CHAPTER 2

Professional Standards
LEARNING OBJECTIVES

Review
Checkpoints

Exercises, Problems,
and Simulations

1.

Name the various practice standards for

internal, governmental, and independent
auditors and auditing firms, and identify their
sources.

45

2.

Explain the 10 AICPA generally accepted

auditing standards (GAAS), and explain how
GAAS was or was not followed in specific
fact situations.

2, 3, 4, 5, 6, 7

39, 40, 41, 43, 44,

48, 51

3.

Explain audit evidence in terms of its

appropriateness and relative strength of
persuasiveness.

8, 9, 10

50

4.

Describe the standard unqualified audit

report in terms of its communication of audit
standards and other messages.

11, 12, 13, 14,

15

42, 46

5.

List the reasons for having general attestation

and assurance standards and explain how
attestation standards differ from generally
accepted auditing standards.

16, 17

47

6.

List and explain the important features of

quality control standards for a CPA firm.

18, 19, 20

49

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SOLUTIONS FOR REVIEW CHECKPOINTS

2.1

Practice Standards

Who issues them

Statements on Auditing Standards (SASs)

(Private Companies)
Auditing Standards (Public Companies)

AICPA Auditing Standards Board

Code of Professional Conduct

Quality Control Standards
Statements on Internal Audit Standards (the
Red Book)
Government audit standards (the Yellow
Book)
International Standards on Auditing and
Assurance
Professional Standards and Practices for
Certified Fraud Examiners
2.2

Public Company Accounting Oversight Board

(PCAOB)
AICPA Professional Ethics Division
AICPA Division for Firms
Institute of Internal Auditors
Government Accountability Office (GAO)
International Federation of Accountants (IFAC)
International Auditing and Assurance Standards
Board (IAASB)
Association of Certified Fraud Examiners (ACFE)

"Procedures" relate to acts to be performed. "Standards" deal with measures of the quality of performance
of those acts and the objectives to be attained by the use of procedures. The standards are less subject to
change. The standards provide the criteria for rejecting, accepting, or modifying a procedure in a given
circumstance. An example of the relative stability of standards and procedures is found in the change from
non-computerized information systems to computerized systems. New procedures were required to audit
computerized information systems, but auditing standards remained unchanged and were the criteria for
determining the adequacy of the new procedures.
The word "procedure" is used in SAS 46 (AU 390) -- "Consideration of Omitted Procedures After the
Report Date"--to refer to (1) an act to be performed and (2) sufficient appropriate evidence. SAS 46 speaks
of omitted procedures and the relative seriousness of their omission. The importance of any "omitted
procedure," however, is the evidence the auditors failed to obtain. Merely omitting technical procedures is
only a superficial analysis of an audit problem; the substance is the evidence not obtained.

2.3

The standard for due audit care is the care that would be exercised by the prudent auditor. The prudent
auditor is one who exercises reasonable judgment, who is not expected to be omniscient, who is presumed
to have knowledge special to his profession, who is expected to be aware of his or her own ignorance, who
is expected to possess the skills of the profession whether a beginner or a veteran.

2.4

Three specific aspects of on-the-job independence

1.
2.
3.

2.5

Three elements of planning and supervision considered essential in audit practice are:

2.6

Programming independence
Investigative independence
Reporting independence

A written audit program.

An understanding of the client's (auditee's) business.
CPA firm procedures to allow an audit team member to document disagreements with accounting
or auditing conclusions and disassociate himself or herself from the matter.

The timing of the auditor's appointment matters because the auditor needs time to plan the audit properly
and perform the work without undue pressure from too-short deadlines.

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2.7

An auditor obtains an understanding of a client, including its internal control, as a part of the control risk
assessment process primarily in order to plan the nature, timing and extent of subsequent substantive audit
procedures. A secondary purpose (not covered in Chapter 2) is to obtain information about significant
internal control deficiencies to report to the client.

2.8

Evidence is defined as all of the information used by the auditor in arriving at the conclusions on which
the audit opinion is based.

