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Chapter 2

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ACC 521
Kathryn Bewley

ACC 521: Chapter 2 – Audit, Assurance, and Quality Control Standards Practice Standards  Practice standards are general guides for the quality of professional work, and the accounting and auditing profession has many sets of standards to choose from.  Four sets: (1) generally accepted auditing standards (GAAS), (2) assurance standards, (3) CICA’s General Standards of Quality Control, and (4) quality control standards from firm peer reviews and provincial institutes’ practice inspection manuals. Generally Accepted Auditing Standards (GAAS)  CICA’S GAAS – First written as a short statement of eight standards. Since 1975, these eight have been augmented by additional explanations and requirements in the assurance Recommendations of the CICA Handbook, section 5100. o In 2010, the CICA handbook section 5100 was largely replaced by CAS 200.  CAS 200 is entitled “overall objective of the independent auditor, and the conduct of the audit in accordance with Canadian auditing standards” o Establishes auditors’ overall responsibilities when conducting an audit in accordance with CAS standards. Lists objectives and a series of principles/concepts to F/S auditing.  Goal is to have more locally organized set of standards, and to communicate the reasoning behind these to the auditor.  If a relevant CAS objective cannot be achieved in an audit, the auditor has to consider whether the overall objectives of the audit, as stated in CAS 200, can be met.  Auditing standards literature includes a series of Audit Guidelines (AuGs).  Auditing Standards – Audit quality recommendations that remain the same over time and for all audits.  Auditing procedures are quite different and include the particular and specialized actions auditors take to obtain evidence in a specific audit engagement. GAAS: Objectives of the Audit of Financial Statements  Overall objective of a F/S audit is to enable the auditor is to express an opinion as to whether the F/S are prepared, in all material respects, in conformity with an applicable framework. GAAS: Ethical Requirements Relating to an Audit of Financial Statements Competence  Rules of professional ethics require competence-adequate technical training and proficiency-in auditors.  Beings with educations, continues with on-the-job training in developing and applying professional judgement in real-world audit situations.  Assurance function: (1) recognize the underlying assertions made by management in each account of the F/S, (2) decide which evidence is relevant to support or refute these assertions, (3) select and perform procedures for obtaining the evidence, and (4) evaluate evidence and decide. Objectivity  Ethics rules require that auditors have an objective state of mind-that is, intellectual honestly and impartiality. Auditors must be unbiased with respect to F/S and other information they audit.  Concept of public interest increasingly guides standard setting and regulators in all aspects of the audit environment. Due Professional Care  Exercise of due professional care requires observance of the rules of professional ethics and GAAS.  An auditor is assumed to have knowledge of the philosophy and practice of auditing and have the ability to recognize indications of irregularities. GAAS Examination Standards  Examination standards are covered by CAS 315, CAS 300, and CAS 200.  Standards set general quality criteria for conducting an audit and also relate to the sufficiency and appropriateness of evidence gathered to support the audit opinion.  CAS 200 concepts and principles that influence the examination standards include conduct of an audit; scope of an audit; reasonable assurance; audit risk and materiality; planning and supervision; internal control assessment; and sufficient, appropriate evidential matter. Conduct of an Audit of Financial Statements  Auditor must comply with CASs and the Canadian Audit Practice Statements (CAPs). Scope of an Audit of Financial Statements  Exercising professional judgement when deciding based on CASs, on the type and extent of audit procedures to perform in the particular circumstances. Reasonable Assurance  Evidence gathered should allow auditor to have reasonable assurance that the F/S as a whole are free of material misstatements, whether due to fraud and error. Audit Risk and Materiality  Audit Risk – Risk that an auditor expresses an inappropriate audit opinion when the F/S are materially misstated.  Objective of the audit is only achieved when audit risk is reduced to an acceptably low level. Planning and Supervision  CAS 300 contains several considerations for planning and supervising an audit.  Concerned with (1) preparing an audit program and supervising the audit work, (2) obtaining knowledge of the auditee’s business, and (3) dealing with differences of opinion among the audit firm’s own personnel.  Audit Program – Lists the audit procedures the auditor will perform to produce the evidence needed for good audit decisions.  Auditors understand the auditee`s business through knowledge acquisition frameworks from strategic management.  The audit team can perform part of the audit at an interim date, a date some weeks or months before the fiscal-year end, and thereby make the rest of the audit work more efficient. Internal Control Assessment  Examination standard CAS 315.12-23 requires an understanding of the auditee`s internal control.  Existence of a satisfactory internal control system reduces the probability of errors and irregularities in the accounts.  Control risk is the probability that a material misstatement (error or irregularity) could occur and not be prevented or detected on a timely basis by the internal control structure, as in CAS 200.  Standard presumes two necessary relationships: (1) good internal control reduces the control risk, minimizing the extent of subsequent audit procedures and (2) conversely, poor internal control produces greater control risk, increasing the necessary extent of subsequent audit procedures. Sufficient Appropriate Evidential Matter  Examination standard CAS 200 recognizes that evidence is the heart of audits of F/S and it requires auditors to obtain enough to justify opinions on those statements.  Includes the underlying accounting data and all available corroborating information as discussed in CAS 330 and CAS 500. GAAS Reporting Standards  Objective of auditors-the report on the audit-is guided by the GAAS reporting standards.  Three objectives identified in CAS 200 deal with acceptability of the financial reporting framework, auditor and management responsibilities, and report content.  Special considerations on special purpose F/S are covered in CAS 800 and 805.  Auditing standards dictate the use of a standard report when the auditor is expressing an opinion on a complete set of general purpose F/S to achieve fair presentation. Detailed guidance is given in CAS 700 and 705.  Unqualified Report – A report without reservation means that the auditors are not calling attention to anything wrong with the audit work or the F/S.  Qualified Report – Either the F/S contains a departure from GAAP or the scope of the audit work was limited.  Unqualified report contains a (1) title, (2) address, (3) introductory paragraph, (4) responsibilities, (5) description of the audit, (6) opinion, (7) signature, (8) date, and (9) auditor’s address. o Responsibilities: second paragraph should state management’s responsibility for the F/S and the third paragraph should describe the auditor’s responsibility for the audit report. o Description of the audit: fourth and fifth paragraphs should declare that the audit was conducted in accordance with GAAS and describe the principal characteristics of the audit; traditionally the scope of the audit. Generally Accepted Accounting Principles (GAAP)  In the audit report, the opinion sentence shows the GAAP standard has meet met.  When a conclusion about GAAP cannot be found in the Handbook Recommendations, auditors follow a hierarchy to find the next highest source of support for an entity’s accounting solution to a financial reporting problem.  The unqualified opinion contains implicit messages: (1) the accounting principles in the F/S have general acceptance-that is, authoritative support; (2) the accounting principles used by the company are appropriate in the circumstances; (3) the F/S and notes are informative of matters that may affect their use, the full disclosure principle; (4) classification and summarization in the F/S is neither too detailed nor too
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