AUDITING I

ACC231

Chapter 2
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The audit standards’

setting process
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Certified Public Accounting “CPA” Firms :

CPA firms have the legal right to perform financial statements audit.

Activities of CPA firms :

CPA firms performs audit, attestation services, other assurance services, as well as non-
assurance services.

Types of CPA firms :

1- Big four international firms :

- They have office throughout the world.

- They audit all largest companies worldwide.
They are :
 Deloitte.
 Price water house coopers.
 Ernst and young.
 KPMG.

2- National firms :
- They have office in major cities.
- They sometimes work with big four (have international capabilities).

3- Regional and large local firms :

- They have one or more office to serve certain region, community or district.
- They share technical information and continuing education with Big Four (have
international affiliation).

4- Small local firms :

- They are single-office firms to serve small business and non-profit organizations.
- They provide tax services rather than auditing.

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Limited Liability Partnerships (LLPs)

- The Big Four CPA firms are organized as “Limited Liability Partnership” (LLPs).
- They are responsible for company’s debts, their own acts, and the acts of employees under
their supervision.

- They are not responsible for negligent acts of other parties and the acts of employees not
under supervision.

Factors influencing the structure of CPA firms :

1- Need for independence Unbiased.
2- Need for competence efficiency and effectiveness.
3- Avoid litigation risk degree of protection.

Hierarchy of CPA firms :

1- Staff assistants :
Experience : 0-2 years.
Responsibility : Detailed audit work.

2- Senior In-Charge Auditors :

Experience : 2-5 years.

Responsibility : Filed work.

3- Managers :

Experience : 5-10 years.

Responsibility : - Review in-charge work.
- Manage relationships with clients.

4- Partners :
Experience : + 10 years.
Responsibility : - Overall audit work.
- Have ultimate responsibility for audit.

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Public Sector

Sarbanes-Oxley Act (S-0 Act)

- S-O Act established the public company accounting oversight Board (PCAOB), which is
supervised the securities and exchange commission (SEC).

Securities and Exchange Commission (SEC)

- SEC assists in providing reliable information to investors to help making their investments
decisions.

SEC requires Submitting 4 forms :

1) S1 for new securities.
2) 8-K for significant events.
3) 10-Q for quarterly financial statements.
4) 10-K for extensive annual financial statement including audit report.

Public Company Accounting Oversight Board (PCAOB) :

1- Provides oversight for public company.

2- Sets auditing and quality control standards for public companies.
3- Provides inspection of auditing quality controls.
4- Provides inspection of compliance with SEC rules.

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Private Sector

American Institute of Certified Public Accounting (AICPA)

1- Sets standards for all services including :

a) Auditing Standards (GAAS) “Reasonable assurance”.

b) Review Standards “Limited assurance”.
c) Compilation Standards “No assurance”.
d) Other attestation standards.
e) Code of professional conduct.

2- Conduct research in accounting and auditing.

3- Publishes a variety of materials such as Journal of Accountancy.
4- Provides Seminars and continuing education.
5- Writes and grades CPA examination.

International Auditing and Assurance Standards Board (IAASB) :

IAASB is established by International Federation of Accounting (IFAC) to set International

Standards on Auditing (ISAs) to ensure uniformity of auditing practices throughout the world.

Types of Auditing Standards :

1- PCAOB auditing Standards.
2- GAAS.
3- ISAs.

Companies
Private Sector Public Sector

GAAS GAAS + PCAOB Standards

Nowadays

ISAs

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Generally Accepted Auditing Standards (GAAS)

The standards provide guidelines for auditors to help them meet their professional
responsibilities.

1) General Standards (Responsibilities standards)

1. The auditor should posses “adequate technical training and proficiency”.

 Competence (formal education, practical experience, continuing professional

development”

2. The auditor should posses “ Independence in internal attitude”.

 Independent :
 “Not being an employee of company”.
 “Not owning shares or stocks in company or its subsidiaries”.
 “Not having any relationship to company”
 “Not having any financial interest”.

3. The auditor should possess “Due professional care”.

 Careful review the work of others, questioning mind, critical assessment.

