D. Planning and supervision.
96. The Standards of the PCAOB can be broken up into three categories, i.e., general, fieldwork, and reporting.
Which of the following is considered in the fieldwork standards?
A. Independence.
B. GAAP.
C. Internal control.
D. Disclosure.
97. The auditing standards
Under the clarified auditing standards, what is the structure of each auditing standard issued by the ASB? What is the purpose of each section?
Introduction explains the purpose and scope of the standard.
Objective defines the context in which the requirements are set.
Definitions include, where relevant, specific meanings of terms in the standards.
Requirements identify what the auditor is required to do to achieve the objective of the standard. Requirements are expressed using the words “the auditor should ” or “the auditor must.”
Application and Other Explanatory Material include cross-references to the requirements and provide further guidance for applying the requirements of the standard
98. What are the AICPA’s fundamental principles?
In place of the ten historical standards that governed the auditing profession, as part of the clarity project the AICPA developed seven fundamental principles that govern audits. The four categories, with their specific principles, are:
Purpose of an Audit and Premise upon Which an Audit Is Conducted
1. The purpose of an audit is to enhance the degree of confidence that users can place in the financial statement.
This purpose is achieved when an auditor expresses an opinion on the financial statements.
2. An audit is based on the premise that management has responsibility to prepare the financial statements, maintain internal control over financial reporting, and provide the auditor with relevant information and access to personnel.
Responsibilities
3. Auditors are responsible for having the appropriate competence and capabilities to perform the audit, should comply with ethical requirements, and maintain professional skepticism throughout the audit.
Performance
4. The auditor needs to obtain reasonable assurance as to whether the financial statements are free from material misstatement.
5. Obtaining reasonable assurance requires the auditor to plan and supervise the work, determine materiality levels, identify risks of material misstatement, and design and implement appropriate audit responses to the assessed risks.
6. An audit has inherent limitations such that the auditor is not able to obtain absolute assurance about whether the financial statements are free from misstatement.
Reporting
7. The auditor expresses an opinion as to whether the financial statements are free of material misstatement or states that an opinion cannot be
expressed.
99. Audit phases
Identify at least five steps involved in an audit.
Phase I Making Client Acceptance and Continuance Decisions
Phase II Performing Risk Assessment
Phase III Obtaining Evidence about Internal Control Operating Effectiveness
Phase IV Obtaining Substantive Evidence about Accounts, Disclosures, and Assertions
Phase V Completing the Audit and Making Reporting Decisions
100. PCAOB Assertions
Discuss the five management financial statement assertions identified in the PCAOB Standards. Provide examples.
Existence or Occurrence: Assertions about existence address whether assets and liabilities exist and assertions about occurrence address whether recorded transactions, such as sales transactions, have occurred.
Example: Management asserts that sales recorded in the income statement represent transactions in which the exchange of goods or services with customers for cash or other consideration had occurred.
Completeness: Assertions about completeness address whether all transactions and accounts that should be included in the financial statements are included.
Example: Management asserts that notes payable in the balance sheet include all such obligations of the organization.
Valuation or Allocation: Assertions about valuation or allocation address whether accounts have been included in the financial statements at appropriate amounts.
Example: Management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value.
Rights and Obligations: Assertions about rights address whether assets are the rights of the organization, while assertions about obligations address whether liabilities are the obligations of the organization.
Example: Management asserts that amounts capitalized for leases in the balance sheet represent the cost of the entity’s rights to leased property and that the corresponding lease liability represents an obligation of the entity.
Presentation and Disclosure: Assertions about presentation and disclosure address whether components of the financial statements are properly classified, described, and disclosed.
Example: Management asserts that obligations classified as long-term liabilities in the balance sheet will not mature within one year
101. Write the three general auditing standards of the PCAOB.
The general audit standards are:
1. Technical Training and proficiency: The examination is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
2. Independence: An independence is mental attitude is to be maintained by the auditor or auditors.
3. Due Professional Care: Due professional care is to be exercised in the performance of the examination and the preparation of the report.
102. Explain the meaning of due professional care.
Due professional care refers to the skill and care of a professional expected in an audit. Following Generally Accepted Auditing Standards (GAAS) is one benchmark for due professional care. However, following GAAS is not always sufficient. If a reasonably prudent person would have done more, the professional should do at least as much. Due professional care is also determined by evaluating whether someone with similar skills in a similar situation would have performed the same way as the auditor.
103. What are the three broad types of audit procedures? What is the purpose of each test?
Risk assessment procedures. Procedures performed by the auditor to obtain information for identifying and assessing the risks of material misstatement in the financial statements whether due to error or fraud. Risk assessment procedures by themselves do not provide sufficient appropriate evidence on which to base an audit opinion, but are used for purposes of planning the audit.
Tests of controls. Audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements, typically at the assertion level.
Substantive procedures. Audit procedures designed to detect material misstatements in accounts which include tests of details and substantive analytical procedures.
104. There are nine specific actions an auditor can undertake to collect evidence. Identify each action and provide an example.
Types of Audit Procedure (examples in italics) Inspection of documentation
Examining a client document for evidence of authorization Inspection of assets
Physically examining a client’s equipment Observation
Looking at a process or procedure, such as observing the client use of a restricted access area External confirmation
Obtaining a direct written response to the auditor from a third party, such the client’s customers, confirming the amount owed to the client
Recalculation
Checking the mathematical accuracy of a document or record, such as an inventory count sheet Reperformance
Independently performing procedures or controls that were originally performed by the client, such as reperforming a bank reconciliation
Analytical procedures
Analyzing plausible relationships among both financial and non-financial data Scanning
Performing a type of analytical procedure which involves reviewing accounting data to identify significant or unusual items, such as examining a credit balance in an account that typically has a debit balance
Inquiry
Seeking information of persons within or outside of the client organization, such as communicating with the CFO or general counsel about changes in accounting policy