Exam 1 Review

Auditing is the indirect result of the industrial revolution. Corporate form of business (selling shares to absentee shareholders) lead to auditing as a profession, since the owners of the business were separated from the actual management of the business.

1886 in NY the first CPA was certified in the US. Chartered accountants (UK CPAs) previously had verified investments, etc.

The setting of accounting standards are much more controversial over the setting of auditing standards.

Members of the board can assent which means they approve the standards. Dissent means they disapprove the standard (hardly happens). Assenting with qualification means in total, they approve it, even if there's some aspects that they don't agree with.

Evaluates the efficiency and effectiveness of any part of an organization's operating procedures and methods.

Conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority.

Conducted to determine whether the financial stattements are stated in accordance with specified criteria.

Due to people getting upset over bad audits (the audit standards were largley fine and accepted, but it was the way particular firm(s) were applying them improperly) that led to political moves to get congress to put more teeth in their laws.

CEO and CFO now required to certify their 10-K and 10-Q, with penalties for knowingly misrepresenting including civil charges of $5 mil and imprisonment 20 years. CPA firms must now register with PCAOB, and pay annual fees and quality reviews by the board. This lead to many firms dropping out of public auditing, which lowered competition. They now report to audit committees (has the power of law), not management. The reports include key accounting policies and practices used, existence of alternative GAAP (if any), and disagreements between management and the auditor. Opinion on the quality of internal controls is now required. Management must issue internal control report acknowledging responsibility for maintaining adequate controls. Non-audit issuer services are still prohibited but with force of law. These include management decisions and consulting (info sys, internal audit, appraisals, etc). Each audit committee member shall be an independent board member, and must establish procedures for taking complaints.

-Leadership responsibilities for quality within the firm "tone at the top"
-Relevant ethical requirements
-Acceptance and continuation of client relationships and specific engagements
-Human resources
-Engagement performance
-Monitoring

CPA firms must be peer reviewed every 3 years by the PCAOB. 25% of peer reviewed firms first review have errors found from the review.

part 1 has to list in order:
-business
-risk factors
-properties
-legal proceedings

(rug cleaning) an example of clients imposing huge restrictions and the auditors not acting on these scope restrictions. created fake earnings, fake buildings for restorations, etc. manipulated creditors for short-term loans and then stockholders after they went public. auditors' lack of industry knowledge didnt question the 66% profits in a competitive bid industry, as well as their earning the national amount of profits for the industry, within their one company. their contract for $7 million was contained to one page (red flag)

In the cases where the opinion would be qualified, you need to indicate if it was due to ARFR departure or scope restriction.

If the opinion is adverse, don't choose AFRF departure as all adverse opinions are due to this.

If the opinion is disclaimer, do not choose scope restriction as almost all disclaimer of opinions are due to this.

Independent disclaimers are highly unusual.

6 assertions for transaction cycles (AICPA):
C^3 O A P
-Completeness
-Classification
-Cutoff
-Occurence
-Accuracy
-Presentation
5 assertions for account transactions and balances at year end (PCAOB):
C E R V P
-Completeness
-Existence
-Rights/obligations
-Valuation/allocation
-Presentation/disclosure

1. Planning and designing an audit approach =
obtain understanding of the entity and its environment. understand internal control and assess control risk. assess risk of material misstatement.
2. Testing controls and transactions at interim =
testing internal controls and accuracy of recording of transactions.
3. Testing details of balances (substantative procedures) =
substantative analytical procedures and obtaining direct, written communication with third parties to verify details of balances
4. Issuing an audit report =
combine information to reach an overall conclusion as to whether the financial statements are fairly presented, relying heavily on the auditor's professional judgment

sets the scope, timing, and direction of the audit and guides the development of the audit plan

-human error, lapses in judgment, collusion
-cost factor of conducting a 100% thorough audit is not economically viable
-time factor, there is not enough time to audit every single thing in a timely manner

-Independent auditor's report
-Addressee
-Report on the audit of the financial statements
-Opinion (yada yada)
-Basis for opinion
-Responsibility of management for the financial statements
-Auditor's responsibility for the audit of the financial statements
-Other information
-Report on other legal and regulatory requirements

-auditor's scope has been restricted (and alternative procedures cannot be completed)
-statements are not in conformity with GAAP or other AFRF

qualified opinions are the only opinions that include the phrase "except for..." and always include this statement.
the basis for qualified opinion will follow this, rather than precede such as an unmodified opinion.
disclaimer of opinion is written as " we were engaged to audit" rather than "we audited". auditor also will not express an opinion (disclaimer is the lack of an opinion).

examples of EOM/OOM:
-lack of consistent application of gaap
-auditor agrees with a departure from gaap
-substantial doubt about going concern
-change in accounting principles
-reports involving other auditors (different wording may be used in this case only)

OOM references a matter that IS NOT presented or disclosed in the financial statements, while an EOM references a matter that IS presented or disclosed in the financial statements.

both don't have a specific place in the audit report, they just need proper headings. both can only be on unmodified opinions only.

1. failure to follow gaap. gaap departure. material. qualified opinion "except for" ARFR departure.
?. failure to follow gaap. immaterial. unmodified opinion.
?. scope has been restricted. highly material. disclaimer opinion due to scope restriction. only unmodified opinion on balance sheet. (split decision)
2. scope restriction. material. disclaimer opinion on restriction in scope.
3. none. immaterial. unmodified opinion.
4. failure to follow gaap. material. qualified due to gaap departure.
5. none (change in estimtes, not accounting princilpe). immaterial. unmodified opinion. (if change in principles, unmodified with eom statement on the change with standard wording)