BeckerPuertoRico_Presentacion_232_a6.ppt

Becker PR

1. Becker CPA Review
AUDIT 6
2015

2. Professional Responsibilities

3. Ethics & Professional Responsibility
Code of Professional Conduct – AICPA members
–Principles
•Responsibilities – exercise sensitive professional & moral
judgments
•Public interest – serve the public interest, honor trust &
demonstrate commitment to the profession
•Integrity – highest sense of integrity
•Objectivity & Independence – objectivity applies to all
services; but independence applies to attestation services
•Due care –observe standards, no negligence
•Scope & nature of services – internal quality control
measures, determine conflicts of interests & assess whether
activities are consistent with professionalism

4. Independence Rule
Independence Rule
In Fact & Appearance
Not required for compilations & non-attest services
Impaired if:
–Has a direct financial interest
–Has a material indirect financial interest
–A member or his immediate family has a loan to or
from a client. Exceptions are:
•100% collateralized car loans with a financial institution client
•Cash advance or credit card balances < $10,000
•A bank account that is fully insured by the government
•A passbook loan
–Acceptance of more than a token gift

5. Independence Rule
Employment Relationships
–Independence is impaired if an individual who
was formerly employed by the client participates
or is in a position to influence – covers any period
of his or her employment with the client
–Independence is impaired by an immediate family
member’s employment with a client in a key
position (internal audit employee)
–Independence is impaired if an employee leaves
the firm and is employed by the client in a key
position
–Independence is impaired if the CPA is interested
in a job at client’s company

6. Independence Rule
–A firm could perform non-attest services and still
maintain independence if, among other things, it did not
have custody of the client’s assets and did not make
decisions on the client’s behalf
–Independence is not impaired by being a member of or
an honorary trustee for a nonprofit charitable, civic, or
religious group if the position is purely honorary and the
member does not participate in any management
functions
–Independence is impaired with respect to a client who
is more than 1 year overdue
–Actual or threatened litigation may impair independence

7. Integrity & Objectivity Rule
Free of conflicts
Must not knowingly misrepresent facts
Must not subordinate judgment

8. General Standards Rule
Professional competence
–Undertake only services that the member can
reasonably be expected to complete with
professional competence
Due professional care – critically review the work
done
Planning & supervision
Sufficient relevant data – for conclusions &
recommendations

9. Compliance with Standards Rule
Comply with standards for auditing, compilation,
management consulting, tax, or other
professional services
–SAS
–PCAOB
–SSARS
–SSAE

10. Accounting Principles Rule
A member shall not express an opinion or state
affirmatively or negatively that financial
statements are presented in conformity with
GAAP if there is any departure from an
accounting principle that has a material effect
on the financial statement.

11. Confidential Client Information Rule
A member may not disclose any confidential client
information without the specific consent of the
client except in the following circumstances:
–Subpoena
–Peer review program
–Ethics division, trial board, state society, or board of
accountancy

12. Contingent Fees Rule
A contingent fee is a fee dependent upon a finding
or result
Contingent fees are permitted in the following
cases:
–Fixed by courts
–Tax matters
–Compilations only if the member includes a
statement the member is not independent

13. Discreditable Acts Rule
Examples:
–Failure to return records to a client
–Discrimination or harassment
–Failing to follow applicable standards in government
audits
–Negligence
–Failing to follow GAAS
–Solicitation or disclosure of CPA Exam questions &
answers
–Failure to timely file a personal or firm tax return or
to timely remit payroll or other taxes collected on
behalf of others

14. Advertising & Solicitation Rule
Permitted but should not be false, misleading, or
deceptive
–False or unjustified expectations
–Imply the ability to influence a court
–Intentionally underestimate fees
–Would mislead or deceive a reasonable person

15. Commissions & Referrals Rule
Not permitted if:
–Auditing or reviewing
–Compiling F/S without disclosing the lack of
independence
–Examining prospective financial statements
The commission must be disclosed to the
client
Referral fees must be disclosed to the client

16. Form of Practice and Name Rule
May not designate itself as “members of the
AICPA” unless all of its partners or
shareholders are members of the Institute
May not designate itself as CPAs unless all of its
partners or shareholders are members of the
AICPA
A firm may continue to use the names of 1 or more
past partners or shareholders
If all partners except one have died or left – 2
years

