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ACFM 327 Midterm
| Term | Definition |
|---|---|
| Public Company Accounting Oversight Board (PCAOB) | Responsible for setting all audit standards to be followed on audits of public companies |
| Business Risk | Risk that an entity will fail to meet its objectives |
| Complexity Remoteness Time Sensitivity Consequences | What are the 4 conditions that increase demand for reliable information? |
| Information Risk | Probability that information circulated by a company will be false or misleading |
| Providers and Users | There is a conflict of interest between who usually? |
| Intermediaries | Information professionals serve as __________ |
| Assurance | Lending of credibility to information |
| Attestation | Professional service resulting in a report on an assertion(s) about subject matter that is the responsibility of another party |
| Auditing | Systematic process of objectively obtaining & evaluating evidence regarding assertions about economic actions & events to ascertain the degree of correspondence between assertions & established criteria & communicating results to interested users. |
| Assurance Services | Any independent professional service that improves the quality of information or its context for decision makers |
| Independence Professional Services Improving the Quality of Information or Its Context For Decision Makers | What are the 4 elements of assurance services? |
| Attestation Engagements | Service where a practitioner is requested to examine whether management's assertion about some type of subject matter can be relied upon |
| System-Generated Reports | Any report that is generated by audit client's information system that is used to execute its financial statements |
| Financial Reporting Part 1 | Process of providing statements of financial position, results of operations, changes in cash flows, & accompanying disclosures to outside decision-makers who do not have access to management's internal sources of information |
| Financial Reporting Part 2 | Contain management's assertions about transactions & events & related disclosures that occurred during the period being audited, and assertions about account balances & related disclosures at the end of the period |
| Sarbanes-Oxley Act of 2002 (SOX) PCAOB (Standards, Inspections, Quality Control) | What things help ensure that audit quality is not compromised? |
| AICPA Purpose of an Audit | Purpose is to provide financial statement users with an opinion by an auditor on whether the financial statements are presented fairly in all material respects in accordance with an applicable financial reporting framework, enhancing confidence |
| Generally Accepted Accounting Principles (GAAP) International Financial Reporting Standards (IFRS) | What are the applicable financial reporting frameworks? |
| Prepares & presents financial statements & want to provide useful/reliable info about performance position using GAAP IFRS Attests to if statements are fairly presented & provide reasonable assurance (free material misstatement) using AICPA, PCAOB, IAASB | Financial Reporting vs. Auditing |
| SOX Section 302 SOX Section 404 | What are the management certification and reports? |
| SOX Section 302 | CEO & CFO must include a signed personal certification in every periodic SEC filing (Form 10-K & 10-Q) to attest they have reviewed it, no false statements, fair presentation, responsible for controls, and mandatory disclosures |
| SOX Section 404 | Governs internal control over financial reporting and is the operational backbone of modern auditing for public companies, splitting control responsibilities between management (a) & auditors (b) |
| Agreed-Upon Procedures Prospective Financial Info Pro Forma Financial Info Compliance Attestation Controls @ Service Org Examination of MD&A Sustainability Reporting | What are the 7 elements of Attestation Engagements? |
| Agreed-Upon Procedures | Practitioner performs specific procedures on subject matter and reports the findings without providing an opinion or conclusion and may be financial or nonfinancial |
| Prospective Financial Information | Practitioner obtains reasonable assurance about, whether in all material respects, the info is presented in accordance with guidelines created by AICPA & whether assumptions underlying are suitably supported and provide reasonable basis for respons. party |
| Pro Forma Financial Information | Practitioner obtains reasonable assurance about whether, in accordance with the criteria: management's assumptions provide reasonable basis & and in all material respects give appropriate effect to assumptions & reflect proper application |
| Compliance Attestation | Practitioner obtains reasonable assurance about whether entity complied with specified requirements in all material respects & express an opinion in written report about if it complied & management's assertion about its compliance |
