Chapter 2

1. Chapter 2 Professional Standards Chapter 2

2. 1. Basis of Auditing • Objectives of auditing • Responsible parties involved in auditing • Similarities with other disciplines • Limitations of auditing Chapter 2

3. 2. Practice Standards • AICPA standards • Citation Methods • SAS Number • AU Section Number (AU-C) • Professional Standards, Vol. I and II (and III) • Sources of Auditing Standards • Statements on Auditing Procedures — SAPs (1-54) • Statements on Auditing Stds — SASs — AU (1-133) Chapter 2

4. 2. Practice Standards (continued) • Sources of other Standards • Statements on Stds for Attestation Engagements — SSAEs — AT-C • Statements on Stds for Accounting and Review Services — SSARSs — AR-C • Consulting Standards — CS • Quality Control Standards — QC • Peer Review Standards — PR • Tax Practice Standards — TX Chapter 2

5. Practice Standards (continued) • Sources • Personal Financial Planning Standards — PFP • Code of Ethics Standards — ET • AICPA Bylaws Standards — BL • Continuing Education Standards — CPE Chapter 2

6. Practice Standards (continued) • Clarity Project • Purpose: • to make standards easier to read, understand, and apply • to converge US GAAS with ISAs issued by IAASB • Project started in 2004 • AU sections renumbered to ISA numbers • New format for standards • introduction, objective, definitions, requirements, application and other explanatory material • Effective for audits of financial statements for years ending on or after December 15, 2012 • Primarily was issued as one SAS – SAS 122 • SSARS Clarity Project completed (SSARS 21) – effective December 2015 • Attestation Clarity Project just completed (SSAE 21) – effective May 2017 Chapter 2

7. Practice Standards (continued) • International Standards • International Auditing and Assurance Standards Board — IAASB • (Part of IFAC) • International Auditing Standards (ISAs) • International Standards on Assurance Engagement (ISAE) • IFAC Code of Ethics • (International Financial Reporting Standards — IASB) • PCAOB Standards • 2003 adopted 101 existing SASs • Auditing Standards – AS • Reorganized standards • Ethics and Independence Standards – IT • Quality Control Standards – QC Chapter 2

8. 2. Practice Standards - Terminology in auditing standards Chapter 2

9. 2. Practice Standards (continued) Summary of Practice Standards Chapter 2

10. 3. GAAS and Principles • General standards (responsibilities principle) • adequate technical training • independence • due professional care • Fieldwork standards (performance principle) • adequately planned & supervised • internal control • sufficient appropriate evidence • Reporting standards (reporting principle) • GAAP • consistency • adequate disclosure • opinion Chapter 2

11. 3. GAAS and Principles Comparison of AICPA GAAS to Principles: Responsibilities Addresses whether auditor can accept engagement Chapter 2

12. 3. GAAS and Principles Comparison of AICPA GAAS to Principles: Performance Provides guidance on conducting the audit Chapter 2

13. 3. GAAS and Principles Comparison of AICPA GAAS to Principles: Reporting Provides guidance on issuing audit report Chapter 2

14. 4. Evidence • SAS 122 • Performance Principle:The auditor must obtain sufficient appropriate evidence • Definition of evidence • All the information used by the auditor in arriving at the conclusions on which the audit opinion is based Chapter 2

15. 4. Evidence (continued) • Sufficiency and Appropriateness • Interrelated • Sufficiency – quantity (affected by RMM and quality of evidence) • Appropriateness – quality (affected by its relevance and reliability) • Limitations (cost, persuasiveness) • Generalizations about reliability • Source – knowledge, location, reliability of ICS, direct/indirect, directly by auditor • Nature – documentary form, originals, reliability of form (e.g., ability to be altered, certainty of sender), document experts Chapter 2

16. 4. Evidence (continued) • Types of Evidence • Underlying Accounting Data • journals, general and subsidiary ledgers, accounting manuals, work sheets, spreadsheets, cost allocations, reconciliations, etc. • Corroborating Information • auditor’s direct personal knowledge • documentary evidence • created outside and transmitted directly to auditor • created outside and held by client • created by and held by client • client representations Chapter 2

17. 4. Evidence (continued) • Types of Evidence (continued) • Physical evidence • Mathematical evidence • Oral evidence • Confirmations • Written representations • Analytical procedures • Electronic evidence Chapter 2

18. 5. Attestation Standards • Apply to attest services • affirm to be genuine • when a CPA expresses a conclusion about the reliability of subject matter or an assertion that is the responsibility of another party • includes financial and nonfinancial services Chapter 2

19. 5. Attestation Standards • SSAEs apply to • forecasts and projections • pro forma information • internal control • compliance with laws, regs, contracts • MD & A • agreed-upon procedures Chapter 2

20. 6. Quality Control for Firms • AICPA • National Peer Review Committee (formerly known as the Center for Public Company Audit Firms) • Private Companies Practice Section (PCPS) • PCAOB registration • PCAOB inspections • State level peer review • Quality Enhancement Program in Nebraska Chapter 2

21. 6. Quality Control for Firms • An audit firm must establish a system of QC to provide it reasonable assurance that the firm will comply with professional, regulatory, and legal requirements • QC standards apply to all firms and all services provided • Specific QC policies and procedures vary by firm size Chapter 2

22. 6. Quality Control for Firms • AICPA Elements of Quality Control • leadership responsibilities • ethical requirements • acceptance and continuance of clients and engagements • human resources • engagement performance • monitoring Chapter 2

23. Review Questions for Discussion • Chapter 22.12.32.72.82.122.15 • 2.16 • 2.17 • 2.19 • 2.21 • 2.25 Chapter 2