17. Rule 505 Form of Practice and Name
Ownership – over 50% must belong to CPAs
A CPA must have ultimate responsibility
Non CPA owners:
–Must be actively engaged as a firm member
in providing services to the firm’s clients
–Abide by the AICPA Code
–Not hold themselves out to be CPA’s
–Can use title: principal, owner, officer,
member, or shareholder

18. The Sarbanes-Oxley Act of 2002

19. Sarbanes-Oxley Act
Public Company Accounting Oversight Board
•5 members
•Subject to oversight by the SEC
•Duty to:
–Register public accounting firms
–Establish rules relating to the preparation of audit
reports for issuers
–Conduct inspections, investigations, and disciplinary
proceedings concerning registered public accounting
firms

20. Sarbanes-Oxley Act – Title I
Each Registered Firm:
•Must update the registration annually
•Must maintain the audit documentation for at
least 7 years
•Provide a concurring or second partner review of
each audit report
•Must monitor ethics and independence from
issuers

21. Sarbanes-Oxley Act – Title II
Independence – Prohibited services:
–Bookkeeping
–Information systems
–Appraisal and valuation services
–Actuarial services
–Management functions or human resources services
–Internal auditing
–Services as a broker, dealer, adviser or banker
–Legal services
–Expert services unrelated to the audit

22. Sarbanes-Oxley Act – Title II
Tax services are permissible if pre-approved by audit
committee
All services and permitted non-audit services should
be pre-approved by the audit committee
The lead and reviewing partner must rotate off the
audit every 5 years
Certain important issues should be communicated to
the audit committee (policies, alternative
treatments, written communications between the
audit firm & management)
The audit firm cannot have employed the issuer’s
CEO, CFO, Controller, or Chief Accounting
Officer for a one-year period preceding the audit

23. Sarbanes-Oxley Act – Title III
It is unlawful for any officer or director of an
issuer, or any person acting under the
direction of an officer or director, to take
any action to fraudulently influence, coerce,
manipulate, or mislead any independent
public or certified accountant engaged in
the performance of an audit of the financial
statements of the issuer for the purpose of
rendering such financial statements
materially misleading.

24. Sarbanes-Oxley Act – Title IV
Enhanced financial disclosures
•All financial reports must reflect all material
adjustments identified by a registered firm
•Financial reports must disclose all material off-
balance sheet transactions
•Any officer, director or owner of more than 10% of
any equity security must file a report
•Sec reports must include an internal control report
•Sec requires disclosure on whether they have a
code of ethics for senior financial officers
•Sec requires disclosure whether or not the audit
committee has at least one member who is a
financial expert

25. Securities & Exchange Commission
Independence – same rules discussed in the
Code of Ethics

26. Licensing & Disciplinary
State Board of Accountancy
–Residency requirements
–Educational requirements
–Experience requirements
Can suspend or revoke a CPA’s license
–Misconduct while performing accounting services
–Misconduct outside the scope of accounting
services
–Criminal conviction
There is a due process.

27. Licensing Penalties
–Suspension
–Monetary fine
–Reprimand
–Probation
–CPE courses

28. AICPA & State CPA Societies
–The code of professional ethics
–Joint Ethics Enforcement Program – single
investigation
–The AICPA & state societies can santion but they
cannot suspend or revoke.

29. Securities & Exchange Commission
The SEC may censure, suspend, or revoke an
accountant’s right to practice before the SEC.
The SEC can issue cease and desist orders.