| Controls at a Service Organization | Service auditor obtains reasonable assurance about whether in all material respects based on management's description of system presents system, if controls were suitably designed to provide reasonable assurance, & operate effectively, & express opinion |
| Examination of MD&A | Practitioner wants to express opinion on presentation as whole by reporting whether: it includes in all material respects required elements, historical financial amts have been accurately derived, & underlying info provide reasonable basis for disclosures |
| Sustainability Reporting | Practitioner evaluates & reports on non-financial metrics such as GHG emissions, energy usage, human capital metrics, and climate transition risks, against established criteria |
| Attestation | Auditing is part of _____________________ |
| Assurance | Attestation is part of ______________________ |
| Consulting | ___________________ is not assurance |
| Transactions & Events Account Balances Presentation Disclosure | What statements contain assertions? |
| Existence or Occurrence Completeness Valuation or Allocation Rights & Obligations Presentation & Disclosure | What are the 5 PCAOB Assertions? |
| Existence | Asserts that each of the balance sheet & income statement balances actually exist |
| Occurrence | Asserts that each of the income statement events & transactions actually did occur in the proper period |
| Completeness | Management asserts that all transactions, events, assets, liabilities, and equities that should have been recorded have been recorded & that all disclosures that should have been included in the footnotes have been presented |
| Valuation | Determine whether the proper values have been assigned to assets, liabilities, & equities |
| Allocation | Refers to the appropriate percentage of an asset or liability balance being recorded on income statement in accordance with GAAP or IFRS |
| Rights & Obligations | Asserts that they have ownership rights for all amounts reported as assets on company's balance sheet & that amounts reported as liabilities represent company's own obligations |
| Presentation & Disclosure | Asserts that all transactions & events have been presented correctly in accordance with GAAP or IFRS & that all relevant info has been disclosed to financial statement users |
| Existence, Occurrence, Cutoff, Completeness, Accuracy, Valuation, Allocation, Classification, Understandability, Rights & Obligations, Presentation, & Disclosure | What are the ASB Assertions? |
| Cutoff | Refers to accounting for revenue, expense, & other transactions in proper period |
| Accuracy | Refers to appropriate recording of transactions at the correct amount |
| Classification | Transactions must be classified in correct accounts |
| Understandability | Quality of information that enable users to perceive its significance |
| Significant Accounts / Disclosures | Financial statement account or footnote disclosure is considered significant if there is a chance that account or footnote disclosure could contain a material misstatement |
| Relevant Assertion | Management assertion is relevant if there is a reasonable possibility that a material misstatement exists related to that assertion for the significant account or footnote disclosure being audited |
| Assertions | Procedures map to ____________________ |
| Several | One error can affect ________________ assertions |
| Do assets listed really exist? | Key Question for Existence |
| Did transactions really occur? | Key Question for Occurrence |
| Did recorded sales transactions occur in the period? Are transactions included in the proper period? | 2 Key Questions for Cutoff |
| Are all accounts recorded on the balance sheet? Were all transactions recorded on the income statement? | 2 Key Questions for Completeness |
| Are the balance sheet accounts valued correctly? Are the transactions accurately recorded? | 2 Key Questions for Accuracy, Valuation, & Allocation |
| Does the company really own the assets? Are all legal responsibilities to pay the liabilities identified? | 2 Key Questions for Rights & Obligations |
| Were all transactions recorded in the correct accounts? | Key Question for Classification |
| Are the disclosures understandable to users? Are all required footnote disclosures included? | 2 Key Questions for Presentation |
| Professional Skepticism | State of mind that is characterized by appropriate questioning & a critical assessment of audit evidence |
| Skepticism | Manifestation of objectivity, holding no special concern for preconceived conclusions on any side of an issue |
| Healthy Skepticism | Should be viewed as a show-me attitude, not a predisposition to accepting unsubstantiated explanations |
| What do I need to know? How well do I know it? Does it make sense? What could go wrong? | What are the 4 questions that skeptical auditors ask? |
