Professional Responsibilities Module 1

Summary of the 10 Generally Accepted Auditing Standards (GAAS)

TTraining and Proficiency
IIndependence
PProfessional Care
PPlanning and Supervision
IInternal Control
EAudit Evidence
GGenerally Accepted Accounting Principles
OOpinion
DDisclosures
CConsistency
The Standards spell out TIP, PIE, and GODC (the reporting standards are ordered 1, 4, 3, 2 for GOD and a soft-c to sound like
gods)
General Standards (3)
1) Training and proficiency. The auditor must have adequate technical training and proficiency to perform the audit.
2) Independence. The auditor must maintain independence in mental attitude in all matters relating to the audit.
3) Professional care. The auditor must exercise due professional care in the performance of the audit and the preparation of the
report.
Standards of Fieldwork (3)
1) Planning and supervision. The auditor must adequately plan the work and must properly supervise any assistants.
2) Internal control. 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, to design the
nature, timing and extent of further audit procedures.
3) Audit evidence. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a
reasonable basis for an opinion regarding the financial statements under audit.

Standards of Reporting (4)

1) GAAP. The auditor must state in the auditors report whether the financial statements are presented in accordance with
generally accepted accounting principles (GAAP).
2) Consistency. The auditor must identify in the auditors report those circumstances in which such principles have not been
consistently observed in the current period in relation to the preceding period.
3) Disclosures. When the auditor determines that informative disclosures are not adequate, the auditor must so state in the
auditors report. 4) Opinion. The auditor must either express an opinion regarding the financial statements, taken as a
whole, or state that an opinion cannot be expressed, in the auditors report. When the auditor cannot express an overall
opinion, the auditor should state the reasons therefor in the auditors report. In all cases where an auditors name is
associated with financial statements, the auditor should clearly indicate the character of the auditors work, if any, and
the degree of responsibility the auditor is taking, in the auditors report.
CODE OF PROFESSIONAL RESPONSIBILITIES
AICPA
General Standards & Accounting Principles
A CPA must perform with competence and must exercise due care
Competence implies combination of education and experience
Due care includes proper supervision and reviewing work of assistants
Examples of actions that would violate the standard of due care include
Performing professional services without complying with the appropriate standards.
Expressing an unqualified opinion on financial statements known to be materially misstated.
Failing to report the discovery of fraud to the clients audit committee
Independence
A member in public practice should be independent in the performance of professional services as required by AICPA
standards.
The independence rule and its related interpretations are heavily examined; rulings are examined to a lesser extent.
Interpretation 101-1 is extremely important; it has three major subsections.
A. Restricts activities and investments by those involved on the attest engagement covered members.
B. Restricts investments in the client by all in CPA firm.
C. Restricts positions held in the client by all in CPA firm.
Interpretation 101 A: IndependenceThose Involved with the Audit
Covered members: The concept of covered members is important since certain independence requirements apply to them.
Included as covered members are:
A member of the attest engagement team.
A person who may influence the attest engagement (e.g., partner who supervises the partner in charge of the attest
engagement).
A partner in the office in which the lead attest partner practices.
Certain partners or managers who provide non-attest services to the client.
The firm, including its benefit plans.
Interpretation 101 A: IndependenceThose Involved with the Audit (continued)
A member in public practice shall be independent in the performance of professional responsibilities

Independence impaired if a covered member

Had committed to acquire any direct or material indirect financial interest in the client.
Was a trustee or executor for estate that had/committed to acquire any direct or material indirect financial interest
in the client in excess of 10% of assets.
Had a material joint closely held investment.
Had a loan to or from the client, officer, director of the client, or any individual owning 10% or more of clients
capital (there are some exceptions to this).

Interpretation 101 B Investments that Impair Independence

Partner or professional employee of the firm, his or her immediate family owned more than 5% of capital
Was associated with the client as a(n)
Director, officer, or employee, or in any capacity equivalent to that of a member of management
Promoter, underwriter, or voting trustee

Interpretation 101 C Activities that Impair Independence

Independence impaired by

Supervising clients personnel

Signing clients checks
Acting as clients stock transfer agent
Entering into lease with client
Accepting gifts from client
Obtaining material loan from client, even if fully collateralized (except by cash balances)

