1

CHAPTER 2Professional

Responsibilities:Defining Quality

of Assurances

2

What is GAAS?

3

Generally Accepted Auditing Standards Generally Accepted Auditing Standards (GAAS)(GAAS)

- the foundation of all auditing theory and practice

4

- the foundation of all auditing theory and practice

- the basis of all Statements on Auditing Standards issued by the ASB

Generally Accepted Auditing Standards Generally Accepted Auditing Standards (GAAS)(GAAS)

5

- the foundation of all auditing theory and practice

- the basis of all Statements on Auditing Standards issued by the ASB

- ten standards categorized into three groups: general, field work, and reporting

Generally Accepted Auditing Standards Generally Accepted Auditing Standards (GAAS)(GAAS)

6

GENERAL STANDARDSGENERAL STANDARDS1. The audit is to be per- formed by a person or per- sons having adequate technical training and pro- ficiency as an auditor.

7

- formal accounting education, contin- uing professional education - technical qualifications and experi- ence in client industry

GENERAL STANDARDSGENERAL STANDARDS1. training and proficiency

8

GENERAL STANDARDSGENERAL STANDARDS2. In all matters relating to the assignment, an independence in mental attitude is to be main- tained by the auditor or auditors.

9

- concerns audit quality: completeness of work- papers, sufficiency of evidence, appropriate report - court precedents form “prudent practitioner;” i.e., what a competent practitioner would do

GENERAL STANDARDSGENERAL STANDARDS3. Due professional care

I’m a prudentpractitioner!!

10

GENERAL STANDARDSGENERAL STANDARDS3. Due professional care is to be exercised in the performance of the audit and the preparation of the report.

11

FIELD WORK STANDARDSFIELD WORK STANDARDS1. The work is to be ade- quately planned and as- sistants, if any, are to be properly supervised.

12

- planning is complex for large clients, consider: scheduling personnel, types of tests and their timing - supervision is critical because of assistants’ lack of experience

FIELD WORK STANDARDSFIELD WORK STANDARDS1. planning and supervision

December

13

FIELD WORK STANDARDSFIELD WORK STANDARDS2. A sufficient understanding of internal control is to be obtained to plan the audit and determine the nature, timing, and extent of tests to be performed.

14

FIELD WORK STANDARDSFIELD WORK STANDARDS3. Sufficient, competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.

15

REPORTING STANDARDSREPORTING STANDARDS1. The report shall state whether the financial statements are pre- sented in accordance with GAAP.

16

REPORTING STANDARDSREPORTING STANDARDS2. The report shall identify those circumstances in which such practices have not been con- sistently observed in the cur- rent period in relation to the preceding period.

17

REPORTING STANDARDSREPORTING STANDARDS3. Informative disclosures in the financial statements are to be regarded as reason- ably adequate unless other- wise stated in the report.

18

REPORTING STANDARDSREPORTING STANDARDS4. The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons there- for should be stated. In all cases where an audi- tor’s name is associated with financial state- ments, the report should contain a clear-cut indi- cation of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.

19

What is the purpose of the audit report?What is the purpose of the audit report?

The audit report is an explanation of the audit process and conclusionsreached.

The report is the formal communica-tion between the auditor and the external users of the financial state-ments, primarily the stockholders.

20

Generally Accepted Auditing StandardsGenerally Accepted Auditing Standards

REPORTING STANDARDSREPORTING STANDARDS1. The report shall state whether the financial statements are presented in accordance with GAAP.

AceCompany

19x2Financial

Statements

G A A P?

21

REPORTING STANDARDSREPORTING STANDARDS1. The report shall state whether the financial statements are presented in accordance with GAAP.

What financial statements are What financial statements are required by GAAP?required by GAAP?

22

What financial statements are What financial statements are required by GAAP?required by GAAP?

- balance sheet- income statement- statement of retained earnings- statement of cash flows

23

Could an auditor accept anCould an auditor accept anengagement to audit engagement to audit only oneonly one(or more) financial statement?(or more) financial statement?

REPORTING STANDARDSREPORTING STANDARDS1. The report shall state whether the financial statements are presented in accordance with GAAP.

24

Could an auditor accept anCould an auditor accept anengagement to audit engagement to audit only oneonly one(or more) financial statement?(or more) financial statement?

yes, as long as access toinformation underlying thestatement(s) is unrestricted

25

REPORTING STANDARDSREPORTING STANDARDS2. The report shall identify those circum-stances in which such principles have not been consistently observed in the current period in relation to the preced-ing period.

AceCompany

19x1Financial

Statements

consistent?Ace

Company

19x2Financial

Statements

26

Footnotes

REPORTING STANDARDSREPORTING STANDARDS3. Informative disclosures in the finan-cial statements are to be regarded asreasonably adequate unless otherwisestated in the report.

AceCompany

19x2Financial

Statements

27

REPORTING STANDARDSREPORTING STANDARDS4. The report shall either contain an expression ofopinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefor should be stated. In all cases where an auditor’s name is associated with financial statements, thereport should contain a clear-cut indication of thecharacter of the auditor’s work, ifany, and the degree of responsibilitythe auditor is taking.

AceCompany

19x2Financial

Statementsopinion?

28

conditions requiring a departure conditions requiring a departure from the unqualified reportfrom the unqualified report

Departures from GAAP (AU 508) result in aqualified or adverse opinion depending onmateriality and pervasiveness.

AceCompany

19x2Financial

Statements

G A A P

29

conditions requiring a departure conditions requiring a departure from the unqualified reportfrom the unqualified report

Departures from GAAP (AU 508) result in aqualified or adverse opinion depending onmateriality and pervasiveness.

The correct information should be includedin an additional third paragraph. If thisinformation is not available, the report should state that fact.

Inadequate disclosure is a GAAP departure.

30

The audit report should The audit report should notnot include any include anystatements that would statements that would counterbalancecounterbalance

the opinion:the opinion:

- negative assurance - “nothing came to our attention that would lead us to believe...”

- piecemeal opinion - positive comments on some components of the financial statements when a disclaimer or adverse opinion is issued