| Anchoring Bias | Possibility that an auditor might "anchor" on a number provided by a client manager and then have difficulty adjusting to the economically correct amount |
| Clarify Issues & Objectives Consider Possible Alternatives Gather & Evaluate Relevant Evidence Reach an Audit Conclusion Carefully Document Rationale for Professional Judgement Reached | What are the 5 steps of the KPMG Professional Judgement Framework? |
| Must have a questioning mind and a critical assessment of audit evidence | What does the PCAOB Staff Audit Practice No 10 say? |
| Hurtt Skepticism Scale | 30 survey questions, has 6 measurable characteristics: questioning mind, search for knowledge, suspension of judgement, interpersonal understanding, autonomy, & self-esteem |
| Financial Statement Auditing Nonaudit & Attestation Tax Services Advisory Services | What are the public accounting services? |
| Compilation, review, MD&A, internal controls, what-if projections | What does Nonaudit & Attestation consist of? |
| Aggressive tax positions or "listed" transactions, contingent fees, tax services for key executives | What are some tax services that impair independence (PCAOB)? |
| Bookkeeping & Related Services Design or Implementation of Financial Info Systems Appraisal or Valuation Services Actuarial Services Internal Audit Outsourcing Management/HR Investment or Broker/Dealer Legal & Expert Services Unrelated to Audit | What are the eight SOX prohibited services for public audit clients? |
| Audit Committee | Who pre-approves permitted services? |
| Independent Auditor | Qualified audit practitioner who has no financial, operational, or personal ties to the entity being audited that would impair objective judgement |
| External Auditor | Auditor who works for an outside, third-party public accounting firm, as opposed to being an employee of the organization being examined |
| Certified Public Accountant (CPA) | Statutory professional credential and license granted by a state board of accountancy indicating that an individual has satisfied the required education, passed the Uniform CPA Exam, & met state-mandated experience requirements |
| Control Reviews Compliance with Laws Economy & Efficiency Program Results | What are some internal auditing services? |
| Operational Auditing | Systematic review of an organization's activities in relation to specified objectives for the purpose of assessing performance, identifying opportunities for improvement, and developing recommendations |
| Financial Audits Attestation Engagements Performance Audits: Economy & Efficiency Audits, Program Audits | What are the components of governmental auditing? |
| GAO Comptroller General GAGAS | What things preside over governmental auditing? |
| IRS Auditors Bank Examiners (Dodd-Frank) | Who are some regulatory auditors? |
| Education (150 or 120 hours) Exam Experience State Certificate & License | What are the CPA requirements? |
| AUD, FAR, REG, BEC | What are the CPA exam sections? |
| Ethics Risk Assessment Further Procedures & Evidence Conclusions & Reporting | What is in the AUD content areas? |
| Continuing Professional Education (CPE) | Mandatory post-licensure professional learning & development that licensed CPAs must complete periodically to maintain their license & right to practice |
| State Boards of Accountancy | Official state government regulatory agencies established by state statutes to regulate the accounting profession and protect the public interest |
| National Association of State Boards of Accountancy (NASBA) | National collective organization that represents & serves all 55 State Boards of Accountancy across the United States |
| CA CISA CFE CFA CISSP CIA CMA CITP | What are some other credentials? |
| AICPA ISACA IIA ACFE IMA | What are the certifying bodies? |
| Sarbanes-Oxley (SOX) in 2002 & then PCAOB was created for issuers | The standards were self-regulated by the AICPA untl when? |
| Register Firms Set & Enforce Standards Inspect Audits SEC Approval of PCAOB Standards | What are some PCAOB roles? |
| PCAOB & Auditing Standards (AS) | What are the 2 rule-making bodies for issuers? |
| AICPA Auditing Standards Board (ASB) & SASs | What are the 2 rule-making bodies for non-issuers? |
| GAO & Government Auditing Standards (Yellow Book) | What are the 2 rule-making bodies for governmental entities? |
| IAASB & International Standards on Auditing (ISAs) | What are the 2 rule-making bodies for foreign entities? |
| Generally Accepted Auditing Standards (GAAS) | Purpose is to obtain reasonable assurance about whether financial statements as a whole are free of material misstatement, whether due to fraud or error & issue report on financial statements |
| Audit Procedures | Specialized actions auditors take to obtain evidence in an engagement |
| Audit Standards | Audit quality guides that apply to all audits |
| Fundamental Principles PCAOB Standards & ASB SASs Interpretive Publications | What is the hierarchy for setting standards? |
