alright moving on let's now turn your attention to professional standards
and the very first thing the term that we're gonna hear repeatedly throughout
every lecture is and what I like this generally accepted
auditing standards highlight that next
wanted to write the word gas G a a ass
because you will see that repeatedly used in both multiple choice questions
your task based simulations and of course in our materials to get too
comfortable with
now incidentally the spectra materials are based on the
clarified sasser's statements on Auditing Standards which
are testable on the CPA exam starting on July 1 2013
so this lecture is for everyone taking the exam
starting in July 2013 and forward are
letter P generally accepted government auditing standards known as
got gas now we're gonna cover those standards
in one of our necks lectures and then we have a third group that we want to focus
in on and that's the public company
Accounting Oversight Board some people refer to acutely as
people but again they don't like that freezing so we're just gonna call
PC a LB and why don't you put those initials down right after you
highlighted that title PCA OB and after you put that damn
make this special no these rules
okay again this we're going to talk about it for a sec these rules apply
to accounting firms CPA firms when they're auditing
publicly traded companies known as issuers so let's make a note regarding
that
required when auditing
and issuer I repeat that required
when auditing and issuer
issue world again financial instruments like stocks and bonds to the general
public issuer
and put that in quotes and then in brackets next
put public company so again PCL be standards
will be required when auditing and issuer which is a publicly traded
company
all right now underneath see the second line I'd like you to highlight
sarbanes-oxley act of 2002 that socks
the PCL establishes audit
and related professional practice standards to be used
in the preparation and issuance up audit reports for
issuers just like what we wrote about highlight the next light issuers
consistent
the subject to the rules of the SEC primarily
public companies after highlighted
that line underscore the word issuer
and underscore primarily
public company so again we
emphasize this
now why is that going to be important for you to know because later on you're
gonna see
various multiple choice questions that will say a family owned privately owned
business
and then you're gonna switch off your not gonna have to comply with PCL be
Sanders
all you have to do is comply with again auditing standards
but not PCL be so again at PCL be says
again auditors must you may not have to do that
under general standards but if you're issuing if you're auditing in issuer
then you'll have to comply with those standards and we will carefully break
out the unique
additional work that's required under PCA will be
I let's go back to the materials
down to number three and highlight public accounting firms
must register with the PCL be in order to audit public
companies ft highlighted
underscore the whole thing as well okay so again highlighted
add underscored
I'm moving on I just like to point something out your
again this is again one of our notes note that the
Auditing Standards Board known as ASP retains the authority to set performance
and reporting standards for audits financial statements are
doll on issuers alright so again
Auditing Standards Board creates auditing standards
the PCL be creates them for the issuers publicly traded companies
and then of course let's take a look at the next
empty and highlight International Standards on Auditing the international
auditing and assurance standards board
a standard-setting board for
International Federation of accountants so they handle
all the International auditing standards so in theory by the way
you could have one company in the United States you gotta follow US standards for
the issuer
then there may be a family-owned company over in europe or
Asia and they would ultimately follow international standards
there is a movement towards convergence
convergence means that US standards and international standards would come into
harmony with each other
they're working on it but they're not quite there yet let's just chat a little
bit about standards for engagements on
other audits I personal the statement on standards for
at s station humans and statements on standards for accounting and review
services were gonna cover those in our next class together
those would be things like compilations and reviews and things of that sort
so we're going to take a look them next lecture
I continuing on number three other guides there's the AICPA Code of
Professional Conduct will be taking a look at that under professional
responsibilities
and the statement of quality control standards again same area
we also have the SEC the Securities Exchange Commission
alright the big one of course sarbanes-oxley act like you to highlight
that
2002 write the words Sox soxx
because you're here most time in the general public that people refer to it
by its initials Sox selects and then lets highlight letter E
letter E is your again that is going to be in this particular case
your International Federation
other counts and again they have a code of ethics
for professional accountants and highly the International
Standards Board accountancy a standard-setting board
up the International Federation of accountants establishes
the IFAC hold ethics for accounts
so again there are different rulemaking bodies some for international
and in the US we can break them down between publicly-traded
and non publicly traded
all right let's go on to Roman numeral for auditing guides
the gas hierarchy and lets highlight literary
the AICPA statements on Auditing Standards
sasser's and PCL be auditing standards you got the two groups
one for the public 14 again pride what I like this for statement in the United
States
auditors are required to comply with sass statements on Auditing Standards
published by the Auditing Standards Board for audits up non
issuers and PCL be
audit standards for audits of issuers
I so again we've got most that down I
look down at letter be with me interpreter publications are out there
to help us understand
exactly what did something mean when it says professional skepticism
risk assessment there's additional interpretations
helping auditor understand that specifically in one area or another
an example we may have a subsidiary in a foreign country
which according to again most information is a high corruption area
well then what is something the interpretations that we should put
towards professional skepticism
regarding corruption and violations of the Foreign Corrupt Practices Act
lots of different interpretations back to the materials
there are other or in publications such as other