2.9

External documentary evidence is audit evidence obtained from the other party to an arm's-length
transaction or from outside independent agencies. External evidence reaches the auditor directly and does
not pass through the hands of the client.
External-internal documentary evidence is documentary material that originates outside the bounds of the
client's data processing system but which has been received and processed by the client.
Internal documentary evidence consists of documentary material that is produced, circulates, and is finally
stored within the client's information system. Such evidence is not touched by outside parties at all or is
several steps removed from third-party attention.

2.10

Evidence obtained from related parties is potentially biased, and the information may be self-serving and
misleading.

2.11

FASB, FASAB, and GASB statements are the highest level of authoritative support for GAAP. Textbooks,
handbooks, and journal articles are the lowest level.

2.12

Yes. The unqualified opinion sentence in the audit report implies, among other things, that the accounting
principles used by the company are appropriate in the circumstances.

2.13

Two messages are usually implicit in a standard audit report by their absence: (1) disclosures are adequate,
and (2) the accounting principles have been consistently applied.

2.14

Four types of opinions and their messages:

Type
Unqualified opinion
Adverse opinion
Qualified opinion
Disclaimer of opinion

Message
Financial statements are presented in conformity with GAAP.
Financial statements are not presented in conformity with GAAP.
Financial statements are presented in conformity with GAAP, except
for one or more departures.
Auditor's declaration that no opinion is given.

2.15

Investors, creditors and other users tend to assume that financial statements are audited and "everything is
OK" whenever they know a public accountant has been involved in producing the statements. If an audit
has not been performed, accountants need to make the fact known so users will not mislead themselves. If
an audit has been performed, accountants must report their work and conclusions for users' benefit.

2.16

The purpose served by the attestation standards is to guide attestation work in areas other than audits of
financial statements.

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2.17

The major differences between attestation standards and generally accepted auditing standards lie in the
areas of practitioner competence, internal control, and reporting. Some other differences are minor ones.
GAAS presume knowledge of accounting and require training and proficiency as an auditor (meaning an
auditor of financial statements. The attestation standards are more general, requiring training and
proficiency in the "attest function" and knowledge of the "subject matter of the assertions."
The attestation standards have no requirement regarding an understanding of an entitys internal control.
Considerations of internal control are implicit in the task of obtaining sufficient evidence. Anyway, some
kinds of attested information may not have an underlying information control system in the same sense as a
financial accounting and reporting system.
Reporting is different because attestations on nonfinancial information do not depend upon generally
accepted accounting principles. The attestation standards speak of "evaluation against reasonable criteria,"
and "conformity with established or stated criteria" and leave the door open for attestations on a wide
variety of informational assertions.

2.18

While GAAS relate to the conduct of each audit engagement, quality control standards govern the quality
of a CPA firm's accounting audit practice as a whole.
Quality Control Standard No. 2 gives five elements of quality control for a CPA firm. When a peer review
or quality review is conducted, the reviewers "audit" the CPA firm's statement of policies and procedures
designed to ensure compliance with the five elements. These statements vary in length and complexity,
depending upon the size of the CPA firm.

2.19

This is an example of a policy statement related to engagement performance as it relates to consultation for
assistance with difficult accounting and auditing problems.

2.20

In addition to the standard setting role previously discussed, one of the primary roles of the Public
Company Accounting Oversight Board (PCAOB) is to monitor firms engaged in the practice of auditing
public companies. The Boards goal is to ensure that audit quality is not compromised and that auditor
performance continues to meet public expectations. Soon after it began operations in early 2003, the
PCAOB began registering professional services firms providing auditing services to public entities. Firms
not registered are not allowed to conduct audits of public companies. Other Board monitoring activities
include inspections of registered auditing firms (similar to peer reviews), special investigations, and
disciplinary proceedings.

SOLUTIONS FOR MULTIPLE-CHOICE QUESTIONS

2.21

a.
b.
c.
d.

Incorrect
Correct
Incorrect
Incorrect

Due professional care is a general, not reporting, standard.

This standard is a reporting standard.
Sufficiency of evidence is a standard of fieldwork.
The report should state that GAAP has been followed in the preparation of the
entitys financial statements.