| Responsibilities Performance Reporting | What are the 3 fundamental principles? |
| Have appropriate competence/capabilities to perform audit Comply with relevant ethical requirements Maintain professional skepticism & exercise professional judgement throughout planning & performance of audit | What are the auditors' responsibilities? |
| Competence & Capabilities | Education Continuing Professional Education Experience |
| Relevant Ethical Requirements | Independence: in fact & in appearance Threats: financial & managerial relationships Fee arrangement & rotation of audit firms Due care |
| Professional Skepticism & Professional Judgement | Skepticism: Evaluate contradictory evidence & reliability of documentary evidence & of management/governance Impediments: financial incentives/pressures, relationship Judgement: gather, evaluate, conclude, mgmt estimates, documentation of judgement |
| Independence in Fact | Auditors' mental attitude & impartiality with respect to the client |
| Independence in Appearance | Extent to which others perceive auditors to be independent |
| Financial & Managerial | What are the 2 types of relationships that jeopardize independence? |
| Due Care | Level of performance that would be exercised by reasonable auditors in similar circumstances |
| Reasonable Assurance Plan & Supervise Materiality Risk Assessment Audit Evidence | What are the 5 elements of performance? |
| Planning & Supervision | Written audit plan Understand client's business & industry Differences of opinion among firm personnel Timing: engaged before year-end, interim date, or roll-forward period |
| Materiality | Bases: net income, sales/revenue, total assets Plan, perform, evaluate misstatements Qualitative factors |
| Risk Assessment | Understand entity, environment, & IC Risk of material misstatement Effective controls reduce control risk Substantive procedures for detection risk Issuers: audit of internal control over financial reporting |
| Audit Evidence | Sufficiency (quantity) & Appropriateness (quality) Relevance & reliability Sources: auditor, external, internal Reliability rules Documentary evidence; external, internal, or both |
| Audit Plan | Comprehensive list of specific audit procedures that audit team needs to perform to gather sufficient, appropriate evidence on which to base their opinion on financial statements |
| Materiality | Amount or event that has substantial likelihood to influence financial statement users' decisions |
| Internal Control over Financial Reporting | Policies & procedures implemented by entity to prevent or detect material accounting frauds or errors & provide for their correction on timely basis |
| Risk of Material Misstatement | Combined probability that material misstatement will occur & not be prevented or detected on timely basis by entity's internal controls, combination of inherent & control risk |
| Inherent Risk | Probability that in absence of internal controls, material errors/frauds could enter accounting system used to develop financial statements |
| Control Risk | Likelihood that client's internal control policies & procedures fail to prevent or detect material misstatement |
| Substantive Procedures | Detailed audit & analytical procedures designed to detect material misstatements in account balances & footnote disclosures |
| Helps auditors determine nature, timing, & extent of further audit procedures | What is the purpose of assessing risk? |
| Evidence | Info used by auditors in arriving at conclusion on which audit opinion is based, which includes underlying accounting data & all available corroborating info |
| Appropriate | Characteristics related to quality (relevance & reliability) of audit evidence |
| Relevance | Nature of info provided by audit evidence |
| Appropriateness | Evidence quality & sufficiency relates to evidence quantity |
| Sufficiency | Measure of quantity of audit evidence |
| Detection Risk | Likelihood that auditors' substantive procedures will fail to detect material misstatement that exists within account balance or class of transactions |
| Written report: opinion or statement that no opinion can be expressed Applicable financial reporting framework: GAAP, IFRS, special purpose Four opinion types "In all material respects" Report sections | What are some elements of reporting? |
| Unmodified (unqualified) Qualified Adverse Disclaimer | What are the four opinion types? |
| Adverse Opinion | Conclude that entity's financial statements are not presented in conformity with GAAP |
| Qualified Opinion | Concludes that except for relatively isolated departure, entity's financial statements are presented in conformity with GAAP |
| Unmodified (Unqualified) Opinion | Concludes that financial statements are presented fairly, in all material respects, in conformity with GAAP |
| Disclaimer of Opinion | Indication that opinion cannot be expressed |