or in publications have no authority status
but are helpful in giving Titans
aren't moving on Roman numeral five
and at the very top of this page would you put gas G
a a s because we're gonna be looking at auditing standards
and let's highlight Roman numeral five overall
objectives and underneath that a one highlight
to obtain reasonable assurance I we're going to try to get
another evidence to give us reasonable assurance
and ultimately the objective after we get that
reasonable assurance is number two let I like to report
on the financial statements right there there's the ultimate
we're gonna get reasonable assurance by getting evidence
evidence that supports our opinion and then we're gonna report
that opinion on those financial statements I let's go to be
conduct of the audit
I the conduct of it but I like that number one and this is very important
professional skepticism
I like that now what does that mean well an auditor should be alert
alert for audit evidence that contradicts other audit evidence
obtained
so you want to make sure that things match things reconcile
that you can you can trace in Balch things back to supporting documents
I can be what else is professional skepticism
it means information that calls into question the reliability of documents
and responses to inquiries that may be used as
whatever its
those of you who read things like the Wall Street Journal or the New York
Times
you're probably aware all of the frauds that have gone on
in the public over the last several years we can go back to the 2000 or back
to the 2008 to 2012 period of time
and there are so many companies that committed fraud
and what they did was they forged documents and those documents were
looked at by the auditors if the auditors had
had professional skepticism they may have questionnaires
they may have gone back to the outside source to say is this really what you
wrote
is this really a statement that you prepared except for
there are cases where clients literally
forged bank statements to hide in conceal their frauds
so again you want to look for any evidence that suggests that these
particular documents
are forgeries that they have been altered or that they're not correct
or complete let's go back to the material
note all
letter C I'd like you to underscore this one's conditions that indicate
possible fraud and after underscored
out out to the margin I want you to have three
separate lines one word each the three elements that create the perfect
environment for fraud number one
pressure right that were down the word underneath it
the second element a perfect environment for fraud
opportunity and then the third element
rationalization pressure
opportunity rationalization
those create the perfect environment or conditions
for a fraud
now in fraud studies by the way
I do tremendous amounts of work in this area for about
fifty different major corporations and i cant go through a nutshell
what we alternately try to identify pressure
almost all organizations have pressure pressure to get the job done
pressure to get good results pressure to beat out the competition
there's no one working in corporate America who doesn't feel
pressure pressure to do their job and do it better opportunity
well if you're in accounting you have the ability to cut corners
if you're high up in management you also have management override
who's going to question the boss and of course if you have colleagues that
you're working with
course usually befriend people as you work with them you may ultimately have
collusion where two or more at you ultimately scheme to do something and
override the internal controls
so first of all this pressure second is the perception
opportunity you have to believe you're going to get away with it
as I always like to say there's no criminal in jail
who thought I'm gonna get caught but I'll have a helluva good time for a week
or two
with what I stole it they all think they can get away with it it's the perception
that the opportunities you'll get away with it and third is rationalization
rationalization is the justification of why I'm doing
this means that you have a lacquer ethics a lack of integrity
that's why our profession has gone to such great lengths
to mandate ethical training every two to three years for
every single CPA in the United States so pressure
opportunity rationalization great perfect environment
and when we go to internal control and we go to evidence those two sessions
that will work together
you're gonna see that we're always looking to see if those elements are
present
so let's go back to our materials
now down under be too where it states epochal
requirements go down to the second line and I just want you to highlight this
you have to be independent independence in both act
and appearance highlight that and then draw an arrow from back
down to the passkey and in the past
let's just read this the auditor must be independent the entity when performing
an engagement in accordance with gas generally accepted auditing standards
on last and there are some exceptions gas provides otherwise which is very
very few exceptions
or the auditor is required by law or regulation to accept the engagement and
report on the financial
lotta times that's going to be in governmental some will cover that
in our next lecture as well general independence in both fact and appearance
and if you lack that what you have to do right
otherwise it's going to be a disclaimer of opinion which we're going to talk
about in just a little while
let's go on to our next page and let's go to number three highly professional
judgment the auditor should
exercise professional judgment in planning and performing the audit
now we're going to get into a much much more that when we go to our
audit lecture number three the again the assessment of internal control
what we're going to do is we're gonna go through a whole bunch of things
we're going to start with are we independent do we have the
qualifications to do the audit and the expertise to understand this industry
we're going to look into the industry look for issues that are associated with
the industry
then we're gonna jump down to that company and say what issues maybe have
we heard about this company
then we're going to assess the potential for financial statement risk we're going
to do our
audit risk and we're going to look at control risks and all those detection
restore gonna go through all those
we're gonna test internal control we're going to determine how much we can rely
on it or how much we can't rely on it
that will ultimately is again determine the nature extent and
heininger audit procedures will gather evidence
will evaluate the evidence and then we're going to express this opinion so
there's a lot of stuff that goes in
to the planning and performing again that's the most important thing