2.22

a.
b.
c.
d.

Incorrect
Incorrect
Incorrect
Correct

This practice relates to CPA competence and training, not due professional care.
This practice is a reporting standard.
Sufficiency of evidence is a standard of fieldwork, not due professional care.
These practices are a part of due professional care.

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2.23

a.
b.
c.
d.

Incorrect
Correct
Incorrect
Incorrect

GAAS relates to the conduct of an audit engagement by CPAs.

Quality Control Standards are firm- (rather than CPA-) related.
GAAP relates to accounting, rather than auditing practices.
International auditing standards govern the conduct of audits conducted across
international borders.

2.24

a.
b.
c.
d.

Incorrect
Incorrect
Incorrect
Correct

They may lack training and supervision, but d. is a better answer.

They may lack planning and supervision, but d. is a better answer.
The auditors had enough investigative independence to know the problem.
The auditors let some feelings for the client override their obligations to the
users of the financial statements.

2.25

a.
b.
c.

Correct
Incorrect
Incorrect

d.

Incorrect

According to the second GAAS standard of fieldwork.

Consulting suggestions are secondary objectives in an audit.
Control information is, at best, indirect evidence about assertions in the financial
statements.
Control information provides little opportunity to learn about accounting
principles changes.

2.26

a.
b.
c.
d.

Incorrect
Correct
Incorrect
Incorrect

External evidence is quite reliable.

Representations from management should least affect auditors conclusions.
Auditor-prepared evidence is highest on the scale of appropriateness.
Although a representation of a client employee, inquiry of the companys legal
counsel is considered more reliable than that of company management.

2.27

a.
b.

Incorrect
Incorrect

c.

Incorrect

e.

Correct

Inquiry of management should least affect auditors conclusions.

Although very persuasive, an auditors personal knowledge (answer d) provides
the most persuasive evidence
Observation of a clients procedures provides evidence on the effectiveness of
the clients internal control, but not the existence assertion for newly acquired
computer equipment.
An auditors personal knowledge provides the most persuasive evidence.

a.
b.
c.

Incorrect
Incorrect
Incorrect

d.

Correct

2.29

c.

Correct

Initials of the preparer and reviewer provide evidence of due professional care
and planning and supervision.

2.30

a.
b.

Incorrect
Correct

c.
d.

Incorrect
Incorrect

Adequate knowledge is required.

Understanding of internal control is not required (because it may not always be
relevant to the subject).
Sufficient evidence is required.
Independence is required.

a.
b.
c.
d.

Incorrect
Incorrect
Correct
Incorrect

EITF positions are in the third level of authoritative support.

AICPA industry guides are in the second level.
FASB statements on standards are in the first level.
FASB statements on concepts are in the fourth level.

2.28

2.31

Considered last on the scale of appropriateness.

Considered fourth on the scale of appropriateness.
Auditor personal knowledge is usually ranked first, but the procedures were
being performed on client internal documents.
Considered second (behind auditors personal knowledge) on the scale of
relative appropriateness, but best of the alternative.

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2.32

a.
b.
c.
d.

Incorrect
Incorrect
Incorrect
Correct

Considered fourth on the scale of appropriateness.

Considered last on the scale of appropriateness.
Considered second on the scale of appropriateness.
Considered first on the scale of relative appropriateness.

2.33

a.

Incorrect

b.

Incorrect

c.

Incorrect

d.

Correct

Understanding a client's internal control does not directly determine auditor's

training and proficiency.
Understanding a client's internal control does not directly determine auditors'
independence.
Understanding a client's internal control does not directly help satisfy the quality
control standard about audit staff professional development.
The primary purpose of obtaining an understanding of a client's internal control
is to plan the nature, timing, and extent of subsequent substantive audit
procedures on an engagement.

2.34

b.

Correct

Given the choices presented, the EITF position is ranked highest on the GAAP
hierarchy (see Exhibit 2.3).

2.35

b.

Correct

Governmental auditing standards are issued by the Government Accountability

Office (GAO). Government accounting standards are issued by the GASB.