| Critical Audit Matters | Matters communicated or required to be communicated to audit committee that involve challenging, subjective, or complex auditor judgement relating to material accounts & disclosures |
| Report Sections (For Issuer) | Opinion on financial statements Basis for opinion Critical audit matters Firm name, city, date Auditor tenure Report on internal control |
| System of Quality Management | Policies & procedures implemented by firm to provide with reasonable assurance that firm & its personnel comply with professional standards & applicable regulatory & legal requirements & issue reports that are appropriate in circumstances |
| Leader Responsibilities ("Tone at the Top") Relevant Ethical Requirements Acceptance & Continuance of Client Relationships & Engagements Human Resources Engagement Performance Monitoring | What are the 6 elements of quality control & monitoring? |
| Record reviews Document reviews Discuss Assessment of guidance Independence compliance CPE Acceptance decisions | What are some monitoring procedures? |
| Annual (more than 100) At least every 3 years (less than 100) Sample engagements System of quality control Public reports | PCAOB Inspections |
| AICPA Peer Review | What do non-issuers undergo for quality control & monitoring? |
| Integrity & reputation of client Firm's competence Compliance with legal & ethical requirements Document withdrawal | What does acceptance & continuance refer to? |
| Engagement Reviews | Internal evaluation of significant judgements made by audit team & conclusions reached in formulating its report on engagement conducted by firm |
| Engagement | Process undertaken by firms to evaluate impact of deficiencies on specific engagements on overall SQM |
| System-Level | Process undertaken by firms to evaluate overall components of firm's SQM across all engagements conducted by firm |
| Inspection | Evaluation of accounting firm's audit engagements & system of quality control conducted by PCAOB & required for any firms providing auditing services to issuers |
| Obtain/Retain Engagement Engagement Planning Risk Assessment Audit Evidence Reporting | What are the 5 stages of an audit? |
| Pre-Engagement Activities Client Acceptance & Continuance Independence & Ethics Engagement Letter & Termination Letter | What occurs during Stage 1 (Obtain/Retain Engagement) of the audit? |
| Pre-Engagement Activities | Perform procedures for acceptance or continuance of client relationship Determine compliance with independence & ethical requirements Reach a contractual understanding with the client |
| Client Acceptance & Continuance | Management integrity as primary factor Communicate with predecessor auditor Form 8-K & auditor changes Other acceptance procedures |
| Predecessor Auditor | Public accounting firm that has been terminated or has voluntarily withdrawn from audit engagement (completed or not) |
| Prospective auditors must contact predecessor auditor, but can only do that if the client agrees to them speaking with them | What are the roles of the prospective auditor, predecessor auditor, and client? |
| YES, and prospective auditor should be cautious about attempting the engagement | Is it a red flag if the client refuses to let the prospective auditor talk to the predecessor auditor? |
| Things that should be inquired during the talk between the prospective auditor and predecessor auditor | Management Integrity Disagreements with Management Identified or suspected fraud or noncompliance with laws Reason for change of auditors |
| Form 8-K | "Current events" report filed periodically at occurrence of major events, such as earnings releases, major asset sales, acquisitions, and auditor changes |
| Other Acceptance Procedures | Review of financial info Criminal background checks of senior managers Inquiries of bankers, legal counsel, underwriters, analysts Special attention or unusual risks; skills needed (IT, valuation, industry) Independence evaluation |
| Management Integrity (or lack thereof) | Primary reason for accepting (or not) of an audit engagement |
| Independence in Fact & Independence in Appearance | Auditors must have independence in what? |
| Red Flags | Financial institutions, alleged fraud, regulatory investigation, frequent auditor changes, & recent losses are examples of what? |
| Annual Review & Review upon major events | In order to continue with the engagement every year, auditors must do what? |
| Objectives of engagement Management's responsibilities Auditors' responsibilities Limitations of engagement | What does an engagement letter contain? |
| Access to audit documentation by successor auditors Reissuance of auditors' report Fee arrangements for future services | What does a termination letter contain? |
| Overall audit strategy Nature, timing, & extent of further audit procedures Internal control audit plan Substantive audit plan Relevant assertions for each significant account & disclosure | What occurs during Stage 2 (Engagement Planning) of the audit? |
