Finance and AccountingAuditing

• Definition of Auditing: Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria.
• Assurance Services: These are independent professional services that improve the quality of information for decision-makers.

1. Action: Distinguish between types of audits.

2. Example: Understand the difference between operational, compliance, and financial audits to apply the correct methodology.

3. Action: Engage in continuous education.

4. Example: Keep updated with standards from bodies like PCAOB, IAASB, and AICPA.

• Audit Standards: The GAAS (Generally Accepted Auditing Standards), PCAOB standards, and the International Standards on Auditing (ISAs).
• Ethics in Auditing: Integrity, objectivity, and independence are pivotal.

1. Action: Commit to ethical decision-making.

2. Example: When facing a potential conflict of interest, leverage the AICPA Code of Professional Conduct as a guideline.

3. Action: Maintain independence.

4. Example: An auditor should not have any financial interest in the client company to avoid bias.

• Types of Audit Reports: Unqualified, Qualified, Adverse, and Disclaimer.

1. Action: Tailor audit reports appropriately.

2. Example: Issue an Adverse Report if the financial statements are materially misstated and a Qualified Report for a single issue like a lack of sufficient evidence on inventory valuation.

3. Action: Follow proper reporting standards.

4. Example: Comply with PCAOB’s Auditing Standard (AS 3101) when drafting audit reports.

• Framework for Ethical Decision-making: A structured approach to ensure ethical dilemmas are handled properly.

1. Action: Implement a decision-making framework.

2. Example: Use the AICPA’s Decision-Making Model, which includes identifying threats and evaluating safeguards.

3. Action: Engage in scenario analysis.

4. Example: Simulate ethical dilemmas in trainings, such as confidentiality breaches or fraudulent financial reporting.

• Legal Liability for CPAs: Understanding liability under common law, statutory law, and specific act violations.

1. Action: Perform due diligence.

2. Example: Regularly review the Sarbanes-Oxley Act requirements, particularly Section 404 about internal control over financial reporting.

3. Action: Document thoroughly.

4. Example: Maintain an audit trail that demonstrates how procedures were performed and conclusions reached, abiding by Federal Rules of Evidence.

• Responsibilities: Auditors must provide reasonable assurance about the absence of material misstatements.

1. Action: Set clear objectives.

2. Example: Break down audit engagements into specific tasks such as fraud risk assessment and internal control evaluation.

3. Action: Engage in risk assessment.

4. Example: Utilize frameworks like COSO to assess the risk of material misstatement due to fraud.

• Types of Evidence: Physical examination, confirmations, documentation, and analytical procedures.

1. Action: Collect diverse evidence.

2. Example: Combine multiple forms of evidence like confirming receivables with customers and inspecting received goods.

3. Action: Utilize sampling techniques.

4. Example: Apply stratified sampling to concentrate efforts on high-value transactions which may contain material misstatements.

• Audit Planning: Involves understanding the client’s business and industry and designing audit procedures accordingly.
• Materiality: Significance of an omission or misstatement in financial statements.

1. Action: Develop a detailed audit plan.

2. Example: Include risk assessment procedures, timing, and extent of audit tests.

3. Action: Set materiality thresholds.

4. Example: Determine materiality level based on quantitative (e.g., 5% of net income) and qualitative factors.

• COSO Framework: A model for designing, implementing, and assessing internal control.

1. Action: Evaluate internal controls.

2. Example: Test controls over cash disbursements to verify their effectiveness.

3. Action: Report deficiencies.

4. Example: Report significant deficiencies or material weaknesses to management and those charged with governance per PCAOB standards.

• Types of Sampling: Statistical vs. non-statistical sampling methods.

1. Action: Choose appropriate sampling method.

2. Example: Select statistical sampling for large populations for more scientifically valid inferences.

3. Action: Calculate sample sizes correctly.

4. Example: Use random sampling and determine sample sizes based on the confidence level, tolerable error, and expected error rate.

• Audit Procedures for Cash: Verifying cash balances and reconciling bank statements.

1. Action: Perform bank reconciliations.

2. Example: Reconcile the bank statement balance with the general ledger cash account to detect any discrepancies.

3. Action: Verify investments.

4. Example: Review investment policies and perform cutoff tests to ensure proper recording.

• Final Steps: Review of audit documentation, final analytical procedures, and obtaining representation letters.

1. Action: Perform final analytical procedures.

2. Example: Compare final financial statements with expected results to identify any unusual relationships.

3. Action: Obtain management representations.

4. Example: Acquire written representations from management to confirm that all significant information was disclosed.

Finance and AccountingAuditing