ACCT3109 Quiz 1 Notes PDF

**Chapter 1 Quality Auditing: Why It Matters** +-----------------------+-----------------------+-----------------------+ | **1-1 An Overview of | | | | External Auditing** | | | +=======================+=====...

**Chapter 1 Quality Auditing: Why It Matters** +-----------------------+-----------------------+-----------------------+ | **1-1 An Overview of | | | | External Auditing** | | | +=======================+=======================+=======================+ | **External Auditing** | | | +-----------------------+-----------------------+-----------------------+ | Overview | External auditors | | | | performing a | | | | financial statement | | | | audit provide | | | | **independent | | | | assurance** on: | | | | | | | | - ***[Reliability | | | | of the financial | | | | statements | | | | ]*** | | | | | | | | - ***[Internal | | | | control | | | | effectiveness | | | | ]*** | | | | | | | | ***Integrated | | | | audit***: Provided | | | | when an external | | | | auditor is engaged to | | | | perform an audit of | | | | the **[effectiveness | | | | of internal | | | | control]* | | | | * | | | | over financial | | | | reporting that is | | | | integrated with an | | | | **[audit of financial | | | | statements]{.underlin | | | | e}** | | +-----------------------+-----------------------+-----------------------+ | Decision Makers' Need | - Decision makers | | | for Reliable | need information | | | Information and the | that is | | | Role of a Financial | transparent and | | | Statement Audit | unbiased | | | | | | | | - Exhibit | | | | 1.1identifies | | | | potential | | | | financial | | | | statement users | | | | and the decisions | | | | they make based | | | | on financial and | | | | internal control | | | | information | | | | | | | | A screenshot of a | | | | computer screen | | | | Description | | | | automatically | | | | generated | | +-----------------------+-----------------------+-----------------------+ | **Need for | | | | Independent Assurance | | | | \[[PRCC]\ | | | | ]** | | | +-----------------------+-----------------------+-----------------------+ | ***Potential bias*** | Management has | | | | **incentives** to | | | | bias financial | | | | information to convey | | | | a better impression | | | | of financial data | | | | than real | | | | circumstances might | | | | merit | | | | | | | | - E.g. overstate | | | | income to earn | | | | more bonuses | | | | (management's | | | | compensation tied | | | | to profitability | | | | or stock price | | +-----------------------+-----------------------+-----------------------+ | ***Remoteness*** | Organization and | | | | users of its | | | | financial information | | | | are **distant** from | | | | each other in terms | | | | of either geographic | | | | distance or the | | | | extent of information | | | | available to the both | | | | parties | | | | | | | | - E.g. users cannot | | | | interview | | | | management, tour | | | | a company's | | | | plant, or review | | | | its financial | | | | records | | | | firsthand; can | | | | only rely on | | | | financial | | | | statements | | +-----------------------+-----------------------+-----------------------+ | ***Complexity*** | Difficulty in | | | | determining a proper | | | | presentation of | | | | **complex | | | | transactions, | | | | information**, and | | | | processing systems | | +-----------------------+-----------------------+-----------------------+ | ***Consequences*** | With unreliable | | | | information, | | | | investors lose a | | | | significant source of | | | | information needed to | | | | make important | | | | decisions | | | | | | | | - E.g. May invest | | | | in a fraud | | | | company; may lose | | | | significant | | | | amounts of money | | +-----------------------+-----------------------+-----------------------+ | **Financial Statement | | | | Audit** | | | +-----------------------+-----------------------+-----------------------+ | What is Financial | A systematic process | | | Statement Audit? | of **objectively | | | | [obtaining and | | | | evaluating]{.underlin | | | | e} | | | | evidence** regarding | | | | assertions about | | | | economic actions and | | | | events to | | | | **[ascertain]{.underl | | | | ine} | | | | the degree of | | | | correspondence | | | | between those | | | | assertions and | | | | established | | | | criteria**; and | | | | **[communicating]{.un | | | | derline} | | | | the results to | | | | interested users** | | +-----------------------+-----------------------+-----------------------+ | Overall objective of | - Obtain | | | an audit | **[reasonable | | | | assurance]{.under | | | | line}** | | | | about whether the | | | | financial | | | | statements are | | | | **[free from | | | | material | | | | misstatements]{.u | | | | nderline}** | | | | | | | | - Report on the | | | | financial | | | | statements based | | | | on the auditor's | | | | findings | | | | | | | | - To accomplish | | | | these objectives, | | | | the auditor: | | | | | | | | - Complies with | | | | relevant | | | | **ethical and | | | | professional | | | | conduct** | | | | requirements | | | | | | | | - Conducts the | | | | audit **in | | | | accordance | | | | with | | | | professional | | | | auditing | | | | standards** | | | | | | | | - Exercises | | | | professional | | | | judgment, | | | | **professiona | | | | l | | | | scepticism**, | | | | and critical | | | | thinking | | | | | | | | - Obtains | | | | **sufficient | | | | appropriate | | | | evidence**, | | | | via a | | | | structured | | | | process, on | | | | which to base | | | | the auditor's | | | | opinion | | | | | | | |  | | | | | | | | *Parties involved in | | | | preparing and | | | | auditing financial | | | | statements* | | | | | | | | - **Management** | | | | | | | | | | | | | | | | - Preparing and | | | | presenting | | | | financial | | | | statements in | | | | accordance with | | | | the applicable | | | | financial | | | | reporting | | | | framework; | | | | | | | | - Designing, | | | | implementing, and | | | | maintaining | | | | internal control | | | | over financial | | | | reporting | | | | | | | | - Providing the | | | | auditors with | | | | information | | | | relevant to the | | | | financial | | | | statements and | | | | internal controls | | | | | | | | | | | | | | | | - **Internal Audit | | | | Function** | | | | | | | | - Provides | | | | management | | | | and the audit | | | | committee | | | | with | | | | assurance on | | | | internal | | | | controls and | | | | reports | | | | | | | | - **Audit | | | | Committee** | | | | | | | | - A | | | | subcommittee | | | | of the board | | | | of directors | | | | | | | | - Oversees both | | | | management | | | | and internal | | | | auditors | | | | | | | | - **External | | | | Auditor** | | | | | | | | - Obtain | | | | reasonable | | | | assurance | | | | about whether | | | | management's | | | | statements | | | | are | | | | materially | | | | accurate and | | | | to provide a | | | | publicly | | | | available | | | | report | | | | | | | | - Conducts | | | | procedures | | | | and make | | | | judgments in | | | | accordance | | | | with | | | | professional | | | | standards | | +-----------------------+-----------------------+-----------------------+ | **External Auditing** | | | +-----------------------+-----------------------+-----------------------+ | Providers of External | - Sole-practitioner | | | Auditing Services | firms | | | | | | | | - Local and | | | | regional firms | | | | | | | | - Large | | | | multinational | | | | professional | | | | services firms | | | | such as the Big 4 | | | | (KPMG, Deloitte | | | | Touche Tohmatsu, | | | | PricewaterhouseCo | | | | opers, | | | | EY) | | +-----------------------+-----------------------+-----------------------+ | Skills and Knowledge | - Communication | | | | skills; Critical | | | | thinking skills; | | | | CPA license | | | | | | | | - Decision-making | | | | skills; | | | | Leadership | | | | skills; General | | | | professionalism | | | | | | | | - Technical | | | | knowledge; | | | | Teamwork skills | | +-----------------------+-----------------------+-----------------------+ | **1-2 Achieving Audit | | | | Quality** | | | +-----------------------+-----------------------+-----------------------+ | **Five Primary | | | | Drivers of Audit | | | | Quality | | | | \[[CSERF] | | | | \]** | | | +-----------------------+-----------------------+-----------------------+ | Achieving Audit | - Performed in | | | Quality | accordance with | | | | **generally | | | | accepted