IndependenceEffect on Independence of Family Members, Relatives and Friends

Overall: These groups may impair a CPAs independence.
General Rules:
Immediate family (spouse, spousal equivalent or dependent): Restrictions generally same as for accountant. Exceptions relate
to those in other than a key position with a client and certain benefit plans.
Close relatives (parent, sibling, or nondependent child): Independence not impaired unless close relative has a key position with
client or a material financial interest of which the accountant is aware.
Other relatives and friends: Independence not impaired unless a reasonable person aware of the facts would conclude there is
an unacceptable risk.
IndependenceUnpaid Fees
Unpaid fees may impair independence.
May not extend beyond one year
Audit may be performed, but report may not be issued until prior year fees paid
IndependenceAuditor on Engagement Considers or Takes Employment with Audit Client
Individual must inform the audit firm when seeking or discussing potential employment with client.
Individuals independence impaired (should be taken off job) until employment by client is no longer being considered
by that individual.
Once individual accepts employment with audit client, the audit firm should consider the need to modify the audit plan
or change members of the audit.
In any audit performed within a year of the professional joining the client, a member of the audit firm with no
connection to the audit must review all work to ensure it takes into account independence issues.
IndependenceNon-attest Services
May provide advice, research materials, and recommendations
Client must accept responsibility for making all decisions
Specific client personnel must be designated to oversee services
Client must be responsible for establishing and maintaining all internal controls and may not outsource such services
to the auditor
An understanding of the objectives of the engagement and client responsibilities must be documented prior to
performing the non-attest services for an attest client
A member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent
facts or subordinate his or her judgment to others.
Misrepresentation of facts: Member is forbidden to knowingly (or let someone else)
Make materially false and misleading entries
Fail to correct financial statements or records that are materially false and misleading
Sign a document containing materially false and misleading information

A conflict of interest may exist if member performing a service and the member/ members firm has a relationship that
could in the members judgment be viewed as impairing the members objectivity. For example,
Suggest that the client invest in a business in which he or she has a financial interest.
Provide tax services for several members of a family who may have opposing interests.
Have a significant financial interest or influence with a major competitor of a client.

Obligations of a member to his or her employers external accountant

Must be candid and not knowingly misrepresent facts or knowingly fail to disclose material facts

Responsibilities to Clients
A member in public practice shall not
Disclose any confidential client information without the specific consent of the client
Accept a contingent fee for
An audit or review of a financial statement
A compilation of a financial statement
An examination of prospective financial information
Prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client
A CPA must maintain client information as confidential. May disclose client information to
Comply with a subpoena
Cooperate with a quality control review
Other Responsibilities and Practices
A CPA should not perform acts discreditable to the profession, such as
Retaining client records
Understating anticipated fees for services
Accepting a commission in relation to an attest client
Practice under a misleading name A CPA shall be competent.
Agreeing to perform professional services implies that the member has the necessary competence to complete those
professional services but is not infallible
Involves both the technical qualifications of the member and staff and the ability to super-vise and evaluate the quality
of the work performed
If the member does not have the necessary competence, may perform additional research or consult with others
But if cannot attain competence, should recommend client seek help from someone else
Tax Preparer
Actions by an accountant preparing a clients tax return can result in penalties for
Not providing client with copy of return
May not recommend a tax position that lacks merit
Failing to sign return as a preparer
Must make a reasonable effort to answer
Endorsing and cashing clients refund check
applicable questions on the return

May rely on client information when preparing the

Failing to fi le a timely return
return
Not advising client of tax elections
Must make reasonable inquiries about questionable
Neglecting evaluation of joint versus separate
or incomplete information
returns A CPA performing tax services
May use estimates

Standards for Consulting Services

When performing consulting services, a CPA must adhere to certain general standards
Professional competence
Due professional care
Planning and supervision
Obtaining sufficient relevant data

GAO Code of Ethics

Federal auditors, or CPA firms auditing federal dollars, should not perform management functions or make
management decisions.
Federal auditors, or CPA firms auditing federal dollars, should not audit their own work.
Federal auditors, or CPA firms auditing federal dollars, should not provide non-audit services that are material to the
subject matter of an audit.
Emphasis:
Accountability of government officials to the Congress
Accountability of the auditor to conduct work professionally
No requirement to evaluate management controls
Executive leadership of the audited agencies is not the primary customer
Management input not solicited as part of the audit process
Management input not solicited in development of solutions
Management is presented with findings to which it must respond