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Chapter 2
Auditing & Assurance Services 9e

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 Chapter 2
Professional Standards
The Securities and Exchange Commission may need
to prohibit trading in about 270 China-related
companies by early 2024. . . Now it’s up to Beijing to
let the oversight board in so we can ensure the
relevant audits are up to U.S. standards.
Gary Gensler, Chair of the Securities and Exchange
Commission, “Chinese Firms Need to Open Their
Books,” The Wall Street Journal, September 14,
2021, p. A17.

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 Chapter 2 Learning Objectives
1. Understand the development and source of generally
accepted auditing standards.
2. Describe the fundamental principle of responsibilities and
how this principle relates to the characteristics and
qualifications of auditors.
3. Describe the fundamental principle of performance and
identify the major activities performed in an audit.
4. Understand the fundamental principle of reporting and
identify the basic contents of the auditors’ report.
5. Understand the role of a system of quality control and
monitoring efforts in enabling public accounting firms to
meet appropriate levels of professional quality.

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 History of Professional Standards-Setting

AICPA Auditing Standards Board: Non-issuers (Nonpublic

entities).
• Statements on Auditing Procedure (1939 to 1972).
• Statements on Auditing Standards (1972 to current).
PCAOB: Issuers (Public entities).
• Auditing Standards.

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 Overview
GAAS and Principles.
• Responsibilities.
• Performance.
• Reporting.

Quality of Public Accounting Firms’ Practices.

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 Generally Accepted Auditing Standards

Identify necessary qualifications and characteristics of

auditors and guide the conduct of the audit.
Purpose of GAAS is to achieve the following objectives of an
audit examination.
• Obtain reasonable assurance about whether financial
statements are free of material misstatement.
• Report on the financial statements and communicate in
accordance with auditor’s findings.

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 Components of Auditing Standards

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 Engagement Overview and Principles

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 Overview 1

GAAS and Principles.

• Responsibilities.
• Performance.
• Reporting.

Quality of Public Accounting Firms’ Practices.

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 Responsibilities Principle
Competence and capabilities.
• Experience and expertise.

Independence.
• Independence in fact v s. independence in appearance.
ersu

• Financial and managerial relationships.

Due care.
• Level of performance by reasonable auditor in similar circumstances.

Professional skepticism and judgment.

• Skepticism: Appropriate questioning and critical assessment of evidence.
• Judgment: Application of training, knowledge, and experience in making
informed decisions during audit.

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 Overview 2

GAAS and Principles.

• Responsibilities.
• Performance.
• Reporting.

Quality of Public Accounting Firms’ Practices.

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 Performance Principle
Goal is to provide reasonable assurance that financial statements do not contain
material misstatements.
Planning and supervision.
• Preparation of audit plan.

Materiality.
• Influences decisions of financial statement users.
• Considered throughout the audit.

Risk assessment.
• Understand entity and environment (including internal control).
• Determine necessary effectiveness of substantive tests.

Audit evidence.
• Sufficient = quantity (How many transactions or components?).
• Appropriate = quality (What level of reliability needed? Source?).
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 Overview of Evidence

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 Sufficient evidence
• Related to quantity (number of transactions or components
examined).
• Influenced by effectiveness of entity’s internal control.

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 Appropriate Evidence
Relates to the quality of evidence.
Relevance: Does evidence address assertion(s) of interest?
Reliability: Source of evidence.
• Auditors’ direct personal knowledge.
• External documentary evidence.
• Internal documentary evidence.

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 Summary: Appropriateness of Evidence

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 Overview 3

GAAS and Principles.

• Responsibilities.
• Performance.
• Reporting.

Quality of Public Accounting Firms’ Practices.

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 Reporting Principle
Express an opinion (or indicate that an opinion cannot be
expressed) on entity’s financial statements.
Assess financial statements against financial reporting
framework.
• Set of criteria used to determine the measurement,
recognition, presentation, and disclosure of material items
in the financial statements.
• Examples include GAAP, IFRS, or special purpose
framework.

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 Independent Auditors’ Report 1

Title (Report of Independent Registered Public Accounting Firm).

Addressee: Board of Directors and Shareholders.
Opinion on the Financial Statements.
• Conducted audits of financial statements and internal control
over financial reporting.
• Opinions on financial statements and internal control over
financial reporting.

Basis for Opinion

• Responsibility of management and auditors for financial
statements.
• Description of audit conducted under P CAOB standards.

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 Independent Auditors’ Report 2

Critical audit matters.

• Material accounts and disclosures.
• Challenging, subjective, or complex judgments.

Other.
• Signed by firm.
• Identify office of firm and date audit completed.
• Identify auditor tenure.

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 Types of Audit Opinions
Unmodified (unqualified).
• F/S are in conformity with GAAP.

Qualified.
• Except for limited items, F/S are in conformity with GAAP.

Adverse.
• F/S are not in conformity with GAAP.

Disclaimer.
• Auditors do not express an opinion.

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 Overview 4

GAAS and Principles.

• Responsibilities.
• Performance.
• Reporting.

Quality of Public Accounting Firms’ Practices.

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 System of Quality Control
Provides firm with reasonable assurance that the firm and its
personnel.
• Comply with professional standards and
regulatory/legal requirements.
• Issue reports that are appropriate in the circumstances.

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 Elements of System of Quality Control

1. Leadership responsibilities for quality within the firm (“tone

at the top”).
2. Relevant ethical requirements.
3. Acceptance and continuance of client relationships and
specific engagements.
4. Human resources.
5. Engagement performance.
6. Monitoring.

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 Recent Standard on Quality Management
Previous Standard (QC 10) New Standard (QM 10)
Terminology Quality Control Quality Management
Categories Leadership responsibilities for Governance and leadership
quality within the firm
Relevant ethical requirements Relevant ethical requirements
Acceptance and continuance Acceptance and continuance of client
of client relationships and relationships and specific
specific engagements engagements
Human resources Resources
Engagement performance Engagement performance
Monitoring The monitoring and remediation
process
The firm’s risk assessment process
Information and communication

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 Public Company Accounting Oversight
Board (PCAOB)
Monitors public accounting firms through inspections.
• Firms auditing > 100 issuers: annual.
• Firms auditing ≤ 100 issuers: every 3 years.

Inspection reports list deficiencies in audits conducted by

registered firms (
http://pcaobus.org/Inspections/Reports/Pages/default.aspx)

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 End of Main Content

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