Audit Students!!! Notes from Sept 25

Generally Accepted Auditing Standards

General Standards
• Adequate Training & Proficiency
o Must be a CPA
o If Not a CPA – but you need to have taken classes somewhere else in an accounting degree.
• Independence In Mental Attitude
o In Fact/ In Appearance
• Financial Relationship –
 Stock ownership
 Being in charge of their internal control
• i.e. Internal Auditor
• or if you have designed their internal control systems.
 Family Relationship
 Employee or Manager
• A board member
• Due Professional Care
o Every audit work paper is reviewed by the superior
*Equity Funding Case
 The Company had 1/3 real insurance policy and 2/3rd were fake
 It was found that their policies were fake
• What was the Gross negligence that occurred?
 1. The audit firm decided to send out confirmations to determine the validity of the policyies
• A Confirmation is a letter that is sent out under the supervision of the audit firm to to a third party, where the third party is directed to respond directly to the office of the auditor
• Two Types of confirmations
o Positive Confirmation – Asks for a response whether or not the information on the confirmation is accurate
o Negative Confirmation – Only respond to our auditors if the information is not correct.
• The briefcases with the information for the policies was left at the clients office unlocked so the numbers were changed on the policies
 2. The confirmed a bank in Chicago.
• 10,000,000 in the bank in Chicago? Equity
•

Standards of Field Work
• The Auditor must adequately plan the work and must properly supervise any assistants.
o Adequate Planning –
• Past Financial Reports
• Information about the industry
• What is becoming obsolete
• How does the company do business
o Audit Program
• (see book)
o Properly Supervise any Assistants
• Inform the assistants of what are the related parties
• When problems arise, ask questions.
• The auditor must obtain a sufficient of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud and to design the nature, timing, and extent of further audit procedures.
Understanding of internal control and design nature, extent, and timing of further audit procedures
• Design Nature

• Extent

• Timing
 The Audit has two phases
• The Preliminary Phase
o Happens a few months before the end of the year.
• The Final Phase
 More work at the end of the year, then at the beginning of the year.
 Substantive Tests – 2 types
• Tests of Details of transactions and balances
o Bank Reconciliations
• Analytical Procedures
o This years results vs. other industries results
• The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit – Reasonable Basis for an opinion
Standards of Reporting
• The auditor must state in the auditor’s report whether the financial statements are presented in accordance with GAAP
• The auditor must identify in the auditor’s report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.
o The footnotes are considered an integral part of the financial statements
o The SEC made it so that the auditors
• When the auditor determines that informative disclosures are not reasonable adequate, the auditor must so state in the auditor’s report
o Informative disclosure
• The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report. When the auditor cannot express and overall opinion, the auditor should state the reasons therefore in the auditor’s report. In all cases where an auditor’s name is associated with financial statements, the auditor should clearly indicated the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking, in the auditor’s report.
o 5 kinds of opinions
• Unqualified Opinion – FS Present fairly in accordance with GAAP
• Disclaimer of Opinion – No Opinion can be given (for example when internal controls are so poor no evidence can be given)
• Qualified Opinion Scope Limitation - when the auditor did not observe the beginning taking of inventory, but because the auditor was hired after the beginning of the year, he/she was not there to witness.
 It is possible to satisfy yourself as to the beginning inventory by counting at the end of the year with the inventory at the beginning of the year.
 Explain, “Except for…..” how you were able to apply your
• Adverse Opinion
 The financial statements are not in accordance with GAAP
 In the opinion paragraph, you state the reasons that departed from GAAP and how things would be changed
• Qualified Opinion Departure from Debt

****GLIEM questions on Standards



SORRY THAT'S ALL I HAVE!!
Auditing Standard no. 5
• Has an example of an eternal control report