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This comprehensive text outlines the responsibilities and standards governing auditors and accountants in various engagements. It covers auditing standards (GAAS), attestation engagements, and accounting and review services (SSARS). The materials discuss key aspects such as audit planning, risk assessment, internal controls, evidence gathering, sampling, and reporting. Ethical and independence requirements, including the impact of the Sarbanes-Oxley Act (SOX), are also examined. Additionally, specialized areas like government auditing and single audits are addressed, providing a broad overview of the regulatory landscape. Finally, the use of audit data analytics as an audit tool is explored.
Objective: To provide a concise overview of the core concepts, standards, and procedures discussed in the provided sources.
I. Audit Opinions and Reporting
Types of Opinions: The documents clearly distinguish between different audit opinions based on the severity and pervasiveness of issues:
Unmodified/Unqualified Opinion: Indicates that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. "The auditor of a nonissuer should express an unmodified opinion when the auditor concludes that the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework." Note the distinction: nonissuers use "unmodified," while issuers use "unqualified."
Qualified Opinion: Issued when the auditor finds material misstatements that are not pervasive, or when there is a scope limitation that is material but not pervasive. "The second sentence is modified to include the appropriate qualifying language (i.e., except for or with the exception of) and a reference to the paragraph that describes the departure from the unqualified opinion."
Adverse Opinion: Issued when misstatements are both material and pervasive, indicating the financial statements do not present fairly. "Material and pervasive Adverse Do not present fairly Standard Standard Do not include"
Disclaimer of Opinion: Issued when the auditor cannot obtain sufficient appropriate audit evidence to form an opinion, or in cases of lack of independence. "A statement that the auditor was not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion." Also, note the specific language: "Use of the words 'were engaged to audit' instead of 'have audited.'"
Emphasis-of-Matter, Other-Matter, and Explanatory Paragraphs: These paragraphs are added to the auditor's report to highlight specific circumstances without modifying the opinion (i.e., the opinion remains unmodified/unqualified). An emphasis-of-matter paragraph is used "when referring to a matter that is appropriately presented or disclosed in the financial statements and is of such importance that it is fundamental to the users' understanding of the financial statements. The inclusion of an emphasis‑of‑matter paragraph in the auditor's report does not affect the auditor's opinion." Examples include justified changes in accounting principle or when prior financial statements were audited by a predecessor auditor.
Going Concern: When there's substantial doubt about an entity's ability to continue as a going concern, the auditor must consider the adequacy of financial statement disclosures. The report may include a separate section or emphasis‑of‑matter paragraph (nonissuer) or an explanatory paragraph (issuer). Relevant factors are captured by the mnemonic "FINE": Financial difficulties, Internal matters, Negative trends, External matters.
II. Risk Assessment and Materiality
Audit Risk Model: The audit risk (AR) model is a core concept. AR = RMM x DR, where RMM (Risk of Material Misstatement) = IR x CR (Inherent Risk x Control Risk). Detection Risk (DR) is controlled by the auditor. The equation can be rewritten as DR = AR / (IR x CR)
Materiality: A crucial concept. Misstatements are material if they could influence the judgment of a reasonable user of the financial statements. "Misstatements, including omissions, are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements." Materiality is used for the financial statements as a whole, and performance materiality. Materiality assessments can be revised during the audit.
Factors affecting materiality benchmarks: "The nature of the entity and its industry...The size of the entity, the nature of its ownership, and its methods of financing...Examples of materiality benchmarks, including total revenue, gross profit, profit before tax from continuing operations, and net assets."
Inherent Risk: The susceptibility of an assertion to a misstatement, assuming there are no related controls. Auditors assess inherent risk on a spectrum: "An auditor assesses inherent risk as high on the spectrum of inherent risk if the account is more likely to contain a material misstatement." Factors to consider with high inherent risk.
Control Risk: The risk that a misstatement that could occur in an assertion will not be prevented or detected and corrected, on a timely basis, by the entity's internal control.
Risk Assessment Procedures: Auditors use inquiries, analytical procedures, and observation/inspection to understand the entity and its environment.
III. Internal Control
COSO Framework: The five components of internal control are: Control Environment, Risk Assessment, Information and Communication, Monitoring, and (Existing) Control Activities. Remember it would be a CRIME if you forget the five components.
Understanding Internal Control: Even if an auditor does not test or rely on internal controls, the auditor must obtain an understanding of internal control as it is relevant to the auditor's identification and assessment of the risk of material misstatement.
IV. Audit Evidence and Procedures
Nature, Extent, and Timing (NET): These are the three elements of further audit procedures that the auditor can vary. The higher the assessed risks of material misstatement, the more persuasive the audit evidence must be.
Inquiry: A key audit procedure, involving requesting information from knowledgeable parties, both internal and external. However, inquiry alone is generally not sufficient.
Vouching: Testing from the financial statements back to supporting documents, to gather evidence regarding possible overstatement errors.
Tracing: Testing from source documents to the financial statements to provide evidence of completeness.
V. Sampling
Statistical vs. Nonstatistical Sampling: Statistical sampling enables the auditor to measure the sufficiency of evidence and provide an objective basis for evaluating results. However, auditing judgment is still required.
Attribute Sampling: Used primarily for tests of controls. Key concepts: Deviation rate, tolerable rate, risk of assessing control risk too low. The "upper deviation rate" is compared to the tolerable rate.
Variables Sampling: A statistical sampling method used to estimate the numerical measurement of a population, such as a dollar value. It is used primarily in substantive testing.
PPS (Probability-Proportional-to-Size) Sampling: A hybrid method using attribute sampling theory to express a conclusion in dollar amounts. "PPS automatically emphasizes larger items by stratifying the sample."
Stratification: Dividing a population into relatively homogeneous groups to reduce sample size.
VI. Audit Data Analytics (ADAs)
Definition: ADAs are data analytic techniques that enable auditors to analyze financial and nonfinancial data to discover patterns, relationships, and anomalies during an audit.
Application: ADAs can be used in risk assessment, tests of controls, and substantive procedures.
VII. Specific Transaction Cycles
Revenue Cycle: Segregation of duties is essential.
Expenditure Cycle (Purchases): Focus on proper authorization, requisition, and purchase order controls.
Inventory: Perpetual vs. periodic inventory systems impact the journal entries. Be aware of FOB shipping point vs. FOB destination.
VIII. Communication and Reporting
Communication with Management and Those Charged with Governance: The auditor must communicate significant deficiencies and material weaknesses in internal control.
Material Weakness: A deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis.
IX. Independence and Ethics
AICPA Code of Professional Conduct: Covers responsibilities, the public interest, integrity, objectivity and independence, due care, and scope and nature of services.
Threats to Independence (GAGAS): Self-interest, Self-review, Bias, Familiarity, Undue influence, and Management participation threats.
SEC Rules: Focus on whether a relationship creates conflicting interests, results in the auditor acting as management, places the auditor in a position of auditing their own work, or places the auditor in a position of being an advocate for the client.
Independence is impaired by acceptance of more than a token gift.
X. Other Engagements
Statements on Standards for Attestation Engagements (SSAE) and Statements on Standards for Accounting and Review Services (SSARS) provide guidance for other engagements.
This briefing document provides a high-level summary. The original sources should be consulted for detailed guidance and specific application.
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