Chapter 1
Public accountants in America play particular roles and among these are two types of services offered by these accountants; assurance and non-assurance services. The financial statements that have been audited are required to be in line with GAAP guidelines. Among the audits conducted by these auditors are financial audits while others include compliance, operational and integrated audits.
Other types of auditors include internal auditors who are employed by a company to work for it as an employee, government accountability office auditors who are governed by the comptroller general, and lastly tax auditors who are responsible for enforcing tax laws. The AICPA Auditing Standards Board is responsible for issuing official announcements regarding the auditing standards for nonpublic companies and at the same time offers continuing education, which is a requirement for a CPA certificate, and it does this together with the state societies and other professional organizations. The State Boards of Accountancy are responsible for issuing the CPA exam certificates while the role of the PCAOB is to oversee and discipline CPA qualifiers and CPA firms who deal with audits of the public companies.
The Securities and Exchange Commission (SEC) is responsible for the PCAOB. There are five categories of public accounting firms that include local, regional, national, big 4, and alternative practice structures. A typical national CPA firm comprises partners, managers seniors, and staff assistants who play different roles within the firm.
Chapter 2
There are authority organizations such as the Public Company Accounting Oversight Board, American Institute of Certified Public Accountants, and the State Boards of Accountancy, which all play different roles in the auditing field the generally accepted auditing standards, govern the activities of these auditors including the order of audit reports. Auditors have the responsibility of detecting fraud and other errors that might cause financial statements to have the occurrence of a material misstatement; they also have the responsibility of checking for illegal acts that may affect the financial statements. Nonpublic Companies have Standard Auditors’ Report which follows a definite pattern that contains the title, addressee, content, signature, and date.
Other categories of audit reports include “standard unqualified report and others such as {Unqualified with explanatory language, qualified opinion, adverse opinion, disclaimer of opinion}” (Whittington and Kurt 2010); the public companies also have their audit reports, which use the PCAOB standards instead of the GAAS. The Auditors also make use of elements of quality control but these procedures are not specified by the AICPA, they include; Leadership responsibilities that are implemented for quality in the firm, proper ethical requirements, human resources management, recognition and continuation, appointment presentation, monitoring. Public companies are regulated by the PCAOB while nonpublic companies are regulated by the AICPA & State Boards of Accountancy.
The PCAOB consists of five members and of these, only two might be CPAs and are allowed to last for not more than two terms of five-year periods. The PCAOB members conduct peer reviews; there are only two types, system, and engagement review. Apart from the peer reviews, there are PCAOB inspections that are conducted by the PCAOB staff.
Chapter 3
Every firm that operates has to have operational ethics to ensure that there is public confidence as its responsibility to serve the public, following this; the CPA firms are no exception as they have steps that are to be followed while solving ethical dilemmas. The AICPA has codes of conduct that include a code of professional conduct and additional guidance. The AICPA code of conduct has a list of rules to be followed which range from rule 101 to rule 505.
Independence is one of the rules listed in this code of conduct, which includes independence of mind for the firm and also independence of appearance. The AICPA has a conceptual framework for the rule of independence and this is to ensure that there is an evaluation of the threats aimed at independence. There is a list of covered members in the independence rule.
The Sarbanes Oxley act is also used in operational ethics. There are certain consulting services such as bookkeeping, actuarial services, and investment services to just mention a few that have been prohibited by the Sarbanes Oxley act.
Chapter 5
Audit risks occur when auditors fail to modify their opinion about financial statements and end up issuing unqualified opinions about financial statements which may not be in accordance with the GAAP regulations and this is what makes an audit risk of which there are three types of audit risks (inherent, control and detection risks), to avoid this, financial statement assertions have to be made and there two types of financial assertions; account, transaction and disclosure assertions. Transactions are classified into three categories which include routine, nonroutine, and estimation transactions. Audit procedures are carried out to obtain sufficient and efficient audit evidence concerning the financial statements and for this audit, evidence to be appropriate has to be relevant and reliable.
There are several types of audit evidence including documentary and physical evidence and at the same time, there are audit procedures, which are carried out during auditing and this, includes risk assessment procedures, further audit procedures (test of controls and substantive procedures). The extent of procedures is influenced by the nature of the procedures and the timing only if the two are held constant. Auditors have to also identify accounting misstatements and they also have fundamental approaches to auditing accounting estimates.
Documentation is an important part of auditing and there are two functions of these documents that include primary and secondary functions, these audit documents also have to be sufficient to enable an experienced auditor to understand the audit that has been performed and the conclusions that were arrived at. There are several types of working papers and working files that include current and permanent files. Several procedures also have to be undertaken when preparing a working paper.