2.36

a.

Correct

b.

Incorrect

c.

Incorrect

Consultation with a specialist demonstrates due professional care if the CPA

does not have expertise in the area in question.
CPAs are experts in financial matters, not areas of art (and other collectibles)
valuation.
GAAS applies to all audit engagements.

a.
b.

Incorrect
Correct

c.
d.

Incorrect
Incorrect

a.

Correct

b.
c.
d.

Incorrect
Incorrect
Incorrect

2.37

2.38

Due professional care has not been followed in this case.

The consistency standard relates to the consistent presentation of financial
information, not the consistent presentation of the audit report.
In this case, disclosures have not been adequate.
Footnotes are considered an integral part of the financial statements. Failure to
include an important footnote would be considered a departure from generally
accepted accounting principles.
Attestation standards differ from auditing standards in that they apply to
engagements beyond the audited financial statements.
Attestation standards require that the practitioner be independent.
Attestation standards do apply to prospective what if financial statements.
Attestation standards include fieldwork standards.

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SOLUTIONS FOR EXERCISES AND PROBLEMS

2.39

Audit Engagement Independence

a.

CPAs should not follow clients' suggestions about the conduct of an audit unless the suggestions
clearly do not conflict with his professional competence, judgment, honesty, independence, or
ethical standards. Where there is no disagreement about the results to be accomplished and the
client's suggestion represents a good idea a CPA can accept it. Within professional bounds, mutual
agreement with the client is all right. The CPA must never agree to any arrangement that violates
generally accepted auditing standards or the Code of Professional Conduct.

b.

The reasons against dividing the assignment of audit work solely according to assets, liabilities
and income and expenses include the following:
1.

Work should be assigned to staff members by considering the degree of difficulty in

relation to the technical competence and experience of individual staff members.

2.

Sequence of work performed on an examination should be in accordance with an overall

audit plan.

3.

It is impossible to segregate work areas by major captions because often a close

relationship exists among a number of accounts in more than one category, as for example
where income is based on assets or expense is based on liabilities.

4.

Often a single audit work paper is desirable to substantiate balances in accounts of various
types, such as an insurance analysis supporting premium disbursements, the expense
portion and the prepaid balance.

5.

Duplication of staff effort would be more likely to occur if assignments were made on such
a basis.

6.

Frequently, the scope of work regarding a single account requires simultaneous

participation by the staff, such as in the observation of inventories.

Many audit operations are not susceptible to division by category, as for example investigating
internal control, testing transactions and writing the report.
c.

The CPA's staff member whose uncle owns the advertising agency should not be assigned to
examine the client's advertising account. The CPA firm is responsible for avoiding relationships
which might suggest a conflict of interest. Regardless of whether this staff member could be
independent and unbiased in such a situation, outsiders probably will be influenced in their
thinking by the fact that the uncle is the owner of the advertising agency. Even if a problem of
ethics were not involved, it would be unwise for the CPA to assign this staff member because the
client's attitude could change significantly and the CPA firm's position would be jeopardized if
difficulties later arose in connection with the contract. Any situation in which bias exists or might
arise should be avoided.

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2.40

Fieldwork Standards
The three generally accepted standards of fieldwork and their relation to the illustration are as follows:

2.41

1.

The first standard is that the auditor must adequately plan the work and must properly supervise
any assistants. Fulfilling this standard would include the preparation of an audit program for the
accounts receivable and reviewing it with the assistant prior to beginning the examination. These
things were not done. Also, the completed audit documentation should have been reviewed to
determine whether an adequate examination was performed. The illustration states that this
procedure was followed.

2.

The second standard is that the auditor must obtain a sufficient understanding of the entity and its
environment, including its internal control, to assess the risk of material misstatement of the
financial statements whether due to error or fraud, and to design the nature, timing, and extent of
further audit procedures. The case presented makes no mention of any work on the internal
control. Reliance entirely upon prior year audit documentation in lieu of an evaluation of the
existing internal control is improper because changes may have been made in the system.

3.