| Planning | Size, complexity, industry, prior experience, & IT environment, these are factors that affect what? |
| Accounting Information Systems | Computer operations, organizational structure of processing, data availability, & specialized skills, these are ways to understand what? |
| Staffing Determining materiality Outlining audit procedures | What are the 3 goals of engagement planning? |
| Staffing Engagement | Planning meetings & brainstorming, IT auditors/service auditors, & using specialists & internal auditors |
| Auditor-employed, auditor-engaged, or company | What are the types of specialists? |
| How auditors evaluate auditor-employed or auditor-engaged specialists | Evaluate knowledge, skill, ability, & objectivity; evaluate the work & data. Are referenced in the auditor's report (critical audit matter, modification) |
| IT Auditors | Members of audit team who are specially trained to evaluate computerized controls & processes. Required & included on engagement team |
| Consider Work of Internal Auditors | Can never be considered independent, how they should be objective, |
| How to determine if internal auditor is objective | Investigated by learning about their organizational status & lines of communication in company |
| How to determine if internal auditor is competent | Investigated by obtaining evidence about their educational & experience qualifications, their certifications & continuing education skills, dept's policies/procedures for work quality & making personnel assignments, supervision, reports, & documentation |
| External Auditors | Can never delegate responsibility for audit decisions to internal auditors |
| Specialist | Person skilled in fields other than accounting & auditing who are not members of public accounting firm |
| How auditors evaluate company's specialist | Consider objectivity & competence, specifically knowledge, skill, & ability |
| Time Budget | Used to maintain control of audit by identifying problem areas early in engagement, thereby ensuring that engagement is completed on timely basis |
| Interim Audit Work | Procedures performed several weeks or months before date of financial statements, later rolled forward |
| Year-End Audit Work | Procedures performed shortly before & after date of financial statements |
| Efficiency Billing Next year's planning | Purposes of time reports |
| "Eating Time" | Underreport actual number of hours spent to perform audit work & it is unethical |
| Reasons Some Inaccuracy is Allowed | Unimportant inaccuracies do not affect users' decisions & hence are not material, cost of finding & correcting small misstatements is too high, & time taken to find them would delay issuance of financial statements |
| Performance Materiality | Amount less than materiality for financial statements as a whole to make sure that the aggregate of uncorrected & undetected immaterial misstatements does not exceed materiality for financial statements as a whole |
| Benchmarks for Materiality | Profit before tax, total net assets, total revenues, gross revenue or contributions (nonprofits) |
| Nature of item or issue Engagement circumstances Possible cumulative effects | What are the qualitative factors of materiality? |
| Planning substantive procedures Setting performance materiality Deciding on audit report | What are the 3 uses of materiality? |
| Risk Assessment Tests of controls Substantive procedures | What are the 3 purposes of audit evidence? |
| Substantive Audit Plan | Contain list of audit procedures for gathering evidence related to relevant assertions identified for an audit client's significant financial statement accounts & disclosures |
| Revenue & Collection Acquisition & Expenditure Production Finance & Investment | What are the 4 cycles of audit evidence? |
| Inspect records & documents Inspect tangible assets Observation Inquiry Confirmation Recalculation Reperformance Analytical procedures | What are the 8 procedures for audit evidencee? |
| Substantive Analytical Procedures | Evaluations of financial info made through analysis of plausible relationships among both financial & non-financial data, designed to identify unexpected fluctuations or the absence of expected relationships; more efficient |
| Tests of Details | Audit procedures applied directly to specific individual items, transactions, or ending account balance components to verify their validity, mathematical accuracy, & presentation; more effective |
| External (Formal/Informal) External-Internal Internal | What is the hierarchy of the reliability of documents? |
| Vouching | Audit procedure where the auditor selects an item that is already recorded in the accounting records or ledger and follows it backward to inspect the underlying source documents, tests occurrence/existence |
| Tracing | Audit procedure where the auditor selects a source document generated the time of an event & follows it forward to verify that it was properly entered & included in the accounting records, journals, & general ledger, tests completeness |