Chapter 6
To conduct an audit an auditor needs to obtain clients and this can be done by submitting a proposal or contacting the predecessor auditor, after the acquisition of a client there, certain auditing processes are followed which also include auditing stages. Certain items are included in engagement letters and in determining materiality, one has to assess the risk of material misstatement and after this, they should determine and design extra audit procedures. While assessing fraud risks there are two types of these fraud risks, which include management fraud and defalcations (Whittington and Kurt 2010).
Once the risks of fraud are recognized a response needs to be made and this can be done in three ways that are an overall response or one that was made during auditing procedures (the fraud) and fraud as a result of administration override. The possibility that the fraudulence might have been committed should not be overridden during the auditing and further audit procedures need to be determined. Audit documentation needs to contain three items, which include risk assessment, procedure results, and consideration of fraud.
There should be a link between source documents, ledgers, and journal entries and this is what consists of an audit trail, with this trail the auditor may choose to follow the audit trail in the two directions that have a relation to the direction of testing. The client’s transaction cycle is an area that should be considered critically by the auditor while conducting internal control. Audit programs, which include the system portion and substantive test portion, are also essential while conducting the audit.
Chapter 7
Internal control is a process that is achieved by the board of directors and managers and is aimed at achieving the goals of the entity and there are control objectives in every area of internal control, the Foreign Corrupt Practices Act that was approved in 1977 calls for the presence of an effective structure of internal control. Internal control consists of certain procedures such as risk assessment and monitoring and at the same time there, limitations that accompany internal control such as misunderstandings of given instructions and also compliance might deteriorate with time. An internal control framework was issued by COSO in 2004 regarding enterprise risk management through internal control still operates around the former COSO framework.
Sufficient understanding of the entity as well as an internal control is required by the auditor so that they can evaluate the risk of material misstatement regarding the financial statements and determine whether it was caused by errors or fraudulence. At the same time, there is an overall approach that is taken by auditors when it comes to internal control and the nature of transactions has to be evaluated as they have one of the strongest controls. Assessment of risks needs to be done at the financial statement level as well as the assertion level.
Audit procedures have to be designed and performed and this includes test controls that tackle the application of the controls and how it was done, the consistency of the controls and who did it and by what means. Some deficiencies arise in internal control and this includes less than significant, significant deficiency, and material weakness. Internal audit control approaches are also under section 404b while the strength of internal control is almost minimal in small companies due to the small numbers of employees in these small companies.
Chapter 10
There are sources of cash and the auditors to consider inherent risk and fraud risks that have a relation to cash use cash equivalents that are useful to the auditors during the auditing process and these. Cash has small account balances but a good part of the auditor’s time is dedicated at this account because it is a high-risk account and it is the most liquid asset and therefore a greater temptation. There are guidelines for internal control that are supposed to reduce fraud risks and financial misstatements.
Internal control is exercised over cash receipts and cash disbursements and audit of the cash involves understanding the client and their environment to consider the possibilities of inherent risk and fraud risks that are related to cash. Substantive tests are also conducted on cash balances while potential misstatements are usually common in cash disbursements. Standard confirmations are carried out by communicating with officials of financial institutions and this mainly touches on the client’s deposit and their loan balances.
There is proof for cash general information that reconciles the cash transactions and account balances and the check 21 Act has its stipulations that should be followed and aid in the work of auditors. Financial investments are also audited and they aid in assessing the risks associated with material misstatements. Test valuation is also done using FASB No.133 and FASB No.159.
Chapter 11
Sources of account receivables and notes receivable are also useful during auditing because they provide a region where most incidences of fraud occur and the objectives for the auditing of these receivables help to gauge the risks of inherent risks and fraud. Internal control controls activities that are related to receivables and revenue. Revenue cycles control also provides useful information that can be used for the detection of fraud by the auditors.
Audit documentation and working papers are also lead schedules for the receivables and at the same time, there are audit steps concerning receivables. There are details that are supposed to be followed in order to gain a good understanding of the client business. There are also fraud risks that are related to receivables and revenue.
Confirmation of receivables should also be conducted unless the accounts receivables are deemed immaterial, the confirmations would be ineffective and the combined assessments of the auditors concerning inherent and control risk is low. There are two types of confirmations, which include negative and positive confirmations, and certain criterion is also used for the recognition of revenue. As much as a criterion exists, there are still problems that are encountered during the recognition of revenues and allowances are made for doubtful accounts.
Reference List
Whittington, R. and Kurt, P. (2010). Principles of Auditing and Other Assurance Services, Seventeenth Edition (17th). Los Angeles: Irwin/McGraw-Hill.