The third standard is that the auditor must obtain sufficient appropriate audit evidence through
audit procedures performed to afford a reasonable basis for an opinion regarding the financial
statements under audit. The assistant's preparation of audit documentation, confirmation requests
and other procedures seem to fulfill the requirements of this standard if the audit work is properly
performed and is of sufficient depth.

Time of Appointment and Planning

From a theoretical viewpoint (and, if fact, from a practical viewpoint as well) such short notice of a request
for an audit causes difficulties with planning the audit work, with staffing, and with reviewing the work--all
of these features being elements of the exercise of due audit care. The December 26-January 20 period is a
serious time constraint for a first audit. The greatest difficulties involve the third general standard (due
audit care) and the three field standards. In view of the short notice and the time constraint, there may be
some question as to whether a sufficient first audit could be completed by January 20.

2.42

Reporting Standards
You must determine whether an unqualified opinion satisfies the GAAS reporting standards, in particular:
a.

Determine whether the financial statements are presented in conformity with GAAP.
1.
Read the footnote description of accounting policies.
2.
Use a GAAP checklist.
3.
Review the audit documentation for any indication of accounting policies not described
in the footnote or ones apparently not in conformity with GAAP.
4.
Refer to SAS criteria concerning the "meaning of present fairly" (SAS 69 regarding
determinations that:
(i)
The accounting principles are generally acceptable, having authoritative support.
(ii)
The accounting principles are appropriate in the circumstances.
(iii)
The financial statements are informative.
(iv)
The information is reasonably summarized.
(v)
Material adjustments have not been waived without good reasons.

b.

Determine whether any accounting changes have been made and whether accounting principles
have been applied consistently.

c.

Determine whether the footnote disclosures are adequate to inform users of any material
information evident in the audit documentation.

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2.43

GAAS in a Computer Environment

In an audit of a computer-based system, adequate training and experience must be directly related to EDP.
In particular, the auditor should be knowledgeable of what computer systems do, how to test the operations
of an EDP system, and how to use EDP-unique documentation.
The training and proficiency standard contributes to satisfaction of the independence standard by enabling
the auditor to make his or her own decisions and judgments. Otherwise, he or she might tend to subordinate
his judgment to other persons, possibly to client personnel. When the auditor lacks training and proficiency,
it is virtually impossible to maintain an operational independence over audit decisions. An independence of
mental attitude is futile if actual decisions are subordinated to others.
The exercise of due audit care requires a critical review at every level of audit supervision of the work done
and the decisions made by auditors. Lacking the requisite skills and lacking independent decisions, the due
care expected of an auditor at operational, supervisor, and review levels cannot be delivered.
The first fieldwork standard requires adequate planning and supervision of assistants. Training and
proficiency in computer systems auditing is necessary to plan access to computerized records, programs,
and to obtain machine time for conducting audit procedures. The planning should provide for an early
examination of the computer system so that further procedures involving non-computer control and
accounting features may be planned should they depend upon computer control procedures.
Training and proficiency are very important for being able to obtain an understanding of a computer
systems internal controls. Client personnel will expect audit personnel to be capable of working with a
computer system.
The third standard of fieldwork requires the auditor to obtain sufficient appropriate audit evidence to
provide a basis for an opinion on financial statements. Documentary evidence relating to a computer
system includes program flow charts, logic diagrams, and decision tables that are not normally used in
non-computer systems. Since these types of documentation are a part of the evidence, they must be
understood by the auditor, and understanding of them comes through training and proficiency in their use.

2.44

Authoritative Support
SAS 69 (1992), amended by SAS 91 (1999), specifies the hierarchy of sources of authoritative support.
Refer to Exhibit 2.3 in Chapter 2.

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2.45

Sources of Professional Standards:

Source

Description
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
2.46

Definition of a financial statement audit

Guidance for reporting on internal control
Standards for the practice of internal auditing
Generally accepted government auditing
standards
Education requirements for becoming a CPA

a.
b.
c.
d.

AICPA auditing standards board

PCAOB
Institute of Internal Auditors
U.S. Government Accountability Office

e.