30. AUDIT DOCUMENTATION

31. Audit Documentation
Working papers are the principal record of
procedures, evidence obtained, & conclusions
reached.
Audit documentation is the property of the auditor.
Purposes:
•Support the report.
•Evidence as to compliance with GAAS
•Assistance in planning, conducting & supervising
•Accountability
•Information for future audits

32. Requirements of Audit Documentation
•Assist in planning, conducting, and supervising
the audit
•Show that the accounting records reconcile with
the financial statements
•Provide a record of evidence, results of tests,
and conclusions
•Enable reviewers to understand the work
performed and the evidence obtained

33. Report Release Date
Date in which the auditor grants the client
permission to use the report
Documentation retention:
–Sas (non-issuers) – 5 years
–PCAOB (issuers) – 7 years
Documentation completion date:
–Allowance of a 60 day period (PCAOB - 45 days)
after the report is released to assemble the
complete audit documentation file (documentation
completion date)
–Changes made after the 60 day period should be
fully documented without deleting the original

34. Nature & Extent of Audit
Documentation
The quantity, type, & content of audit
documentation are based on the auditor’s
judgment. The auditor should consider:
•The risk of material misstatement
•The extent to which judgment was required
•The nature of the specific auditing procedure
•The significance of the evidence obtained
•The nature & extent of any problems identified
•The need to document conclusions that may not be
obvious

35. Specific Contents of W/P
Permanent file – includes audit documentation that
has a continuing interest from year to year
(contracts, leases, options, bylaws, articles of
incorporation, minutes).
Current file – contains all audit documentation
applicable to the year under audit.
–Audit program
–Financial statements and report
–Working trial balance, adjusting journal entries

36. Specific Contents of W/P
–Letter of confirmations
–Letter of representation
–Analyses, worksheets, schedules
–Abstracts or copies of entity documents
–Records of significant audit findings
–Selection & application of accounting principles
–Possible misstatements in the F/S
–Cause significant difficulty in applying necessary audit
procedures
–May result in modification to the auditor’s standard report
–Records of tests of controls & substantive tests

37. Significant Audit Findings
Audit documentation should include audit findings,
actions taken, and conclusions reached.
Significant audit findings include:
–Selection and application f accounting principles
–Matters that give rise to significant risks
–Possible material misstatements
–Significant difficulties in applying audit procedures
–May result in modification of the auditor’s opinion

38. Information Technology

39. EFFECT OF INFORMATION
TECHNOLOGY
Differences:
Segregation of duties
Disappearing audit trail
Uniform processing of transactions
Computer initiated transactions
Potential for increased errors & irregularities
–Remote, security, design or maintenance
Potential for increased supervision and review

40. Effect on Evidence Gathering
Audit procedures can be:
–Around the computer
–Auditing through the computer (computer-
assisted audit techniques)
The auditor should seek help

41. Auditing Around the Computer
The auditor tests the input data, processes the
data independently, and then compares his
independently determined results to the
program results.

42. Computer Assisted Audit
Techniques
Sometimes the only feasible way to complete
the audit. CAATs include:
1.Transaction tagging – a technique to
“electronically mark” specific transactions
and follow them through the client’s system
2.Embedded audit modules – sections of the
application program that collect transaction
data for the auditor.

43. Computer Assisted Audit
Techniques
3. Test deck data method – technique that
uses the application program to process a
set of test data, the results of which are
already known.
–Some invalid conditions
–Live computer files are not affected in any way
(off-line)
4. Integrated test facility – similar above except
that test data is commingled with live data
(on-line)

44. Computer Assisted Audit
Techniques
5. Parallel simulation – auditor reprocesses
some or all of the client’s live data and the
compares the results with the client’s files.
The auditor’s system is used to process the
client’s data.

45. Generalized Audit Software
Packages
Allow the auditor to perform tests of controls
and substantive tests directly on the client’s
system
Advantages:
–Test a much higher % of transactions
–Little technical knowledge
–Reduces audit time

46. Auditing with a Computer
May achieve audit efficiency
Advantages:
–Automatic math, reduces errors
–Automatic cross referencing
–Automatic preparation of F/S , tax returns
–Reduction in supervisory review time
–Automatic performance of analytical
–Enhanced client service
–Improved morale and productivity
Disadvantages:
–May not contain readily observable details of
calculations

47. Governmental Auditing
CPA examination questions frequently
focus on the additional standards
applicable to governmental audits and
the additional contents of reports.

