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Auditing Notes - Chapter 2

Auditing Notes - Chapter 2

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Published by: Future CPA on Mar 27, 2009
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Becker Auditing 2008 Edition Chapter 2 1
Quality Control Standards
I. Applicability:A. A CPA firm is required by the AICPA Code of Professional Conduct to adopt a system of quality control for itsauditing, attestation, and accounting and review services.B. Statements on Quality Control Standards (SQCS) are issued by Auditing Standards Board and are applicableto
both 
audit and non-audit engagements.II. Elements: The five interrelated elements of quality control are:
 
A –
Acceptance and Continuance of Clients and Engagements
 
 
I –
Independence, Integrity, and Objectivity
 
 
C –
Continuous Monitoring
 
 
P –
Personnel Management
 
 
A –
Assurance Regarding Engagement Performance
 
 
AICPA is all about quality control standards.
 
A.
Acceptance and Continuance of Clients and Engagements
 1.
Policies to decide to accept or continue client relationship and to perform a specific engagement
 2.
Policies for the likelihood of association with a client whose management lacks integrity isminimized and that the firm:
 a.
Undertakes only those engagements that it can reasonably expect to complete withprofessional competence
 b.
Appropriately considers the risks associated with providing professional services in theparticular circumstances
 3.
Examples:
 a.
Reviewing the FS and credit rating of the proposed client
 b.
Inquiring of third parties as to the reputation of the proposed client
 c.
Evaluating the firm’s ability to service the client properly
 d.
Periodically re-evaluating clients for continuance
 B.
Independence, Integrity, and Objectivity
 1.
Maintain public confidence in the profession
 2.
Policies that personnel maintain independence (in fact and appearance), perform all professionalresponsibilities with integrity, and maintain objectivity in discharging professional responsibilities
 3.
Qualities are defined and described as follows:
 a.
Independence
encompasses impartiality and freedom from any obligation to or interest inthe client
 b.
Integrity
requires personnel to be honest and candid. Service and the public trust must notbe subordinated to personal gain advantage
 c.
Objectivity
imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest
 4.
Examples include:
 a.
Maintaining records showing which personnel were previously employed by clients or haverelatives holding key positions with clients
 b.
Notifying personnel as to the names of the audit clients publicly held
 c.
Confirming with staff that prohibited relationships do not exist
 d.
Emphasizing independence of mental attitude in training and supervision
 5.
The SOX of 2002 contains certain provisions that must be followed to maintain independence:
 a.
Prohibits other services for audit clients (i.e. bookkeeping, financial information systemsdesign/implementation, appraisals, actuarial services, internal audit outsourcing services,management/human resource functions, investment services, legal services)
 i.
Other non-audit services may be performed if they are pre-approved by the auditcommittee and disclosed to investors in periodic report (i.e. tax services)
 ii.
Tax service and related fees must be communicated to audit committee in writing.Potential effects of the services on the firm’s independence should be discussedwith audit committee and documented
 
 
Becker Auditing 2008 Edition Chapter 2 2
b.
Cannot audit public companies whose CEO, CFO, etc. if also a previous employee of theaccounting firm who worked on the audit during the preceding year.
 i.
1 year cool off period
 c.
The lead partner and the reviewing partner must rotate off the audit every 5 years
 d.
No contingent fee arrangements
 e.
Not provide audit clients any tax services for confidential or aggressive tax transactions
 f.
Not provide any tax services to corporate officers of audit clients, or family members of corporate officers.
 i.
Officers personal tax return NOT allowed
 C.
Continuous Monitoring
 1.
Establish policies to oversee that policies established by the firm for each of the other elements of quality control are suitably designed and are applied
 2.
Monitoring involves an ongoing consideration and evaluation of the:
 a.
Relevance and adequacy of the firm’s policies and procedures
 b.
Appropriateness of the firm’s guidance materials and any practice aids
 c.
Effectiveness of professional development activities
 d.
Compliance with the firm’s policies and procedures
 3.
Examples:
 a.
Inspect audit documentation and administration files for selected clients
 b.
Peer review conducted under AICPA standards
 c.
A “wrap-up” or second partner “preissuance” review of audit documentation by a partnernot involved in the audit. SOX 2002 requires such review for every public company auditreport. Purpose of this review is to focus on the fair presentation of the FS in conformitywith GAAP
 d.
Performance of corrective actions and communication of weaknesses to firm personnel
 4.
Peer Review
 a.
Self-Regulation
:i.
One CPA firm reviews another CPA firm’s compliance with quality control. CPA firm,that is member of the AICPA, must have a peer review every 3 years to maintainmembership with AICPA. Firm can choose the firm to ask or ask AICPA to select areview team
 b.
Purpose
 ii.
Purpose of peer review is to determine and report whether the CPA firm hasdeveloped adequate policies and procedures for the elements of quality control andif following them in practice
 c.
Results
 iii.
A report is issued with conclusions and recommendations. If firm fails to takecorrective actions, it is subject to sanctions
 D.
Personnel Management
 1.
Criteria for hiring, assignment of the firm’s personnel to engagements, professional development,and advancement
 2.
Personnel management policies should be established:
 a.
Those hired possess the appropriate characteristics to perform competently
 b.
Work is assigned to personnel that have the degree of technical training and proficiencyrequired in the circumstances
 c.
Personnel participate in continuing education and professional development activities
 d.
Personnel selected for advancement have the qualifications necessary to fulfill theresponsibilities to be assumed
 3.
Examples:
 a.
Requiring timely identification of staffing requirements
 b.
Planning for the total personnel needs of all the professional engagements
 c.
Requiring a background check on new personnel
 