State board of accountancy

Contents of the Uniform CPA Examination

Requirements for obtaining a reciprocal CPA
certificate.
Standards of financial accounting
Auditing standards for public companies
Interpretations and rulings for the Code of
Conduct
Standards for involvement with unaudited
financial statements of nonpublic companies
Standards for consulting practice in CPA firms

f.
g.

AICPA examinations division

State board of accountancy

h.
i.
j.

Statements on auditing standards

Statements on responsibilities in tax practice
Guidance for lending credibility to nonfinancial
information
Statements on responsibilities in personal
financial planning practice

m.
n.
o.

Financial Accounting Standards Board

PCAOB
AICPA professional ethics executive
committee
AICPA accounting and review services
committee
AICPA consulting services executive
committee
AICPA auditing standards board
AICPA federal taxation executive committee
AICPA auditing standards board (attestation
standards)
AICPA personal financial planning executive
committee

k.
l.

p.

Association with Financial Statements.

The consequence of being associated with financial statements is that the fourth GAAS reporting standard is
invoked. "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 examination, if any, and the degree of
responsibility he is taking."
a.

Associated

Issue audit report.

b.

Not associated

Tax returns are an exception.

c.

Associated

Issue disclaimer (public company).

Issue compilation report (nonpublic).

d.

Not associated

CPA is associated with accounting records but not with financial

statements.

e.

Associated

Issue a disclaimer (public company).

f.

Associated

Issue a disclaimer report. (Should have requested client not print the
CPA's name this way.)

g.

Not associated

Nothing needs to be done so long as client doesnt mention CPA in the

interim statement document.

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2.47

Investment Performance Attestation

1, 2.

Proficiency in the attest function and knowledge of the subject matter: The CPAs must be persons
who know and understand investment statistics, operations of mutual funds, and SEC rules about
expenses.

3.

Reasonable criteria: The CPAs must determine whether standards exist for presentation of
investment return statistics and expense ratios, or they must be able to assess the reasonableness of
management's presentation of criteria.

4.

Independence: The CPAs must determine that they have independence in relation to Mystery
Capital Management and its officers and directors.
Due care, planning and supervision, sufficient evidence: The CPAs must conduct the fieldwork
carefully to get the evidence necessary in the circumstances.

3.

Reasonable criteria: The CPAs must determine whether the statistics can be said to be related to
reasonable criteria acknowledged and understandable by users of the advertisements.

2.48

5, 6, 7.

8,10.

Report: The CPAs' report must identify the performance statistics and expense ratios and relate
them to the criteria upon which they are based.

9.

Reservations: If the CPA has any misgivings about misrepresentation of the statistics and ratios
management presents, they must be stated in the report.

11.

Agreed-upon procedures: The CPAs must determine whether the work has been limited to
procedures agreed with the client. If so, the distribution of the report should be noted as limited to
the parties who imposed the limitations.

Auditing Standards Case Study

1.

The examination must be performed by a

person or persons having adequate technical
training and proficiency as an auditor.

1.

It was inappropriate to hire the two

students to conduct the audit. The
examination must be conducted by persons
with proper education and experience in
the field of auditing. Inexperienced
persons can assist, if they are supervised.

2.

In all matters relating to the assignment, an

independence in mental attitude is to be
maintained by the auditor or auditors.

2.

To satisfy the second general standard, the

CPA-auditor must be without bias with
respect to the client under audit. Because
of the financial interest in the bank loan,
the auditor is neither independent in fact
nor appearance with respect to the
assignment undertaken.

3.

Due professional care is to be exercised in the

performance of the examination and the
preparation of the report.

3.

This standard requires performing the audit

with due care, which imposes on everyone
a responsibility to observe the standards of
fieldwork and reporting. Exercise of due
care requires critical review at every level
of supervision of the work done and the
judgments exercised. The auditor did not
review the work or the judgments of the
assistants and clearly failed to adhere to
this standard.

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2.48

Auditing Standards Case Study (Continued)

Standards of Fieldwork
1.

The auditor must adequately plan the work and

must properly supervise any assistants.

1.

