CHAPTER 2- 1

1. WELCOME TO ECON 132- AUDIT PROFESSIONAL STANDARDS: CHAPTER 2 Bob Anderson, UCSB CHAPTER 2-1

2. Question When a CPA firm completes an audit of a business and issues a report, does it express an opinion on the client’s accounting records, financial statements, or both? Give reasons. Solution: The auditors' report expresses an opinion on the client's financial statements, not on the accounting records. A major purpose of the audit is to give outsiders assurance that the financial statements are reliable. The client's accounting records are important to the public accounting firm only because they constitute evidence supporting the financial statements. The CPAs also gather evidence from outside the company and from internal sources other than the accounting records. Bob Anderson, UCSB

3. AICPA GAAS REMEMBER THAT AICPA AUDITING STANDARDS ONLY APPLY TO NON-PUBLIC ENTITIES THERE ARE 10 STANDARDS, WHICH FALL INTO THREE CATEGORIES: • GENERAL STANDARDS • The firm and planning • STANDARDS OF FIELDWORK • Performing the audit • STANDARDS OF REPORTING • Issuance of the Opinion Bob Anderson, UCSB

4. Generally Accepted Auditing Standards (issued by AICPA) General Standards • Adequate technical training and proficiency as an auditor. • Independence in mental attitude is to be maintained by the auditor. • Due professional care is to be exercised. Bob Anderson, UCSB

5. Generally Accepted Auditing Standards (issued by AICPA) Standards of Fieldwork • Work is to be adequately planned and properly supervised • Sufficient understanding of internal control is to be obtained • Sufficient competent evidential matter is to be obtained to afford a reasonable basis for the opinion Bob Anderson, UCSB

6. Generally Accepted Auditing Standards (issued by AICPA) 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 Bob Anderson, UCSB

7. BOILED DOWN: Audit purpose is to perform sufficient work to reduce “audit risk” to a sufficiently low level. AUDIT RISK: The risk that a MATERIAL misstatement may go undetected. • What is material? • Considers both Quantitative and Qualitative measures. • Misstatements may be cause by: • Errors (unintentional mistakes) • Fraud (some degree of intent) Bob Anderson, UCSB

8. 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. Bob Anderson, UCSB

9. 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. Bob Anderson, UCSB

10. The Standard Auditors’ Report • Title • Addressee • Content • Introductory Paragraph • Scope Paragraph • Opinion Paragraph • Signature • Date Bob Anderson, UCSB

11. OPINION: Non-Public We have audited the accompanying balance sheets of A Company, Inc. as of December 31, 20X2 and 20X1, and the relate statements of income, stockholders’ equity and comprehensive income, and cash flows for the years 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 audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of A Company, Inc. as of December 31, 20X2 and 20X1(1), and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Bob Anderson, UCSB

12. OPINION Public- differences from non-public highlighted Report of Independent Registered Public Accounting Firm We have audited the accompanying consolidated balance sheets of BOBS MONEY MAKER Corporation and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BOBS MONEY MAKER Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Dobson Communications Corporation’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting. Bob Anderson, UCSB

13. TYPES OF OPINIONS • UNQUALIFIED: WHAT THEY ALL WANT/ EXPECT. “present fairly in all material respects” • QUALIFIED: Something aint quite right, but not so bad as to make the financial statements misleading. Could be a departure from GAAP • Could be a minor scope limitation • Could be a departure from GAAP which is not so bad as to make the financial statements misleading • ADVERSE: Something is so screwed up that auditor believes that the financial statements are NOT fairly presented. I’VE NEVER SEEN ONE- WHY EVEN BOTHER ISSUING?! • DISCLAIMER: For some reason, we could not do the audit. (perhaps opening inventory is not available or the basis in a piece of property can not be ascertained) ALL BUT THE UNQUALIFIED OPINION REQUIRE A FOURTH “EXPLANATORY” PARAGRAPH Bob Anderson, UCSB

14. The Attestation Standards- NON- Audit Attestation Standards Financial Forecasts and Projections Pro Forma Financial Information Internal Control Compliance With Laws, Regulations, and Contracts Management’s Discussion and Analysis Applying Agreed-Upon Procedures Bob Anderson, UCSB

15. Elements of Quality Control • Independence, Integrity, and Objectivity • Personnel Management • Acceptance and Continuance of Clients and Engagements • Engagement Performance • Monitoring Bob Anderson, UCSB

16. Regulation of the Public Accounting Profession—Public Companies • Public Company Accounting Oversight Board & the SEC • Registration of public accounting firms that audit public companies • Establish or adopt auditing, quality control, ethics, independence and other standards for auditors of public companies • Conduct inspections of registered public accounting firms Bob Anderson, UCSB

17. Regulation of the Public Accounting Profession—Nonpublic Companies • American Institute of Certified Public Accountants • Peer review/inspection program • Ethics investigations • State Boards of Accountancy • Registration of all CPAs and CPA firms • Ethics investigations Bob Anderson, UCSB

18. MORE STUFF • SAS’S REPRESENT A “MINIMUM”, FIRM STANDARDS ARE GENERALLY MORE STRINGENT • AUDIT RISK= Risk that a material misstatement will not be detected. Goal of an audit is to reduce this to as low a level as possible without getting too crazy • What is material? • CONSIDERS BOTH QUALITATIVE AS WELL AS QUANTITATIVE FACTORS • Adequacy of Disclosures: • “Transparency”- all information that an reasonable and informed user would consider significant to their decision-making. • Peer Review: PCAOB reviews and monitors “Registered” Firms and their audits of public companies. Non-Registered firms are required to have a peer review as part of the AICPA requirements. • IAS: Convergence in process as the world is shrinking!! Bob Anderson, UCSB