AUDITING: A RISK

ANALYSIS APPROACH
5th edition

Larry F. Konrath

Electronic Presentation
by Harold
O. Wilson
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CHAPTER 2

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 KEY CONCEPTS OVERVIEW
■ Levels of quality for auditing are defined
by Generally Accepted Auditing
Standards (GAAS) and Statements on
Auditing Standards (SASs).
■ Levels of quality for non-audit services are
defined by various professional
literature.
■ The Code of Professional Conduct “defines”
ethical practices of CPAs
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 GENERAL TOPICS

■ Generally Accepted Auditing Standards, the

principles of independent auditing
■ Professional Standards for Attestations,
Accounting & Review services,
Consulting, and Tax practice
■ Code of Professional Ethics for CPAs, and
detailed principles & rules

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 LEARNING
OBJECTIVES
■ Understanding the ten GAASs and the role
of SASs
■ Identify major professional publications that
define various professional standards.
■ Understand the Code of Professional Ethics.
■ Distinguish ethical conduct from unethical
acts.

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 AUDITOR OBJECTIVES
Independent Auditors are to determine
whether management assertions are fair, and
not misleading, in light of established criteria:
■ GAAP
■ FASB pronouncements
■ APBOs & ARBs
■ Other respected authorities
(e.g., SEC, GAO, IRS, FCC)
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GAAS: GENERAL STANDARDS

■ #1 The examination is to be
performed by a person or
persons having adequate
technical training and
proficiency as an auditor.

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GAAS: GENERAL STANDARDS

■ #2 In all matters relating to

the assignment, an
independence in mental
attitude is to maintained by
the auditor or auditors.

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An intellectually honest state of
mind and impartiality which creates
trust and respect among one’s peers,
colleagues and clients.

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GAAS: GENERAL STANDARDS

■ #3 Due professional care is to

be exercised in the performance
of the examination and the
preparation of the report.

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GAAS: GENERAL STANDARDS
SUMMARIZED
■ Auditors must possess the skills they
declare to have (e.g., client’s
industry, computer knowledge).
■ Auditors must be independent in fact,
and not even appear to lack independence.
■ An auditor’s judgment, prudence, and
vigilance must be conscientious.
■ Be sharp!
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GAAS: STANDARDS of
FIELD WORK

■ #1 The work is to be
adequately planned, and
assistants, if any, are to be
properly supervised.

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GAAS: STANDARDS of
FIELD WORK

■ #2 A sufficient understanding of
the internal control structure is
to be obtained to plan the audit
and to determine the nature,
timing, and extent of tests to be
performed.
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GAAS: STANDARDS of
FIELD WORK
■ #3 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
examination.

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GAAS: STANDARDS of FIELD
WORK SUMMARIZED
■ Planning encompasses arrangements with
clients, scheduling, assessing risk,
developing audit programs & time budgets.
■ Supervisors follow a “pyramid” of
oversight, each becoming responsible for all
subordinates’ work.
■ Internal controls and sampling--in light of
experience and circumstances--influence
the extent and type of evidence for auditors.
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GAAS: STANDARDS of
REPORTING
■ #1 The report shall state
whether the financial statements
are presented in accordance
with generally accepted
accounting principles.

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GAAS: STANDARDS of
REPORTING
■ #2 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.

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GAAS: STANDARDS of
REPORTING
■ #3 Informative disclosures in
the financial statements are
to be regarded as reasonably
adequate unless otherwise
stated in the report.

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GAAS: STANDARDS of
REPORTING
■ #4 The report shall either
contain an opinion regarding
the financial statements,
taken as a whole, or ...

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GAAS: STANDARDS of
REPORTING
■ [#4] …an assertion to the
effect that an opinion cannot
be expressed. When an
overall opinion cannot be
expressed, the reasons
therefor should be stated.

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GAAS: STANDARDS of
REPORTING
■ [#4] …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 taken.

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GAAS: STANDARDS of
REPORTING SUMMARIZED
■ Formal reports become the finished
artworks of accounting systems
and of auditors in their function
of attesting.
■ If possible and practical, auditors are to
form opinions [“good news” or bad”
news”]; however, restrictions by clients or
lack of independence may preclude such.
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ATTESTATION STANDARDS
■ Non-audit services (e.g., compliance with
contracts) involve opinions.
■ There are 11 Attestations Standards
promulgated by the AICPA.
■ Periodically, interpretations are also
issued as Statements on Standards for
Attestation Engagements.