48. Governmental Auditing
Audits of governments & governmental
assistance require compliance with
GAAS & GAGAS
For engagements involving expenditures
of federal financial assistance,
supplementary requirements included in
the SINGLE AUDIT ACT may also apply

49. Sources of Government Auditing
Standards
GAAS – applicable to all audits
GAGAS – Generally accepted government
auditing standards (yellow book)
–Contain standards for audits of:
•Government organizations, programs, activities, and
functions
•Government assistance received by contractors, not-for-
profit organizations, and other non-governmental
organizations
–Includes designing the audit to provide reasonable
assurance of detecting material misstatements
resulting from non-compliance

50. Audit Requirements
Should be conducted in accordance with:
–GAAS & GAGAS
The following requirements also apply (Extra fieldwork & Extra
Reporting Standards):
–Expanded internal control documentation and testing
requirements
–Expanded reporting to include formal written reports on
the consideration of internal control and the assessment of
control risk
–Expanded reporting to include whether the federal
financial assistance has been administered in accordance
with laws and regulations (compliance)
–Application of single audit standards to federal financial
assistance

51. Purpose & Types of Government Audits
Financial audits
–GAAP or OCBOA basis financial statements
Attestation engagements (Expanded
requirements)
–Compliance with specified laws, regulations,
rules, contracts, or grants
–Effectiveness of internal control over compliance
with specified requirements
–Presentation of management’s discussion and
analysis
–Reliability of performance measures

52. Purpose & Types of Government Audits
Performance audits
–Effectiveness, economy, and efficiency
–Internal control
–Compliance – target population has been served

53. Effects of Laws & Regulations
Management’s responsibility
–Identification of applicable laws & regulations
with compliance requirements
–Establishment of internal controls, to provide
reasonable assurance that the entity complies
with those laws and regulations
–Preparation of schedules of expenditures of
federal awards
–Obtain an audit that satisfies relevant legal
regulatory & contractual requirements

54. Governmental Auditing
Auditor’s responsibility
–Obtaining reasonable assurance that the
financial statements are free of material
misstatement resulting from violations of laws
and regulations that have a direct and
material effect on the determination of
financial statements amounts
–Assessing whether management has
identified laws & regulations that have a direct
and material effect on the determination of
amounts in the entity’s financial statements

55. GAAS Requirements for Compliance Audits
Objectives – obtain sufficient evidence to form an
opinion on whether the entity complied, in all
material respects, with the compliance
requirements applicable to its programs.
Assumptions – Management will:
–Identify & comply with compliance requirements
–Maintain effective controls
–Conduct ongoing evaluation and monitoring
–Take appropriate corrective actions on audit findings

56. GAAS Requirements for Compliance Audits
Overall standards
–Perform a risk assessment
–Design responses to the risk assessment
–Determine if supplementary audit requirements exist
–Obtain written representations from management
–Prepare reports
–Prepare documentation
Audit risk of Noncompliance model
–Risk of material noncompliance
•Inherent risk of noncompliance
•Control risk of noncompliance
–Detection risk of noncompliance
Design responses to Risk Assessment
–Tests of operating effectiveness may be required

57. GAAS Requirements for Compliance Audits
Documentation
–The assessed risk of material noncompliance
–Responses to the risk assessment
–The basis or rationale for materiality levels
–Compliance with supplemental requirements
See report on compliance page #51

58. Government Auditing Standards
1.Ethics
2.Independence
3.Professional judgment
4.Competence
5.Quality control considerations – external
quality control review at least once every 3
years

59. Performing Under GAGAS
ADDITIONAL standards for financial audits under
GAGAS include:
–Previous audits & attestation engagements – evaluate
whether corrective actions have been addressed
–Requires additional attention to fraud, noncompliance, and
abuse
–Developing a finding – includes criteria, conditions, cause
and effect or potential effect
–Audit documentation – evidence of supervisory review,
document departures from GAGAS and the impact

60. Reporting Under GAGAS
Reporting standards for financial audits under GAGAS
include additional requirements (beyond GAAS) for
financial audits
1.Include affirmative statement of compliance with GAGAS
2.Include in the same report or separate reports a description
of the scope of testing of internal control over financial
reporting and compliance with laws, regulations, contracts
and grant agreements. State whether the tests provide
sufficient evidence to support an opinion on the
effectiveness of internal control over compliance.

