ACC 442 Lecture Notes - Lecture 14: Public Company Accounting Oversight Board, International Accounting Standards Board, Auditing Standards Board
Financial Statements are...
A summary of events
Phases of Audit
Client acceptance/Continuance
Plan the audit
Consider and audit internal control
Perform substantive testing
Complete the audit
Evaluate results and issue audit report
Auditing
Process of obtaining and evaluating evidence regarding assertions about economic actions and events,
then communicating the results to interested users
Assurance as to whether or not management is reporting financial info based on GAAP, with no material
misstatements
Attest
Not as rigorous as auditing (10-Q)
Assurance
Independent professional services that improve quality of information for decision makers
Audit Opinion big picture
"What you see, is what you get"
Principal Agent Theory
Information asymmetry
Conflict of interest
Monitoring problems
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Moral hazard
Agency costs
Solution: monitoring
Materiality
How wrong do financial statements need to be before a financial statement user would change their
economic decision
"Big Deal" Threshold
Materiality Rule of Thumb
5% of Pretax Income
Qualitative factors matter too
Audit Risk
Risk of issuing a clean opinion when there is a material misstatement
Audit Report provides only 'reasonable assurance"
Evidence
Anything an auditor looks at and/or observes
Sampling
Can't look at everything, so we pick a percent of things/transactions to look at
Audit Report
Title
Audience
Intro Paragraph
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Scope Paragraph
Opinion Paragraph
Explanatory Paragraph
Audit Firm and Report Date
Four Types of Reports
Unqualified - good to go
Qualified - some sort of limitation ("all is good except for...")
Adverse - financials are super messed up, don't trust
Disclaimer - auditor does not issue an opinion, too much missing
Types of Auditors
External - CPA
Internal - industry
Government - government agencies (FBI, IRS, etc.)
Forensic - detect fraud
Academic - University professors
Public Accounting Firms
Limited Liability Partnership
Partners not responsible for fraud, only the person involved in the fraud
Audit Teams
Associate/staff, Senior, Manager, Partner
Sarbanes Oxley Act (SOX)
Only for public companies
Prohibited non-audit services other than tax planning
Audit partner rotation every five years
Board of Directors hires the auditor
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