| Scanning | Audit procedure involving the scrutiny & critical review of accounting records to identify unusual, unexpected, or non-standard items that warrant further investigation |
| Confirmation Applications | Banks, customers, borrowers, agents, lenders, policyholders, vendors, registrar, attorneys, trustees, lessors |
| Sufficient | Inquiry alone is never ____________ |
| Computer-Assisted Audit Techniques (CAATs) | IDEA, Tableau, Alteryx; drones, AI, data analytics, cloud computing |
| Confirmation Controls | Specific safeguards & procedures maintained by the independent auditor to establish & preserve direct, uninterrupted control over the entire external confirmation process from start to finish |
| Current year to comparable prior period(s) Current year to budgets & forecasts Relationships among current-year balances Comparison to industry statistics Relationships to nonfinancial information | What are the 5 types of analytical procedures? |
| Planning & Final Review | When are analytical procedures required? |
| Substantive Testing | When are analytical procedures optional? |
| Audit Documentation | Should contain support for decisions regarding planning & performing audit, procedures performed, evidence obtained, & overall conclusions reached near end of audit |
| Qualities of Good Documentation | Self-contained & understandable, clear statement of purpose/objective, traceability & cross-referencing, precise documentation of nature, timing, extent, documentation of significant matters, clear sign offs, & meaningful defined tick marks |
| Required to Show in Documentation | Records agree to financial statements, work planned & supervised, internal control understood, sufficient appropriate evidence |
| Lead Schedules | Summary of accounts or components in account group |
| Indexing | Systematic assignment of a unique code to each working paper, lead schedule, & testing document in the audit file |
| Cross-Referencing | Practice of recording the index reference of another workpaper directly next to a specific number, summary total, or note to link two related documents together |
| Preparation Techniques | Indexing, cross-referencing, heading, signatures & initials, dates, tick marks |
| Audit Risk | Probability than an audit team will express an inappropriate audit opinion when financial statements are materially misstated |
| Inherent Risk Control Risk Detection Risk | What are the 3 components of audit risk? |
| IR * CR * DR | What is the model/equation for audit risk? |
| High | When the CR & IR are high, what can DR be set at? |
| Moderate to High | When the CR is low & IR is moderate, what can DR be set at? |
| Moderate | When the CR is low & IR is high, what can DR be set at? |
| Moderate to High | When the CR is moderate & IR is low, what can DR be set at? |
| Moderate | When the CR & IR are moderate, what can DR be set at? |
| Low to Moderate | When the CR is moderate & IR is high, what can DR be set at? |
| Moderate | When the CR is high & IR is low, what cam DR be set at? |
| Low to Moderate | When the CR is high & IR is moderate, what can DR be set at? |
| Low | When the CR & IR are high, what can DR be set at? |
| Inverse | There is an ________________ relationship between RMM & detection risk. |
| More effective tests | When lower detection is allowed, how does that impact the nature? |
| Testing performed at year-end | When lower detection is allowed, how does that impact the timing? |
| More tests | When lower detection is allowed, how does that impact the extent? |
| Less effective tests | When higher detection is allowed, how does that impact the nature? |
| Testing performed at interim | When higher detection is allowed, how does that impact the timing? |
| Fewer tests | When higher detection is allowed, how does that impact the extent? |
| Detection risk | Auditors can control which risk? |
| Zero | IR & CR are never assumed to be _______; audit risk must be appropriately low |
| Fraud | Act of knowingly making material misrepresentation of fact with intent of inducing someone to believe falsehood & act on it &, thus, suffer loss or damage |
| Error | Unintentional misstatements or omissions of amounts or disclosures in financial statements |
| Fraud Risk | Which risk is a special case of RMM? |
| Yes | Is fraud risk considered for every engagement? |
| Examples of employee fraud | Embezzlement, larceny, defalcation |
| Act Conversion Cover-Up | What are the 3 phases of employee fraud? |
| White-Collar Crime | What kind of crime is fraud risk? |
| Motivations of Fraud Risk | Meeting earnings projections, overstating vs understating ("cookie jar" reserves, earnings smoothings) |
| Red Flags | These are what of fraud risk: dangling credit & dangling debit |
| Management's characteristics & influence Industry conditions Operating characteristics & financial stability | What are the fraud risk factors? |