61. Reporting Under GAGAS
Reporting standards for financial audits under GAGAS
include additional requirements (beyond GAAS) for
financial audits (continued)
3. Communicate deficiencies in Internal Control, Fraud, and
Non-compliance - Report to the appropriate members of the audited
organization:
•Fraud and non-compliance
•Noncompliance with contracts
•Abuse
4. Report views of Responsible Officials
•Auditor should solicit & report the views of responsible
officials along with any planned corrective actions
•Written responses by the audited organization are
included in the auditor’s report

62. Reporting Under GAGAS
Reporting standards for financial audits under GAGAS
include additional requirements (beyond GAAS) for
financial audits (continued)
5. Reporting confidential or sensitive information
•Audit reports should disclose the exclusion of confidential or sensitive
information from an audit report
•Auditors may issue separate, classified, or limited use reports that
are distributed to only the persons authorized by law or regulation to
receive the confidential information
6. Distribute reports
•Governance
•Officials
•Oversight bodies
•All others authorized

63. Opinion on F/S & Supplementary Schedule of
Expenditures
1.Introductory paragraph – Stats name, F/S audited,
date and periods.
2.Scope paragraph – states that the audit was
performed in accordance with GAAS and GAGAS,
describes an audit & asserts the audit provides a
reasonable basis.
3.Opinion paragraph –opinion as to fair presentation
4.Disclosure paragraph – states that the auditor has
complied with GAGAS and has issued a report on
internal control over financial reporting and on tests of
the entity’s compliance with laws & regulations.
5.Opinion on additional schedules required by the
Single Audit Act (no part of F/S, was audited & is
fairly stated)

64. Reporting Under GAGAS – Fraud & Illegal Acts
GAGAS reporting requirements:
–Consistent with GAAP – report that fraud or an illegal act has
occurred, or is likely to occur.
–Report to any of the following:
•Top official
•Governance
•Oversight body
–The report may be:
•Included in the required audit reports
•Presented as separate audit reports

65. Reporting on Internal Control GAGAS
Requires the auditor to:
–Obtain an understanding of the design of relevant controls and
determine whether they have been implemented
–Communicate all significant deficiencies (reportable conditions) noted
during the audit, even those that are not material weaknesses
–GAGAS requires a written report on the auditor’s understanding of
internal control and the assessment of control risk in all audits
–Significant deficiencies should be reported to specific legislative and
regulatory bodies

66. Single Audits
Entities subject to the Act:
–Expend total federal assistance equal to or in excess
of $750,000 in a fiscal year
Objectives:
–Audit of the entity’s financial statements & reporting
on a separate schedule of expenditures of federal
awards in relation to those financial statements
–Compliance audit of federal awards expended during
the year as a basis for issuing additional reports on
compliance related to major programs and on internal
control over compliance

67. Single Audits – Auditor Responsibilities
1.Express an opinion on the fair presentation of the
F/S in accordance with GAAP.
2.Express an opinion regarding the fair
presentation of the Schedule of Expenditures of
Federal Awards in relation to the F/S
3.Report on internal control over financial reporting
and compliance with federal statutes, regulations,
and the terms & conditions for the federal award
4.Report on compliance for each major program
and report on internal control over compliance

68. Single Audits
Materiality evaluation in a single audit includes a
separate evaluation of materiality for each major
program selected
Determination of major programs

69. Program Specific Audits
When a single audit is not required
Do not incclude reports on the financial statements of the
organization taken a s a whole

71. Pass Key
Audits of an entire organization that include additional
audit procedures on specific programs are called
“single audits”. These audits include a report on the
financial statements of the whole organization and
audit reports on the specific programs
Audits of specific programs are called “program audits”
and do not include reports on the financial
statements of the organization taken as a whole.
Certain recipients under certain circumstances are
permitted to have a program specific audit instead of
a single audit

72. QUALITY CONTROL
STANDARDS

73. Quality Control Standards
AICPA Code of Professional Conduct
System of quality control required to ensure that the firm
complies with professional standards and appropriate
legal and regulatory requirements, and that any
reports issued are appropriate in the circumstances.
Elements of a Quality Control System:
Human resources
Engagement acceptance and continuance
Leadership responsibilities
Performance of the engagement
Monitoring
Ethical requirements

