Galilee CPA Review 2011

AUDIT - Study Unit 1 Engagement Responsibilities

Types of Engagements Compilation no assurance/disclaimer issued Review negative assurance Examination/Audit positive assurance/opinion issued Agreed-upon procedures results of procedures but no assurance 1.1 Attestation Engagements (AT 101) Statements on Standards for Attestation Engagements are issued by the Auditing Standards Board, the Accounting and Review Services Committee, and the Management Consulting Services Executive Committee. The Council of the AICPA granted these bodies, which also promulgate (pronounce)SASs, SSARSs, and SSCSs, respectively, the authority to interpret Conduct Rules 201 and 202. The SSAEs are issued pursuant to that authority. a. SAS = Statement on Auditing Standards issued by the (ASB) Auditing Standards Board a. SSARS = Statement on Standards for Accounting and Review Services b. SSCS = Statements on Standards for Consulting Services c. The Sarbanes Oxley Act of 2002 is a federal legislation that has had a dramatic effect on the engagement responsibilities of public accounting firms i. This ACT created The Public Company Accounting Oversight Board (PCAOB) 1. Attest services include engagements to report findings based on agreed-upon procedures performed on the subject matter of an assertion. Such a report is restricted to the parties who have agreed to the procedures and taken responsibility for their sufficiency. a. The practitioner provides neither positive nor negative assurance, The practitioner must be independent b. The assertion by management or others must be In writing, The client, not the practitioner, determines the nature, timing, and extent of the procedures performed. c. The report should list the procedures performed and the related findings. i. The procedures agreed upon should not be overly subjective or open to varying interpretations. SUMMARY COMPARISON OF ATTENTATION STANDARDS WITH GASS
ATTESTATION (11) General Standards 1T 2S 3R 4I STRIP Training in Attestation Subject Matter Knowledge Reasonable Criteria & Consistent Measurement Independence GAAS (10)

1 T Training in Auditing
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2I

Independence

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Professional Care Planning and Supervision

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Evidence Character of Engagement Conclusions

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3 P Professional Care Standards of Field Work 1 P Planning and Supervision 2 I Internal Control Consideration 3 E Evidence Standards of Reporting 1 C Conformity with GAAP 2 C Consistency 4 E Expression of Opinion (Last) 3 D Disclosure

3R 4L

Reservations Limitations on Report Use

1.2 Audit Engagements The objective of an independent, external audit in accordance with generally accepted auditing standards (GAAS) is to express an opinion on whether an entitys financial statements: i. represent fairly, in all material respects, 1. its financial position, 2. results of operations, and 3. cash flows in conformity with generally accepted accounting principles (GAAP). Generally accepted auditing standards are concerned with the quality of an individual auditors performance, including the professional qualities of the auditor and his/her exercise of judgment in connection with audit engagements. Audit Programs 1. The first standard of field work (GAAS) requires the auditor to plan the audit. An auditor should design the written audit program so that the audit procedures selected will achieve the specific audit objectives. a. In planning, the auditor should consider the nature, timing, and extent of work to be performed and should prepare a written audit program. An audit program aids in instructing assistants and sets forth in reasonable detail the audit procedures necessary to accomplish audit objectives. b. The auditor is responsible for collecting sufficient, competent evidential matter. Audit programs describe the steps involved in that process. The evidence should support the auditors conclusions. c. In obtaining evidential matter in support of financial statement assertions, the auditor develops specific audit objectives in light of those assertions. 1.3 Additional Professional Services The Statements on Standards for Accounting and Review Services apply to compilations and reviews performed by practitioners. b. The AICPA bylaws designate the Accounting and Review Services Committee as the senior technical committee authorized to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonissuer. c. Independence is not required

In an agreed-upon procedures engagement, the practitioner is engaged to report on the results of performing specific procedures set forth by specified parties. The report would list the procedures performed and provide the results of those procedures but would provide no form of positive or negative assurance.