auditing | | | | standards | | | | (GAAS)** | | | | | | | | - GAAS provides | | | | **[reasonable | | | | assurance]{.under | | | | line}** | | | | about the audited | | | | financial | | | | statements and | | | | related | | | | disclosures: | | | | | | | | a. ***Presented | | | | [in | | | | accordance | | | | with | | | | GAAP]{.underl | | | | ine}*** | | | | | | | | b. ***Are [not | | | | materially | | | | misstated]{.u | | | | nderline} | | | | whether due | | | | to errors or | | | | fraud*** | | | | | | | | - Audit firm | | | | culture | | | | | | | | - Skills and | | | | personal | | | | qualities of | | | | audit partners | | | | and | | | | | | | | - Effectiveness of | | | | audit process | | | | | | | | - Reliability and | | | | usefulness of | | | | financial | | | | statements | | | | | | | | - Factors outside | | | | of the control of | | | | external auditors | | | | | | | | A diagram of a | | | | quality control | | | | Description | | | | automatically | | | | generated | | +-----------------------+-----------------------+-----------------------+ | ***1. Audit Firm | Audit firm leaders | | | [Culture] | influence culture | | | *** | | | | | - Value and reward | | | | audit quality | | | | | | | | - Emphasizing that | | | | **"**doing the | | | | right thing**"** | | | | is appropriate | | | | from a public | | | | interest | | | | perspective | | | | | | | | - Provide | | | | [appropriate time | | | | and | | | | resources]{.under | | | | line} | | | | to address | | | | difficult issues | | | | that may arise | | | | | | | | - Ensure | | | | [**monetary** | | | | considerations | | | | **do not** | | | | adversely | | | | affect]{.underlin | | | | e} | | | | audit quality | | | | | | | | - Seek | | | | [guidance]{.under | | | | line} | | | | as needed | | | | | | | | - Provide **quality | | | | systems** in | | | | place for making | | | | client acceptance | | | | and continuation | | | | decisions | | | | | | | | - Foster | | | | [evaluation and | | | | compensation]{.un | | | | derline} | | | | practices that | | | | promote personal | | | | characteristics | | | | important to | | | | quality auditing | | | | | | | | - **[Monitor]{.unde | | | | rline}** | | | | audit quality and | | | | appropriate | | | | consequences are | | | | taken when audit | | | | quality is found | | | | to be lacking | | +-----------------------+-----------------------+-----------------------+ | ***2. [Skills and | Skills and Qualities | | | personal | of the Engagement | | | qualities]{.underline | Team -- Auditors | | | } | positively contribute | | | of audit partners and | to audit quality when | | | staff*** | they: | | | | | | | | - **Understand the | | | | client's | | | | business** | | | | | | | | - Adhere to | | | | **auditing and | | | | ethical | | | | standards** | | | | | | | | - Exhibit | | | | **professional | | | | skepticism** | | | | | | | | - Address issues | | | | identified during | | | | the audit | | | | | | | | - Ensure | | | | **appropriate | | | | levels of | | | | [experience and | | | | supervision]{.und | | | | erline}** | | | | for staff | | | | performing audit | | | | work | | | | | | | | - Ensure | | | | **mentoring and | | | | on-the-job | | | | training | | | | opportunities** | | | | for staff | | | | performing audit | | | | work | | | | | | | | - Participate in | | | | training | | +-----------------------+-----------------------+-----------------------+ | ***3. | The audit process | | | [Effectiveness]{.unde | contributes in a | | | rline} | positive way to audit | | | of the audit | quality when: | | | process*** | | | | | - The **[audit | | | | methodology]{.und | | | | erline} | | | | is well | | | | structured** | | | | | | | | - Quality | | | | **technical | | | | support** is | | | | available when | | | | auditors | | | | encounter | | | | unfamiliar | | | | situations | | | | requiring | | | | assistance or | | | | guidance | | | | | | | | - **Ethical | | | | standards** are | | | | communicated and | | | | achieved, thereby | | | | aiding auditors' | | | | integrity, | | | | objectivity, and | | | | independence | | | | | | | | - Auditors' | | | | **evidence | | | | collection** is | | | | not constrained | | | | by financial | | | | pressures | | +-----------------------+-----------------------+-----------------------+ | ***4. [Reliability | Audit reporting | | | and | contributes | | | usefulness]{.underlin | positively to audit | | | e} | quality when: | | | of audit reporting*** | | | | | - Audit reports are | | | | written in a way | | | | that **[clearly | | | | and | | | | unambiguously]{.u | | | | nderline}** | | | | conveys the | | | | auditor's opinion | | | | on the financial | | | | statements and | | | | **[addresses the | | | | needs of users of | | | | financial | | | | statements]{.unde | | | | rline}** | | | | | | | | - Auditors | | | | appropriately | | | | conclude as to | | | | the [truth and | | | | fairness]{.underl | | | | ine} | | | | of the financial | | | | statements | | | | | | | | c. E.g. in the | | | | US, | | | | concluding | | | | that the | | | | financial | | | | statements | | | | are fairly | | | | presented in | | | | accordance | | | | with GAAP | | | | | | | | - The auditor | | | | communicated with | | | | the audit | | | | committee about | | | | | | | | d. ***[Audit | | | | scope]{.under | | | | line}*** | | | | (what the | | | | auditor is | | | | engaged to | | | | accomplish) | | | | | | | | e. ***[Threats]{ | | | |.underline} | | | | to auditor | | | | objectivity** | | | | * | | | | | | | | f. ***Important | | | | risks | | | | identified | | | | and | | | | judgments*** | | | | that were | | | | made in | | | | reaching the | | | | audit opinion | | | | | | | | g. ***Qualitativ | | | | e | | | | aspects*** of | | | | the client's | | | | accounting | | | | and reporting | | | | and possible | | | | ways of | | | | improving | | | | financial | | | | reporting | | +-----------------------+-----------------------+-----------------------+ | ***5. Factors | - Some factors | | | [outside the | affecting audit | | | control] | quality are | | | of auditors that | outside of the | | | affect audit | direct control of | | | quality*** | the external | | | | auditor, such as | | | | **client | | | | corporate | | | | governance**, and | | | | the **regulatory | | | | environment** | | | | | | | | - Good corporate | | | | governance | | | | includes [audit | | | | committees that | | | | are robust in | | | | dealing with | | | | issues]{.underlin | | | | e} | | | | and a greater | | | | emphasis by the | | | | client on getting | | | | things right as | | | | opposed to | | | | getting done by a | | | | particular date | | +-----------------------+-----------------------+-----------------------+ | **1-3 Professional | | | | Conduct Requirements | | | | that help auditors | | | | achieve Audit | | | | Quality** | | | +-----------------------+-----------------------+-----------------------+ | **AICPA** | | | +-----------------------+-----------------------+-----------------------+ | Introduction | - Codes of | | | | professional | | | | conduct and | | | | related guidance | | | | on professional | | | | responsibilities | | | | | | | | - Organizations | | | | provide such | | | | guidance for US | | | | auditors include: | | | | | | | | - **AICPA -- | | | | American | | | | Institute of | | | | Certified Public | | | | Accountants** | | | | | | | | - Develop standards | | | | for audits of | | | | nonpublic | | | | companies | | | | | | | | - Peer review | | | | program in which | | | | registered firms | | | | are subject to | | | | periodic peer | | | | review of their | | | | nonpublic audits | | | | | | | | - **SEC -- | | | | Securities and | | | | Exchange | | | | Commission** | | | | | | | | - Oversight | | | | responsibilities | | | | for the PCAOB and | | | | for all public | | | | companies that | | | | are traded on US | | | | stock exchange | | | | | | | | - **PCAOB -- Public | | | | Company | | | | Accounting | | | | Oversight | | | | Board\*\*\*** | | | | | | | | - Private nonprofit | | | | organization that | | | | oversees auditor | | | | of public | | | | companies | | | | | | | | - 4 primary | | | | responsibilities: | | | | (1) | | | | **registering | | | | audit firms** | | | | that audit public | | | | companies; (2) | | | | periodically | | | | **inspecting** | | | | registered | | | | audited | | | | firms; (3) | | | | **establishing | | | | auditing and | | | | related | | | | standards** for | | | | registered audit | | | | firm; (4) | | | | investigating