-off between cost and benefits. The main objective of an audit of financial statements is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion in a written report on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework.
In an audit of the financial statements, the auditor performs audit procedures to obtain reasonable assurance about whether the financial statements contain material misstatements. In an audit, the auditor issues an opinion on whether the financial statements are presented fairly, but the auditor is not guaranteeing that the financial statements are accurate with certainty.
Fraud is a broad legal concept that describes any intentional deceit meant to deprive another person or party of their property or rights. The auditor does not take responsibility for detecting all types of fraud, given many types of fraud do not impact the financial statements. For example, when the internal revenue agent audits taxable income, a major source of information will be bank statements, the cash receipts journal and deposit slips.
The internal revenue agent is likely to emphasize unrecorded receipts and revenues. For expenses, major sources of evidence are likely to be cancelled checks and electronic funds transfers, vendors' invoices, and other supporting documentation. The accounting function is the recording, classifying and summarizing of economic events to provide relevant information to decision makers.
The rules of accounting are the criteria used by the auditor for evaluating the presentation of economic events for financial statements and he or she must therefore have an understanding of accounting standards, as well as auditing standards. The accountant need not, and frequently does not, understand what auditors do, unless he or she is involved in doing audits, or has been trained as an auditor.
Examine employee time records and personnel records to determine if sufficient information is available to maximize the effective use of personnel. Review the processing of sales invoices to determine if it could be done more efficiently.
Review the acquisitions of goods, including costs, to determine if they are being purchased at the lowest possible cost considering the quality needed. Review and evaluate the efficiency of the manufacturing process. Review the processing of cash receipts to determine if they are deposited as quickly as possible.
This strategic understanding is also useful in other assurance or consulting engagements. CPAs perform audits in accordance with auditing standards of published financial statements prepared in accordance with U.
GAO auditors perform compliance or operational audits in order to assure the Congress of the expenditure of public funds in accordance with its directives and the law. IRS agents perform compliance audits to enforce the federal tax laws as defined by Congress, interpreted by the courts, and regulated by the IRS.
Internal auditors perform compliance or operational audits in order to assure management or the board of directors that controls and policies are properly and consistently developed, applied and evaluated. Examples of commonly used e-commerce technologies include purchases and sales of goods through the Internet, automatic inventory reordering via direct connection to inventory suppliers, and online banking.
CPAs who perform audits or provide other assurance services about information generated with these technologies need a basic knowledge and understanding of information technology and e-commerce in order to identify and respond to risks in the financial and other information generated by these technologies.
The relationship among audit services, attestation services and assurance services is reflected in Figure on page 12 of the text. Audit services are a form of attestation service, and attestation services are a form of assurance service. In a diagram, audit services are located within the attestation service area, and attestation services are located within the assurance service area.
The interest rate for the loan that requires a review report is lower than the loan that did not require a review because of lower information risk.
A review report provides moderate assurance to financial statement users, which lowers information risk. An audit report provides further assurance and lower information risk. As a result of reduced information risk, the interest rate is lowest for the loan with the audit report.
Given these circumstances, Busch should select the loan from First City Bank that requires an annual audit. In this situation, the additional cost of the audit is less than the reduction in interest due to lower information risk. Busch should select the loan from United National Bank due to the higher cost of the audit and the reduced interest rate for the loan from United National Bank.
Busch may desire to have an audit because of the many other benefits that an audit provides. The audit may detect errors or fraud, and provide management with information about the effectiveness of controls. In addition, the audit may result in recommendations to management that will improve efficiency or effectiveness. The services provided by Consumers Union are very similar to assurance services provided by CPA firms.
The services provided by Consumers Union and assurance services provided by CPA firms are designed to improve the quality of information for decision makers. CPAs are valued for their independence, and the reports provided by Consumers Union are valued because Consumers Union is independent of the products tested. The concepts of information risk for the buyer of an automobile and for the user of financial statements are essentially the same.
They are both concerned with the problem of unreliable information being provided. In the case of the auditor, the user is concerned about unreliable information being provided in the financial statements.
The buyer of an automobile is likely to be concerned about the manufacturer or dealer providing unreliable information. The four causes of information risk are essentially the same for a buyer of an automobile and a user of financial statements: 1 Remoteness of information It is difficult for a user to obtain much information about either an automobile manufacturer or the automobile itself without incurring considerable cost.
The automobile buyer does have the advantage of possibly knowing other users who are satisfied or dissatisfied with a similar automobile. The buyer wants to buy a high quality product at minimum cost whereas the seller wants to maximize the selling price and quantity sold. Either that information is not available or too costly to obtain. The three ways users of financial statements and buyers of automobiles reduce information risk are also similar: 1 User verifies information him or herself That can be obtained by driving different automobiles, examining the specifications of the automobiles, talking to other users and doing research in various magazines.
The buyer of an automobile can return the automobile for correction of defects. In some cases a refund may be obtained. The information provided by Consumer Reports is comparable to that provided by a CPA firm that audited financial statements. The following parts of the definition of auditing are related to the narrative: 1 Altman is being asked to issue a report about qualitative and quantitative information for trucks. The trucks are therefore the information with which the auditor is concerned.
She is a CPA, and she spends most of her time auditing used automobile and truck dealerships and has extensive specialized knowledge about used trucks that is consistent with the nature of the engagement. The only parts of the audit that will be difficult for Altman are: 1 Evaluating the condition, using the guidelines of poor, good, and excellent. It is highly subjective to do so. If she uses a different criterion than the "blue book," the fair market value will not be meaningful.
Her experience will be essential in using this guideline. Extensive training in 1. We're sorry! We don't recognize your username or password. Please try again. The work is protected by local and international copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. You have successfully signed out and will be required to sign back in should you need to download more resources.
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