This standard recognizes that early

appointment of the auditor has advantages for
the auditor and the client. The auditor
accepted the engagement without considering
the availability of competent staff. In addition,
the auditor failed to supervise the assistants.
The work performed was not adequately
planned.

2.

The auditor must obtain a sufficient

understanding of the entity and its
environment, including its internal control, to
assess the risk of material misstatement of the
financial statements whether due to error or
fraud, and to design the nature, timing, and
extent of further audit procedures.

2.

The auditors did not study the client's internal

control nor did the assistants. There appears to
have been no audit examination at all. The
work performed was more an accounting
service than it was an auditing service.

3.

The auditor must obtain sufficient appropriate

audit evidence through audit procedures
performed to afford a reasonable basis for an
opinion regarding the financial statements
under audit.

3.

No evidence was acquired to support the

financial statements. The auditors merely
checked the mathematical accuracy of the
records and summarized the accounts.
Standard audit procedures and techniques were
not performed.

Standards of Reporting
1.

The report shall state whether the financial

statements are presented in accordance with
generally accepted accounting principles.

1.

The report made no reference to generally

accepted accounting principles. Because a
proper examination was not conducted, the
report should state no opinion can be
expressed as to the fair presentation of the
financial statements in accordance with
generally accepted accounting principles.

2.

The report shall identify those circumstances

in which such principles have not been
consistently observed in the current in relation
to the preceding period.

2.

The report makes no reference to the

consistent application of accounting principles.
The improper audit would not enable auditors
to know whether such silence was correct.

3.

Informative disclosures in the financial

statements are to be regarded as reasonably
adequate unless otherwise stated in the report.

3.

Without footnotes, the financial statements

cannot contain adequate disclosure.

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2.48

Auditing Standards Case Study (Continued)

4.

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 should be stated. In all cases where an
auditor's name is associated with financial
statements, the report should contain a clearcut indication of the character of the auditor's
examination, if any, and the degree of
responsibility he or she is taking.

2.49

Quality Control Standards

4.

Although the report contains an expression of

opinion, such an opinion is not based on the
results of a proper audit examination. The
auditor should disclaim an opinion for failure
to conduct an examination in accordance with
generally accepted auditing standards.

Identification of policies and procedures with names of elements of quality control:

a.
Personnel management (advancement and performance)
b.
Engagement performance
c.
Engagement performance (consultation)
d.
Personnel management (assignments)
e.
Personnel management (hiring)
f.
Personnel management (professional development)
g.
Monitoring
h.
Independence, integrity and objectivity
i.
Acceptance and continuance of clients
2.50

Relative Appropriateness of Evidence

a.

Audit evidence obtained from independent sources outside an enterprise provides greater
assurance of reliability (competency) than that which is secured solely within the enterprise.

b.

Accounting data and financial statements developed under satisfactory conditions of internal
control are more reliable (competent) than those which are developed under unsatisfactory
conditions of internal control.

c.

Direct personal knowledge obtained by the independent auditor through physical examination,
observation, computation, and inspection is more persuasive than information obtained indirectly.

McGraw-Hill/Irwin
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2.51

Kaplan CPA Exam Simulation: Generally Accepted Auditing Standards.

To: Kelly, CPA

From: Engagement Partner, CPA
Planning
The auditor must adequately plan the work and must properly supervise any assistants. An audit program
must be developed prior to substantive testing to ensure that adequate planning has occurred. Also, all
evidence is to be recorded within the audit documentation, and then the documentation is reviewed by
qualified personnel (i.e., partner in charge of the engagement) to ensure proper supervision.
Internal Control
The auditor must obtain sufficient appropriate audit evidence through audit procedures performed to afford
a reasonable basis for an opinion regarding the financial statements under audit. The auditor needs to make
an assessment of control risk. If control risk is assessed as high, the auditor will need to gather more
evidence than anticipated or gather better quality evidence. The opposite would be true if control risk is
assessed as low.

McGraw-Hill/Irwin
Auditing and Assurance Services, Louwers et al., 2/e

The McGraw-Hill Companies, Inc., 2007

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