 
Becker Auditing 2008 Edition Chapter 2 3
d.
Requiring supervisors to prepare performance evaluations
 e.
Requiring personnel to attend training
 f.
Consideration of continuity and periodic rotation of personnel
 g.
Consideration of opportunities for on-the-job training
 E.
Assurance Regarding Engagement Performance
 1.
Policies to check that the work performed by engagement personnel meets applicable professionalstandards, regulatory requirements, and the firm’s own standards of quality
 a.
Such policies should encompass all phases of design and execution of the engagement –planning, performing, supervising, reviewing, documenting, communicating results, andconsulting with individuals having appropriate knowledge, competence, judgment, andauthority
 2.
Examples:
 a.
Designating individuals with expertise in matters related to the SEC
 b.
Referring questions to the appropriate group in the AICPA or state society
 c.
Developing and using standard audit forms, checklists, and questionnaires
 d.
Establishing procedures for reviewing engagement documentation and reports
 III.
Other Considerations
 A.
Policies: nature and extent of firm’s quality control policies depend on:
 1.
The firm’s size
 2.
Its organizational structure
 3.
The nature and complexity of its practice
 4.
The degree of operating autonomy allowed its personnel and its individual offices
 5.
Cost-benefit considerations
 B.
Relationship Between Auditing Standards and Quality Control Standards
 1.
GAAS vs. Quality Control Standards
 a.
GAAS relates to the conduct of each individual audit engagement
 b.
Quality Control relates to the conduct of all professional activities of the firm’s practice as awhole
 c.
The quality control standards of a firm affect both the performance of each audit and theperformance of the audit practice as a whole
 2.
Quality Control Deficiencies:
 a.
Deficiencies/noncompliance with quality control standards does NOT mean lack of GAAScompliance
 
OTHER ENGAGEMENTS, REPORTS, AND ACCOUNTING SERVICES
I. Special Reports: Client does not necessarily have to comply with GAAP
o
Auditor has to comply with GAAS and obtain reasonable degree of assurance.
o
Auditing standards have restricted special reports to the following 5 areas:i. OCBOA Other comprehensive basis of accounting financial statements
Ex: cash basis, tax basisii. Specified elements, accounts, or items in a financial statement
Ex: audit accounts receivable onlyiii. Compliance with contractual or regulatory requirements related to audited financial statementsiv. Financial presentations to comply with contractual agreements or regulatory provisionsv. Financial information presented in prescribed forms or schedules that require a prescribed form ofauditor’s reportA. Financial Statements Prepared in Conformity with an OCBOA1. OCBOA Financial Statements = Non-GAAP, considered comprehensive basis of accountinga. A
cash
receipts and disbursements systemb. A basis of accounting that the entity uses to file its
income tax
returnsc. A basis of accounting used to comply with the requirements of a
governmental
regulatoryagency having jurisdiction over the reporting entityd. A definite set of criteria having substantial support that is applied to all material items, suchas
price-level
adjusted financial statements

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