1. An accountant must comply with SSARSs when (s)he submits unaudited financial statements of a nonissuer to a client or third parties. A submission of financial statements is defined as presenting to a client or third parties financial statements the accountant has prepared either manually or through the use of computer software. 2. Management is usually the responsible party, that is, the person(s) responsible for the assumptions underlying prospective financial statements. However, the responsible party may be a party outside the entity, such as a possible acquirer. 3. According to AT 301, a financial forecast consists of prospective financial statements that present, to the best of the responsible partys knowledge and belief, an entitys expected financial position, results of operations, and cash flows. a. A forecast is based on the responsible partys assumptions reflecting conditions it expects to exist and the course of action it expects to take. 4. Pro forma information shows what the significant effects on historical financial information would have been had a consummated or proposed transaction (or event) occurred at an earlier date. Examples of these transactions include a business combination, disposal of a segment, a change in the form or status of an entity, and a change in capitalization. 5. Managements Discussion and Analysis (AT 701) a. Management discussion and analysis (MD&A) may be presented in an annual report or oter documents filed with the SEC. MD&A constitutes a written assertion that may be examined or reviewed by the practitioner. 1.4 Assurance Services Assurance services are independent professional services that improve the quality of information, or its context, for decision makers. Assurance services encompass audit and other attestation services but also include other, nonstandard, services. Assurance services do not encompass consulting services.
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CPA Risk Advisory: Manager and investors are concerned about whether entities have identified the full scope of various business risks and taken precautions to mitigate them. The ElderCare (PrimePlus: Eldercare services assess whether specified goals regarding care for the elderly are being met by various care givers. Services provided to the elderly include accumulation of information, financial management, and assessment of nursing care. CPA Performance Review: This service evaluates whether an entitys performance measurement system contains relevant and reliable measures for assessing the performance compares to its competitors. It provides investors, managers, or others with a comprehensive information base and a more balanced scorecard. Health Care Effectiveness: This service provides assurance about the effectiveness of healthcare services provided by HMOs, hospitals, doctors and other providers. SysTrust: is an assurance service developed by the AICPA and the Canadian Institute of Chartered Accountants, designed to increase the comfort of management and other stakeholders relative to an information system. a. The SysTrust principles are: availability, online privacy, security, processing integrity, availability and confidentiality. Galilee CPA Review
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WebTrust: assurance service is an attestation engagement that assesses a clients Internet site against predefined criteria. a. It relates to three areas of assurance: Transaction integrity, Information protection and privacy, and Business practices disclosures.

1.8 Quality Control A firm has a responsibility to ensure that its personnel comply with professional standards applicable to its accounting and auditing practice. GAAS apply to individual arrangements, but quality control standards apply to the conduct of a firms practice as a whole. 1. Five elements of a quality control system (PAMIE) P Personnel Management (Human Resources) Requires establishment of policies and procedures to provide reasonable assurance that only persons with the required technical training and proficiency perform the work. A Acceptance and continuance of clients and engagements Policies and procedures should be established to provide reasonable assurance that the likelihood of association with clients whose managers may lack integrity is minimized, that the firm undertakes only engagements it expects to complete with professional competence, and that it appropriately considers the risks of providing services. M Monitoring Policies and procedures should be established to provide reasonable assurance that the policies and procedures for the other quality control elements are suitably designed and are being effectively applied. Monitoring is an ongoing evaluation of relevance and adequacy of the system, appropriateness of guidance materials and practice aids, effectiveness of professional development, and compliance. I Independence, integrity, and objectivity Policies and procedures should be established to provide reasonable assurance that personnel maintain independence in fact and appearance in all required circumstances, perform all professional responsibilities with integrity, and maintain objectivity in discharging professional responsibilities. E- Engagement performance Policies and procedures should be established to provide reasonable assurance that work performed by personnel meets applicable professional standards, regulatory requirements, and the firms standards of quality. These policies and procedures relate to planning, performing, supervising, reviewing, documenting, and communicating the results of the audit.
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A peer review does not substitute for monitoring, but is a necessary part of the practice-monitoring requirement for AICPA membership. The applicable pronouncements issued by the AICPA Peer Review Board are the standards for performing and Reporting on Peer Reviews (PR 100) Under the Federal Sabanes-Oxley Act of 2002, a registered accounting firm must adopt quality control standards. The following are quality control standards contained in the act: The lead partner must rotate off the audit every five years The audit report must be reviewed and approved by a second partner

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The accounting firm must supervise any associated person with respect to auditing and quality control standards. Executives must certify the appropriateness of the financial statements The act provides criminal penalties for fraud Auditors may not provide specific nonaudit services for their audit clients.

The PCAOB (Public Company Accounting Oversight Board ) is a private-sector, non-profit corporation, created by the Sarbanes-Oxley Act of 2002 of oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of information, fair, and independent audit reports

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