you know anybody who's ever worked with the carpenter or a construction person
knows there's an expression
measure twice hot once
and essentially that's the same thing and on it planned carefully
then do your work so we're going to talk a lot more about that when we get to
chapter 3 and chapter 4 right back to the materials
it let's just read some things together here in an audit
professional judgment is necessary when making decisions about
materially is materiality 2 percent
5 percent member in his professional judgment that will ultimately determine
that
again what is the audit risk also
the nature extent and Heine would you underscore those words nature extent and
timing
next to those put the word net and ET
because that is the net you're going to throw over
your audit client that's the net you're gonna throw out there over their records
to see what you can Poulin the nature is it gonna be
control testing compliance testing is it gonna be substantive dollar balanced
so you gonna test controls or you gonna literally say
you know roll up my sleeves here I gotta jump in and I actually gotta redo this
to make sure that that's the right number
which one or what combination it's the extent
except means a lot or a little or something in between
and the timing is can you do it intro
or do you have to do it your aunt again if you believe the system strong
you a tested in the middle of the year and then just kinda
look at it quickly at the end of the year to see everything still the same
but if it's a week system you may want to do all your testing at your end
because those are the balances
that your ultimately going to be reporting sewing nature
extend tiny is all based on your assessment your judgment about internal
control
and the wrist the next item evaluating management
judgment in applying the applicable
financials now just to give you an idea you may have a contingency
and that contingency is probable and
reasonably estimated well then of course we know you recorded dollar
you Journal Isaac you put a footnote but in spending to be probable but cannot be
estimated
then it's only a footnote is it so you have to again assess management's
judgment
about the level of probable possible or amo
and whether or not it can be estimated and based on that
judgment they are getting then required to report inappropriately
again note also if tap departure is required
because you want to make sure that your properly and fairly presenting remember
we spoke about this a few minutes ago
that's okay also its academic never seen in the real world but on the CPA exam
they like to always throw a question or so
regarding again you violated app but it was essential
in order to fairly present well then OK it's good
its acceptable and then finally letter A
drawing conclusions based on the audit evidence
obtained alright so those are some of the areas that you have with your
professional judgment
now let's take a look at number four which highlights
vision appropriate what evidence and
audit risk sufficient appropriate audit evidence
and audit risk now what I'd like to do is I wanna
give you one item like you to draw an arrow down to the bottom of the page
because I want to tell you about another exam trip
they always seem to throw one or two multiple choice questions
in this area and I want to make sure that this one doesn't throw you off
so put out exam trick and underscore and then right
week internal control week
internal control then put down
equal sign with us last because it does not equal
an adverse opinion week internal control
does not equal and adverse opinion
like to chat with you about that one for a moment
lot of times they're going to say
that you are an auditor that you have assessed internal control
and it is significantly deficient there are material weaknesses in the internal
control
and then it's going to say you know the auditor should
and one of the items is gonna say rendering adverse opinion
and that's not the correct answer because
weak internal control just means you cannot rely
on their records to create accurate information doesn't mean the records are
wrong
just means you can't rely on their internal control an example I was like
to share
as the following every month I get my
American Express credit card bill maybe you do the same thing i'd
I opened mine up I look at it sometimes I choke on how much it is
and then I scanned it over very quickly
and then I pay the bill notice what I didn't do
I didn't take those little tissue copies and match each one up
I didn't take the previous month's bill to make sure they didn't duplicate
a bill from last month and repeated on this month
and I didn't take an adding machine and add up all the charges to see if they
came to that grand total
I didn't do any of those the reason I
in my judgment have assessed that they have strong internal controls
and on I can rely on their records so I did
minimal amount of work before I signed off
on that statement and paid the bill that's the same with financials
if after testing the system in your judgment
you have enough evidence to support an opinion that their internal controls
strong
then you can do a minimum amount of work before you give then
and audit opinion now on the other hand
I also have a local gas station in my home town
and they don't want to use the the gas companies credit card
he just wants me to sign every time I get gas or
my wife gets gas or my kids get gas
or by the way we also have a car washing their
and you can take your car through the car wash in you just sign off then
and in the winter he has a plow comes up anyplace how's your driveway out
again all we have to do is sign of every month he submits a bill to us
its hand written and sometimes there's cross hours and numbers are written over
excedrin
now without one I go back to every one of my sign
doubters and I match it up I look at the previous month to make sure I'm not
duplicated anything
and I take it and machine and I do add up all the numbers
guess what he's always been right I haven't found any mistakes
but I did not believe his system was strong
I was not confident in his system so again because I did not believe he had
the strong internal controls
to merit the nature extent in the tiny my work being less
I wound up doing more substantive
work to verify before I would sign off on his bill
so again there's that balancing act that we're going to be seeing
and will get much much more into that when we go to our
lecture number three are let's go back up you just finished highlighting
sufficient appropriate audit evidence
and audit risk right a balancing act and then of course number five
highlight compliance with gas right we have to comply with all those standards
that we learn
issuers PCL be again Auditing Standards Board statements on Auditing Standards
for non
issuers I let's go on to our next slide next
eight-year