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Chapter 2
Professional Standards:
“The Rules of the Road”
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Practice Standards
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Generally Accepted Auditing Standards
Standards for Attestation and Assurance Services
Quality Control Standards
Others (Not discussed in this chapter)
– International Standards on Auditing (ISAs)
– Generally Accepted Governmental Auditing Standards (GAGASs)
– Statements of Internal Audit Standards (SIASs)
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Generally Accepted Auditing Standards
• Measures of the quality of the
AUDITOR'S PERFORMANCE
• Same from audit to audit
• STANDARDS vs. PROCEDURES
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General Standards
• The audit is to be performed by a person or
persons having adequate technical training
and proficiency as an auditor.
• In all matters relating to the assignment, an
independence in mental attitude is to be
maintained by the auditor or auditors.
• Due professional care is to be exercised in
the performance of the audit and the
preparation of the report.
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STANDARDS OF FIELDWORK
• The work is to be adequately planned, and
assistants, if any, are to be properly supervised.
• A sufficient understanding of the client’s internal
controls is to be obtained to plan the audit and to
determine the nature, timing, and extent of tests to be
performed.
• Sufficient, competent evidential matter is to be
obtained through inspection, observation, inquiries,
and confirmations to afford a reasonable basis for an
opinion regarding the financial statements under
audit.
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REPORTING STANDARDS
• The report shall state whether the financial statements are presented in
accordance with GAAP.
• The report shall identify those circumstances in which such principles have
not been consistently observed in the current period in relation to the
preceding period.
• Informative disclosures in the financial statements are to be regarded as
reasonably adequate unless otherwise stated in the report.
• The report shall either contain an expression of opinion regarding the
financial statements, taken as a whole, or an assertion to the effect that an
opinion cannot be expressed. When an overall opinion cannot be expressed,
the reasons therefore should be stated. In all cases where an auditor's name
is associated with financial statements, the report should contain a clear-cut
indication of the character of the auditor's work, if any, and the degree of
responsibility the auditor is taking.
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Independent Auditor’s Report
Independent Auditor's Report
Report Title
Report Address
Introductory Paragraph:
•Notice of audit,
•F/S Examined
•Auditor, Management responsibilities
To the Board of Directors and Stockholders
Alpha.Com, Inc.
We have audited the accompanying balance sheets of Alpha.Com, Inc. as of December
31,2002 and 2001, and the related statements of income, retained earnings, and cash flows for
the years then ended. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial statements based
on our audits.
Description of an audit
We conducted our audits in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
Opinion
Paragraph
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Alpha.Com, Inc. as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Signature
Report Date
Anderson, Olds, and Watershed, CPAs, LLC
February 22, 2003
Scope Paragraph:
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EVIDENCE
The auditor must "obtain
sufficient, competent evidential
matter" to support opinion.
– Sufficient Evidence
• Enough to support opinion
• Persuasive enough to convince another
person (judge, jury?)
• Essentially a matter of professional
judgment
– Competent Evidence
• Valid, relevant, reliable.
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CHARACTERISTICS OF
COMPETENT EVIDENCE
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Relevance
– Testing what you want to test (e.g., direction of
testing)
Evidence Source
– Generally an externally generated piece of
evidence more reliable than an internal (clientgenerated) piece of evidence
– Evidence Hierarchy
• Direct personal knowledge
• External evidence
• External-internal evidence
• Internal Evidence
• Verbal and written
Objective v. Subjective Evidence
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Attestation Standards
• Provides guidance on attest engagements other than
audits:
• “An engagement in which a practitioner is engaged to issue or does
issue a report on subject matter or an assertion about the subject
matter that is the responsibility of another party.”
• Same basic set of rules as GAAS, except more
general.
• “Attest function” vs. “audit”
• “Practitioner” vs. “auditor”
• “Engagement” vs. “audit”
• Differences between Attestation and Audit Engagements
(Exhibit 2-4)
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Attestation Engagements
• Financial
– Supplementary financial statistics
– Pro forma financial information
– Financial forecasts and projections
• Non-financial
– Compliance with contractual requirements
– Descriptions of internal control systems
– Inventory quantities and locations
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Quality Control Standards for
CPA firms
• Quality Control Standards
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Independence, Integrity, Objectivity
Personnel Management
Acceptance and Continuance of Clients
Engagement Performance
Monitoring
• Guides the performance of firm-wide audit
and attestation practice
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