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LEVELS OF SERVICE ON
FINANCIAL STATEMENTS
■ Audits of Financial Statements (the
highest level of CPA services).
■ Reviews of Financial Statements (no
overall opinion is rendered); negative
assurance is stated, mainly based on
inquiry & analytical procedures.
■ Compilations of Financial Statements;
no assurance is stated.
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STATEMENTS ON
STANDARDS FOR
ACCOUNTING & REVIEW
SERVICES (SSARS)
■ The AICPA has established what is and is
not acceptable practice for both
compilation and review engagements.
■ Objective of pronouncements: Avoid any
public confusion on levels of service.
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STATEMENTS ON
STANDARDS FOR
CONSULTING SERVICES
■ The AICPA has established what is and is
not acceptable practice for CPA-
Consultants, (e.g., analyzing merger
proposals, providing CPE seminars,
computer systems & programming).
■ Independence must not be compromised.

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STATEMENTS ON
RESPONSIBLITIES IN TAX
PRACTICE
■ The AICPA has provided guidance in
– tax planning & compliance
– representing clients before the IRS
– technical & administrative matters

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 FAQ?
Standards may show some lack of specificity. Is
that a weakness or a strength of such principles
and guidelines?

Lack of specificity allows for

adaptation to circumstances and
clients. Is that good or bad?

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ETHICS: THE CODE OF
PROFESSIONAL CONDUCT
■ ETHICS: Moral principles [based on]
characteristics such as honesty, integrity,
reliability, accountability, and the
distinguishing of right and wrong behavior.
■ There is an aspect of personal values and
duties in relationships--personally and
professionally; both the “spirit” and the
“letter” of ethics are vital!
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 ETHICAL SCHEMA for CPAs

■ Necessity for independence

■ Third-party reliance
■ Value-added functions
■ Professional stature
■ Absence of fraud or bad faith

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 ETHICS CHALLENGED!

■ Questioned independence
■ Third-party losses
(undetected fraud)
■ Professional integrity lapses
■ Impact of the Treadway Report
■ Currently scrutinized by SEC
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 ETHICS: GOOD NEWS!

■ Independence Standards Board

established & functioning!
■ Professional Skepticism, Competence,
Independence re-emphasized!
■ CPA firms reduce/eliminate consulting
engagements for audit clients!
■ New pronouncements on CPAs’
responsibilities to detect fraud!
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 ETHICS IN ACTION

■ Accept engagements only in areas of

competence.
■ Remain independent of client’s managers.
■ Promote public trust before personal gain.
■ Consult with colleagues before accepting
another CPA’s clients, offering jobs.
■ Avoid conflicts of interest, appearance of
“bribes.”
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 ETHICS IN ACTION

■ Take confidentiality and “independence in

fact” vs. advocacy very seriously!
■ Consider collusion as a possible, but poor,
defense!
■ Be careful of “advice” vs. “consulting!”
■ “Failure to supervise” is a very serious
charge against CPAs, stock brokers,
consultants! Never nap!
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 ETHICS IN ACTION
■ Contingent fee arrangements are likely
violations of ethics [many exceptions, e.g.,
complexity, expertise needed, non-attest
engagements & cases].
■ CPA Firm Partners must stay current re
FASB, SASs, SSARSs, GASB, IRS, etc.
■ Advertising should be professional, and in
good taste, designed to serve the public
interest (e.g., be informative).
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 ETHICS IN ACTION
■ Be weary of “unusual circumstances” and
“departures from GAAP.” [Note: The
latter might be advisable in cases where
GAAP might mislead--but is very rare.]
■ To commit acts discreditable to the profession
is unethical.
Would a CPA filing his or her tax return
(with taxes due) after deadlines be “an act
discreditable to the profession?

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ETHICS IN ACTION

Educate your clients! CPAs are not

infallible as to knowledge or
judgment--they are just
accountants,
not magicians!

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 FAQ?
How many of the BIG-5 CPA firms are
organized as limited liability corporations
(LLCs)?

ALL OF THEM!

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 REVIEWING GAAS
The AICPA’s Auditing Standards Board established
GENERALLY ACCEPTED AUDITING
STANDARDS as the “principles of independent
auditing,” relative to competence, evidence and
reporting.
■ Internal Controls evaluated.
■ Evidence (sample data) gathered.
■ Presentations compared to GAAP.
■ Audit Reports prepared.
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 REVIEWING
“RISK-BASED” AUDITS
Risk-based audit: An audit in which the
auditor carefully analyzes the entity and its
existing internal controls, identifies areas
that pose a higher risk [probability] of
financial statement errors, and [therefore]
allocates a greater proportion of audit
resources to those areas.

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CRITICAL TERMS REVIEW
(not limited to the text)
■ Code of Ethics
■ Attestation Standards
■ Audit Risk
■ Discreditable act
■ GAAS & AICPA
■ Referral fees
■ Commissions
■ Contingent fees
■ Due professional care
■ Professional skepticism
■ Consulting services
■ Field Work
■ Treadway Report
■ Engagement Letter
■ Forensic engagements
■ Independence
■ GAAP & FASB
■ Supervision
■ Confidentiality
■ Opinions & Disclaimers
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End of Chapter 2

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