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2) Standards of fieldwork (Performance principle)

1. The auditors should do “adequate planning and supervision”.

2. The auditor should have “Sufficient understanding of internal control”.
3. The auditor should collect “Sufficient appropriate evidence”.

3) Standards of Reporting (Reporting Principle)

1. The auditors should states whether financial statement are presented according
with GAAP or IFRS.
(The auditor must mention Criteria)

2. The auditor should identity circumstances where principles are not consistently
applied.
(The auditor must determine situations when the company change from one accounting
principle to another).

3. The auditor should get “informative disclosures”.

(The auditor should examine the four financial statements in addition to footnotes).

4. The auditor should include “an expression of opinion”.

(The auditor should write the opinion or mention that he cannot express his opinion).

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Statements on Auditing Standards (SAS)

- SASs are interpretations to Generally Accepted Auditing Standards.

- SASs are the most authoritative reference to auditors.
- SASs are the minimum standards to be followed by auditors.

Quality Control : It consists of the methods used to ensure that auditors are meeting their
personal responsibilities.

Factors affecting quality control :

1- Firm size.
2- Firm nature.
3- Cost-Benefit.

Element of quality control :

1- Leadership responsibilities. High quality polices.
2- Ethical requirements. Independence, Compliance, Objectively, Integrity.
3- Acceptance and continuance of client. Client integrity must be considered.
4- Human resources. Qualified personal.
5- Engagement performance. Work performs complies with quality control standards.
6- Monitoring. Tracing the application of previous elements.

Peer Review

- Review of CPA firm by another CPA firm for compliance with quality control standards.

- Peer review done every 3 years.

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Questions :

2-15 The following questions address CPA firms and entities that regulate them. Choose
the best response:

i. not sole proprietorships?

a. Most derive the majority of their revenues from tax services.

b. The most common organizational structure is the limited liability partnership structure.
c. The firm will be subject to an annual peer review.
d. The number of other professionals within a firm generally equals the number of
partners in the firm.

ii. You have been engaged to audit the final statements of a U.S. public company.
Which of the following statements is correct?

a. Your firm must be registered with the PCAOB.

b. Your firm will be subject to auditing and quality control standards issued by the
Securities and Exchange Commission.
c. Your firm must be either a National or Big Four CPA firm.
d. You will be engaged to audit both the quarterly and annual financial statements of
your client.

2-16 The following questions deal with auditing standards. Choose the best response.

i. Which of the following best describes what is meant by U.S. auditing standards?

a. Acts to be performed by the auditor.

b. Measures of the quality of the auditor’s performance.
c. Procedures to be used to gather evidence to support financial statements.
d. Audit objectives generally determined on audit engagements.

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ii. The Responsibilities principle underlying AICPA auditing standards includes a

requirement that

a. field work be adequately planned and supervised.

b. the auditor’s report state whether or not the financial statements conform to generally
accepted accounting principles.
c. professional judgment be exercised by the auditor.
d. informative disclosures in the financial statements be reasonably adequate.

iii. What is the general character of the responsibilities characterized by the

Performance principles?

a. The competence, independence, and professional care of persons performing the audit.
b. Criteria for the content of the auditor’s report on financial statements and related
footnote disclosures.
c. The criteria of audit planning and evidence gathering.
d. The need to maintain an independence in mental attitude in all matters pertaining to the
audit.

2-17 The following questions concern quality control standards. Choose the best
response.

I. The nature and extent of a CPA firm’s quality control policies and procedures
depend on
The CPA The Nature of the Cost-benefit
Firm ’s Size CPA Firm ’s Practice Considerations
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes Yes

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II. Which of the following are elements of a CPA firm’s quality control that should
be considered in establishing its quality control policies and procedures?

Human Resources Monitoring Engagement Performance

a. Yes Yes No
b. Yes Yes Yes
c. No Yes Yes
d. Yes No Yes

III. One purpose of establishing quality control policies and procedures for deciding
whether to accept a new client is to

a. Enable the CPA firm to attest to the reliability of the client.

b. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
c. Provide reasonable assurance that the integrity of the client is considered.
d. Anticipate before performing any field work whether an unqualified opinion can be
issued.

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