74. Human resources
Recruitment and hiring, determining capabilities
and competencies, assigning personnel to
engagements, professional development,
and performance evaluation, compensation,
and advancement
Examples:
1.Timely identification of staffing requirements
2.Background check
3.Evaluations
4.Trainings
5.Rotation
6.On the job training

75. Engagement/client Acceptance &
Continuance
Policies & procedures for deciding whether to accept
or retain a client.
To avoid a client whose management lacks integrity
Undertake only those engagements that the firm can
reasonably expect to complete with professional
competence
Procedures:
1.Reviewing financial statements
2.Third parties
3.Ability to service the client properly
4.Reevaluating for continuance

76. Leadership Responsibilities for
Quality Within the Firm
Culture that emphasizes quality. Tone at the
top!
–Quality should be emphasized over commercial
considerations
–Performance evaluations, compensation, and
advancement should demonstrate a
commitment to quality.
–Sufficient resources should be devoted to
developing, communicating, and supporting the
quality control system.
–Those with operational responsibility for the
quality control system should have appropriate
experience, ability, and authority.

77. Performance
Policies and procedures should be established
to:
•Achieve a consistently high level of performance
(standardized documentation).
•Ensure supervision and revision.
•Maintain confidentiality.
•Allow consultation with experts.
•Provide a means to resolve differences of opinion.
•Perform engagement quality control reviews
(before the engagement report is released).

78. Monitoring
Policies & procedures should be established to provide the firm
with reasonable assurance that its quality control system is
relevant, adequate, operating effectively, and complied
with in practice.
Examples:
1.Quality control reviews (inspections)
2.Peer review –every 3 years AICPA members
3.Wrap up or second partner review
4.Performance of corrective actions

79. Monitoring
Peer reviews
•When one CPA firm reviews another CPA firm’s
compliance with its quality control system.
•Every 3 years for AICPA members
•Purpose is to determine and report whether the
CPA firm being reviewed has developed adequate
policies and procedures for the elements of quality
control and is following them in practice.
•Upon completion, a report is issued with
conclusions and recommendations. A firm that
fails to take corrective actions is subject to
sanctions.

80. Etical Requirements
Independence – impartiality
Integrity – honest
Objectivity – free of conflicts
Examples include:
1.Records showing past employment & relatives
2.Notifying client portfolio
3.Confirming independence
4.Emphasizing independence

81. Sarbanes-Oxley Act 02
Audit firms may not perform:
–Bookkeeping
–Information systems
–Appraisals
–Actuarial services
–Internal audits
–Human resources
–Investment services
–Legal services
–Expert services unrelated to the audit

82. Sarbanes-Oxley Act 02
Audit firms may not audit public companies
whose CEO, CFO has worked for the audit
firm during the preceding year
The lead partner and the reviewing partner
must rotate every 5 years

83. Quality Control Policies
Depend on:
–Size
–Organizational structure
–Complexity of its practice
–Cost benefit
Communication – should be communicated to firm
personnel (oral or in writing).
Relationship between Auditing Standards & Quality
Control Standards
–GAAS relate to the conduct of each individual audit
engagement
–Quality Control Standards relate to the conduct of all
professional activities of the firm’s practice as a whole.

84. Quality Control Policies
Deficiencies:
•Deficiencies or non compliance with a firm’s quality control
standards do not necessarily indicate a lack of compliance
with GAAS
•Deficiencies in quality control for an individual engagement
does not necessarily imply that the firm’s quality control
system overall is insufficient.

85. Engagement Partner Responsibilities
1.The audit complies with standards and applicable legal &
regulatory requirements.
2. The auditor issues a report that is appropriate.
The engagement partner should:
–Remain alert for noncompliance with ethical requirements
–Form a cnclusion with independence requirements
–Be satisfied that procedures regarding client acceptance
have been followed
–Be satisfied with competence & capabilities of personnel
–Take responsibility for the performance of the audit and
reviews
–Be satisfied with audit evidence
–Take responsibility for the engagement team

86. Engagement Quality Control Review
The engagement quality control reviewer should not
be part of the engagement team
The review should be completed before the
engagement partner releases the audit report
Procedures:
–Discussion of significant matters with engagement
partner
–Reading the financial statements and the auditor’s report
–Review of audit documentation
–Evaluation of conclusions