and | | | | **disciplining** | | | | registered audit | | | | firms for | | | | violations of | | | | relevant laws of | | | | professional | | | | standards | | +-----------------------+-----------------------+-----------------------+ | AICPA Requirements: | Introduction | - AICPA has a code | | Code of Professional | | of professional | | Conduct | | conduct to aid | | | | auditors in | | | | conducting a | | | | quality audit | | | | | | | | - The Code applies | | | | to professional | | | | services | | | | performed by | | | | AICPA members | | | | | | | | - Compliance with | | | | the Code | | | | | | | | h. Depends | | | | primarily on | | | | the voluntary | | | | cooperation | | | | of AICPA | | | | members | | | | | | | | i. Depends | | | | secondarily | | | | on public | | | | opinion, | | | | reinforcement | | | | by peers, and | | | | ultimately, | | | | on | | | | disciplinary | | | | proceedings | +-----------------------+-----------------------+-----------------------+ | | Principles | ***AICPA's Code of | | | | Professional | | | \[IPO, RDS\] | Conduct*** consists | | | | of a set of | | | | principles of | | | | professional conduct | | | | -- topics include: | | | | | | | | - **Responsibilitie | | | | s**: | | | | in carrying out | | | | their | | | | responsibilities | | | | as professional, | | | | members should | | | | exercise | | | | sensitive | | | | professional and | | | | moral judgments | | | | in all their | | | | activities | | | | | | | | - **Public | | | | Interest**: | | | | members should | | | | accept the | | | | obligation to act | | | | in a way that | | | | will serve the | | | | public interest, | | | | honor the public | | | | trust, and | | | | demonstrate | | | | commitment to | | | | professionalism | | | | | | | | - **Integrity**: to | | | | maintain and | | | | broaden public | | | | confidence, | | | | members should | | | | perform all | | | | professional | | | | responsibilities | | | | with the highest | | | | sense of | | | | integrity | | | | | | | | - **Objectivity and | | | | Independence**: a | | | | member should | | | | maintain | | | | objectivity and | | | | be free of | | | | conflicts in | | | | discharging | | | | professional | | | | responsibilities. | | | | A member in | | | | public practice | | | | should be | | | | independent both | | | | in fact and in | | | | appearance when | | | | providing | | | | auditing and | | | | other attestation | | | | services. A | | | | member not in | | | | public practice | | | | does not need to | | | | maintain | | | | independence | | | | | | | | - **Due Care**: a | | | | member should | | | | observe the | | | | profession's | | | | technical and | | | | ethical | | | | standards, strive | | | | continually to | | | | improve | | | | competence and | | | | the quality of | | | | services, and | | | | discharge | | | | professional | | | | responsibility to | | | | the best of the | | | | member's ability | | | | | | | | - **Scope and | | | | Nature of | | | | Services**: a | | | | member in public | | | | practice should | | | | observe the | | | | principles of the | | | | Code in | | | | determining the | | | | scope and nature | | | | of services to be | | | | provided | +-----------------------+-----------------------+-----------------------+ | | Conceptual Framework | - AICPA's Code of | | | | Professional | | | \[2S, 2A, FUM\] | Conduct includes | | | | a conceptual | | | | framework for | | | | members in public | | | | practice | | | | | | | | - This framework | | | | incorporates a | | | | "threats and | | | | safeguards" | | | | approach to help | | | | auditors analyze | | | | relationships and | | | | circumstances | | | | that the Code | | | | does not | | | | specifically | | | | address | +-----------------------+-----------------------+-----------------------+ | | | *Conceptual Framework | | | | Threats* | | | | | | | | Threats are | | | | circumstances that | | | | could result in an | | | | auditor lacking | | | | independence in fact | | | | or in appearance -- | | | | which includes: | | | | | | | | i. [**Self-review | | | | threat**: | | | | ] | | | | | | | | occurs when the | | | | audit firm [also | | | | **provides | | | | non-audit work** | | | | for client e.g. | | | | *preparing source | | | | documents*]{.unde | | | | rline} | | | | used to generate | | | | the client's | | | | financial | | | | statements. It | | | | may appear that | | | | the auditor is | | | | [reviewing his or | | | | her own | | | | work] | | | | | | | | ii. [**Advocacy | | | | threat**:]{.under | | | | line} | | | | | | | | occurs when the | | | | auditor acts to | | | | **promote the | | | | client's | | | | interests** [e.g. | | | | *representing the | | | | client in tax | | | | court*]{.underlin | | | | e}*.