Chapter 2 Powerpoint - Auditing Principles PDF

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-1  Both the AICPA and the PCAOB have devel...

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-1  Both the AICPA and the PCAOB have developed Quality Management (Control) Standards for CPA firms  The AICPA recently revised its standards modeled after those of the International Auditing and Assurance Standards Board  The PCAOB is in the process of revising its standard in a similar fashion but currently has a set of standards referred to as Quality Control Standards © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-2  1. The firm’s risk assessment process  2. Governance and leadership  3. Relevant Ethical Requirements  4. Acceptance and continuance of client  relationships and special engagements  5. Engagement performance  6. Resources  7. Information and communication  8. Monitoring and remediation process © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-3  The firm designs and implements a risk assessment process to: 1. 1. Establish quality objectives. 2. 2. Identify and assess quality risks. 3. 3. Respond to quality risks. Example: Policies established for consultations when guidance is needed. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-4 1. The firm establishes governance and leadership quality objectives to assure a culture and leadership with a commitment to quality, appropriate organizational roles, responsibility and authority, with appropriate resources provided. 2. Example: Leadership establishes the tone at the top through its actions, behavior, communications and commitment to quality. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-5 The firm and its personnel comply with relevant ethical requirements. Example: At least annually, the firm should obtain written confirmation of compliance with its independence policies and procedures from all firm personnel who are required to be independent. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-6 The firm undertake to accept and continue relationships and engagements only where the firm: 1. Has considered client integrity. 2. Is competent to perform the engagement. 3. Can comply with legal and ethical requirements. Example: Background information is gathered on all prospective audit clients, including the attitude of principal owners, key management, and those charged with governance on matters such as aggressive accounting and internal control over financial reporting. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-7  The firm’s engagements are consistently performed in accordance with professional standards and regulatory and legal requirements, with policies and procedures addressing: 1. 1. Engagement team understanding of responsibilities. 2. 2. Appropriate supervision, professional judgment and consultation 3. policies. 4. 3. Differences of opinion considered. 5. 4. Proper engagement documentation.  Example: Firm designs policies and procedures that address the tracking of progress of each engagement. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-8  The firm establishes quality objectives obtaining, developing, using maintaining, allocation and assigning resources in the following areas: Human resources, technological resources, intellectual resources, service providers.  Example: Design effective recruitment processes and procedures to help the firm select individuals meeting minimum academic requirements established by the firm, and maturity, integrity, and leadership. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-9  The firm establishes information and communication quality objectives that enable their effective, design, implementation, and operation. Examples: The firm appropriately communicates: 1. 1. Changes to the system of quality management. 2. 2. Relevant information to engagement teams about the client. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-10  The firm monitors the entire quality management system and remediate deficiencies in in-process engagements, completed engagements and engagement partners. 1. Example: The firm inspects a completed engagement for each engagement partner performing audits of financial statements once every three years, and for all other engagement partners, once every five years. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-11  Personnel management  Independence, integrity, and objectivity  Acceptance and continuance of clients and engagements  Engagement performance  Monitoring Note: PCAOB quality standards are similar to those of the AICPA except they do not explicitly address risk assessment, information and communication and monitoring © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-12  Depend on size of firm, number of offices and nature of firm’s practices.  Every CPA firm should have quality management procedures applicable to every aspect of its practice.  Establish controls to provide assurance that the CPA firm meets its responsibilities to clients and public. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-13  In addition to normal review of working papers by audit team members of one another’s work, a variety of additional reviews of engagements and overall quality management processes are performed, including:  1. Engagement quality reviews.  2. Inspections of completed engagements (internally performed).  3. Peer Reviews and PCAOB Inspections  While these review and inspections may address any of the quality management components they ordinarily are most directly related to Monitoring.  Ordinarily reviews and inspections are performed by individuals not otherwise involved with the audit. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-14  Engagement quality reviews ❑ Required by PCAOB for all public company audits. ❑ Performed on nonpublic company audits when CPA firm considers appropriate due to one or more quality risks or otherwise required.  Performed  Prior to issuance of audit report by an individual not otherwise involved in the audit (ordinarily a partner or high level employee).  Emphasis is on significant judgments and conclusions reached by the engagement team, not an overall review of the audit. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-15 Inspection procedures are applied to a sample of engagements to evaluate the adequacy of the firm's quality management policies and procedures, its personnel's understanding of those policies and procedures and proper compliance. Required on a sample of completed engagements, but may also be performed on in-process engagements. Scope varies based on company’s system of quality management. Ordinarily includes a review of working papers, reports, and client financial statements by an individual not directly associated with the audit. © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-16  Members of AICPA  Conducted by CPAs or other CPA firms  Two types of peer reviews  System review  Study of CPA firms’ system of quality management (control)  Select sample of firms’ engagements and examine related working paper files  Engagement review  Sample of CPA work including reports to evaluate appropriateness  Less in scope than system review  Report: pass, pass with deficiencies, or fail © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-17  Conducted by PCAOB staff  Focus  Primarily evaluating performance of sample of individual audit and review engagements; a risk based approach to selection engagements.  Selected quality management (control) and management issues only. This differs from a peer review.  Report  Written report to SEC, part of which is made public © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC 2-18