Auditing: Types of Reports and Audit Risk

• All public companies require audits.

Information Asymmetry

• Managers typically possess more information compared to investors and creditors.

Assurance

• Assurance includes both audit and attestation services.

Audit Risk

• Audit risk refers to the risk that an auditor may express an inappropriate opinion when the financial statements are materially misstated.

Types of Reports

• There are four types of reports: unqualified, qualified, adverse, and disclaimer.

Unqualified Opinion

• An unqualified opinion is a clean report, indicating that the financial statements are free of material misstatements.

Non-Audit Services

• Non-audit services include tax preparation and planning, as well as management advisory services.

External Auditors

• External auditors are employees of a CPA firm.

Internal Auditors

• Internal auditors are employees of the company they audit.

CPA Hierarchy

• The typical CPA hierarchy includes associate, senior, manager, and partner levels.

Sarbanes-Oxley Act of 2002

• The Sarbanes-Oxley Act of 2002 focuses on internal controls.

Professional Skepticism

• Professional skepticism involves a critical assessment of audit evidence.

Auditing Standards

• Auditing standards are the audit quality guides that apply to all audits.

PCAOB Standards

• The PCAOB (Public Company Accounting Oversight Board) sets standards for public company audits.

AICPA Standards

• The AICPA (American Institute of Certified Public Accountants) sets standards for private company audits.

Due Care

• Due care involves following technical standards with competence.

AICPA Rules of Conduct

• The AICPA Rules of Conduct emphasize integrity, objectivity, and independence.

Covered Member

• A covered member is an individual or entity involved in a client's financial audit process.

Family Independence

• Family members are subject to independence rules.

Auditor Objectivity/Independence

• Auditors cannot audit their own work per independence rules.
• Auditors should not function in a management role.
• Auditors must not serve in an advocacy role.
• Auditors must not have mutual interest with the client

Audit Committee

• The Audit Committee approves all audit and non-audit services.

Engagement Risk

• Engagement risk refers to the risks auditors are exposed to during a specific audit.

Ordinary Negligence

• Ordinary negligence is the lack of due care.

Gross Negligence

• Gross negligence is reckless disregard.

Fraud

• Fraud is the intent to deceive.

Common Law

• Common law is case law developed by the court.

Statutory Law

• Statutory law is passed by legislative bodies.

Common Law Negligence

• For common law negligence, the client and third party must prove these points: absence of due care, a direct connection to losses and damages, and breached duty.

Third Party Common Law Negligence Standards

• Standards for third party common law negligence include: reasonably foreseeable for third parties, foreseen third parties, nearly privity, and privity.

Fraud/Gross Negligence

• Auditors must act with intent to deceive and must prove false representation for fraud/gross negligence third party claims.

Securities Act of 1933

• Section 11 imposes liability on issuers for losses and requires information disclosure for losses suffered by third parties.

Private Securities Litigation Reform Act of 1995

• Each defendant is liable for a portion of damages based on percentage.

Securities Exchange Act of 1934

• Section 18 imposes liability on material misstatements, and applies to companies with securities traded on the stock exchange.

Securities Litigation Uniform Standards Act of 1998

• Prevents plaintiffs from evading protections from litigation.

Foreign Corrupt Practices Act

• Passed in response to bribery/misconduct primarily in America.

RICO Act of 1970

• The RICO Act of 1970 combats business by organized crime and implements civil and criminal sanctions for illegal acts.