* | | | | It may appear | | | | that the auditor | | | | [cares more about | | | | the | | | | client]{.underlin | | | | e} | | | | than external | | | | users of the | | | | financial | | | | statements | | | | | | | | iii. [**Adverse | | | | interest | | | | threat**:]{.under | | | | line} | | | | | | | | occurs when the | | | | **auditor and the | | | | client are in | | | | opposition to one | | | | another**, e.g. | | | | when *[either | | | | party has | | | | initiated | | | | litigation | | | | against the | | | | other.]{.underlin | | | | e}* | | | | It may appear | | | | that the auditor | | | | may [care more | | | | about the audit | | | | firm and its | | | | interests]{.under | | | | line} | | | | rather than those | | | | of the company or | | | | external users of | | | | the financial | | | | statements. | | | | | | | | iv. [**Familiarity | | | | threat**:]{.under | | | | line} | | | | | | | | occurs when **the | | | | auditor has some | | | | longstanding | | | | relationship with | | | | an important | | | | person associated | | | | with the client** | | | | | | | | \- e.g. the | | | | *[audit partner's | | | | close relative/ | | | | personal friend | | | | is employed in a | | | | key | | | | position]{.underl | | | | ine}* | | | | at the client | | | | | | | | \- e.g. a member | | | | of the audit team | | | | was *[recently a | | | | director/ | | | | officer]{.underli | | | | ne}* | | | | at the client | | | | | | | | The auditor may | | | | [act in a way | | | | that favors the | | | | client or | | | | individual | | | | employed at the | | | | client]{.underlin | | | | e} | | | | rather than | | | | external users of | | | | financial | | | | statements | | | | | | | | v. [**Undue | | | | influence | | | | threat**:]{.under | | | | line} | | | | | | | | occurs when | | | | **client | | | | management | | | | attempts to | | | | coerce or provide | | | | excessive | | | | influence over | | | | the auditor** | | | | | | | | \- e.g. top | | | | management | | | | *[threatens to | | | | replace the | | | | auditor]{.underli | | | | ne}* | | | | or the audit firm | | | | because of a | | | | disagreement over | | | | an accounting | | | | issue | | | | | | | | \- e.g. top | | | | management | | | | *[pressures the | | | | auditor to reduce | | | | the amount of | | | | work they | | | | do]* | | | | on the audit in | | | | order to achieve | | | | lower audit fees | | | | | | | | \- e.g. an | | | | employee of the | | | | client gives the | | | | auditor *[a gift | | | | that is clearly | | | | significant or | | | | economically | | | | important]{.under | | | | line}* | | | | to the auditor | | | | | | | | The auditor may | | | | [act in a way | | | | that favors the | | | | client or | | | | individual | | | | employed at the | | | | client]{.underlin | | | | e} | | | | rather than | | | | external users of | | | | the financial | | | | statements | | | | | | | | vi. [**Self-interest | | | | threat**:]{.under | | | | line} | | | | | | | | | | | | | | | | vii. [**Management | | | | participation | | | | threat**:]{.under | | | | line} | | | | | | | | occurs when the | | | | **auditor takes | | | | on the role of | | | | management** or | | | | completes | | | | functions that | | | | management should | | | | reasonably | | | | complete e.g. | | | | *[establishing | | | | internal controls | | | | or hiring/firing | | | | client | | | | employees]{.under | | | | line}*. | | | | The auditor is | | | | acting as | | | | management, and | | | | so would in | | | | essence be | | | | [reviewing his or | | | | her own | | | | work] | | | |. | +-----------------------+-----------------------+-----------------------+ | | | *Conceptual Framework | | | | **Safeguards*** | | | | | | | | - Safeguards are | | | | actions or other | | | | measures that may | | | | eliminate a | | | | threat or reduce | | | | a threat to an | | | | acceptable level | | | | | | | | - Safeguards | | | | include: | | | | | | | | - \(1) safeguards | | | | created by the | | | | profession, | | | | legislation or | | | | regulation; | | | | | | | | j. Nonaudit work | | | | not allowed | | | | | | | | k. Professional | | | | standards and | | | | disciplinary | | | | punishments | | | | | | | | l. External | | | | review of | | | | audit firms' | | | | quality | | | | control | | | | systems | | | | | | | | m. Legislation | | | | concerning | | | | independence | | | | requirements | | | | | | | | - \(2) safeguards | | | | implemented by th | | | | e | | | | audit client; | | | | | | | | n. Client | | | | personnel | | | | with | | | | expertise to | | | | adequately | | | | complete | | | | necessary | | | | management | | | | and | | | | accounting | | | | tasks without | | | | the | | | | involvement | | | | or advise of | | | | the auditor | | | | | | | | o. Policies and | | | | procedures to | | | | ensure | | | | appropriate | | | | relationships | | | | with audit | | | | firm | | | | | | | | - \(3) safeguards | | | | implemented by th | | | | e | | | | audit firm | | | | | | | | p. Audit firm | | | | leadership | | | | that stresses | | | | the important | | | | of | | | | independence | | | | | | | | q. Audit firm | | | | quality | | | | control | | | | policies and | | | | procedures | | | | | | | | r. Rotation of | | | | senior | | | | engagement | | | | personnel | | | | | | | | s. Disciplinary | | | | mechanisms to | | | | promote | | | | compliance | +-----------------------+-----------------------+-----------------------+ | AICPA: Independence | The Independence Rule | | | Rule | requires that a | | | | member in public | | | | practice be | | | | independent in the | | | | performance of | | | | professional services | | | | as required by | | | | standards promulgated | | | | by bodies designated | | | | by the AICPA | | | | | | | | - Covered Member | | | | | | | | - Financial | | | | Interests | | | | | | | | - Employment of | | | | Family Members | | | | | | | | - Loans | | | | | | | | - Performing other | | | | Non-audit | | | | Services | | | | | | | | - Network Firms | | +-----------------------+-----------------------+-----------------------+ | SEC and PCAOB | Other Guidance on | | | | Professional | | | | Responsibilities | | | | | | | | - The SEC and PCAOB | | | | have independence | | | | requirements that | | | | apply only to | | | | auditor of | | | | **public | | | | companies** | | | | | | | | - These two | | | | organizations | | | | have | | | | **[complementary] | | | | ** | | | | independence | | | | requirements | | +-----------------------+-----------------------+-----------------------+ | SEC's Commitment to | The independence | | | Independence | requirement serves | | | | two related, but | | | | distinct, public | | | | policy goals: | | | | | | | | viii. Foster | | | | high-quality | | | | audits by | | | | **minimizing** | | | | the possibility | | | | that are | | | | **external | | | | factors** will | | | | influence an | | | | auditor's | | | | judgments | | | | | | | | ix. **Promote | | | | investor | | | | confidence** in | | | | the financial | | | | statements of | | | | public companies | | +-----------------------+-----------------------+-----------------------+ | **Additional | | | | Requirement** | | | +-----------------------+-----------------------+-----------------------+ | Impairment of Auditor | Auditor independence | | | Independence | is impaired when | | | | auditor has a | | | | relationship that: | | | | | | | | - Creates a mutual | | | | or conflicting | | | | interest between | | | | the accountant | | | | and the audit | | | | client | | | | ([self-interest/ | | | | familiarity | | | | threat]{.underlin | | | | e}) | | | | | | | | - Places the | | | | accountant in the | | | | position of | | | | auditing his or | | | | her own work | | | | ([self-reviewed | | | | threat]{.underlin | | | | e}) | | | | | | | | - Results in the | | | | accountant acting | | | | as management or | | | | an employee of | | | | the audit client | | | | ([management | | | | threat]{.underlin | | | | e}) | | | | | |