| Fraud only as it materially affects the financial statements | What is the auditors' responsibility regarding fraud risk? |
| What could go wrong? | What is the question asked for IR? |
| Prior-year misstatements | What is the best indicator for IR? |
| Dollar Size Liquidity Volume of transactions Complexity of transactions Subjective estimates | What are the factors that affect the susceptibility of accounts to IR? |
| Understand client's business & environment | Industry, regulatory, other external factors, nature of company & related parties, effect of client computerized processing, selection & application of accounting principles & disclosures, objectives, strategies, & related business risks |
| Nature of the Company | Organizational structure & management, sources of funding, significant investments, operating characteristics, sources of earnings |
| Related Parties | Those individuals or organizations that can influence or be influenced by decisions of company |
| Performance Measures | Compensation, analyst ratings, budget variances |
| Sources of Information | AICPA industry guidelines, public information, executive compensation arrangements, general business sources (website, trade publications), company sources (contracts, minutes of meetings, legal), client acceptance/continuance, planning, & prior audits |
| Missing minutes | What is a scope limitation of gathering information? |
| Develop expectation Define significant difference Compare expectation with recorded amount Investigate significant differences Document | What are the 5 steps of a preliminary analytical procedure? |
| Horizontal Analysis | Comparative analysis of year-to-year changes in balance sheet & income statement accounts |
| Vertical Analysis | Common size analysis of financial statement amounts created by expressing amounts as proportions of common base |
| Balance sheet Operations Financial distress | What are the ratio categories? |
| Required brainstorming session topics | Prior experience with client, how fraud might be perpetrated & concealed, & procedures to detect fraud |
| Required brainstorming session best practices | Leader, environment, skepticism, prior frauds, checklists, generating vs. evaluating ideas, IT specialist, timing, & audit plan changes |
| Held continually through the engagement | How often do these required brainstorming sessions happen? |
| Fraud Specialist | Forensic accounting expert with specialized skills in uncovering, investigating, & documenting financial fraud & asset misappropriation |
| People to Inquire | Audit committee, management, internal auditors, directors, & others; anonymous discussion boards |
| Type Likelihood Magnitude Pervasiveness | What do we consider when we assess risk? |
| Significant Risks | Risks where IR is very high due to combined likelihood & magnitude of potential misstatement |
| Significant Risk Factors | Recent developments, complexity, related parties, judgement & uncertainty, & unusual transactions |
| Extended Procedures | Audit procedures used in response to heightened fraud awareness as result of identification of significant risks |
| Responses to Significant Risks & Fraud Risk | More experienced team members, examine more transactions, test at year-end, higher quality evidence, & unpredictable procedures (surprise inventory observations) |
| Warning Signs of Significant Risks & Fraud Risk | Discrepancies, conflicting evidence, missing documentation, & evasive or hostile management |
| One level above the people involved | How to communicate fraud when it is clearly inconsequential fraud? |
| Those charged with governance or audit committee | How to communicate fraud when it involves senior management or affecting the financial statements |
| Audit Committee | Composed of independent, outside members of the BoD who can provide a buffer between audit firm & management |
| Confidentiality & Permitted Disclosures | Form 8-K letter, successor auditor, subpoena, government auditing standards |
| Direct-Effect Noncompliance | Produces direct & material effects on financial statement amounts that require some assurance as errors & frauds |
| Indirect-Effect Noncompliance | Refers to violations of laws & regulations that are not directly connected to financial statements |
| Response to Noncompliance | Understand, evaluate, discuss with management, report, disclose, consult legal counsel, & withdraw |
| Private Securities Litigation Act of 1995 | When auditors believe an illegal act that is more than "clearly inconsequential" has or may have occurred, auditors must inform organization's BoD. |
| Give SEC the report they gave to the BoD within one business day or resign from engagement & give SEC report within one business day | BoD has one day to report to SEC, if they do not auditors must do what? |
| PCAOB NOCLAR Proposal | Controversial standard-setting project & fundamentally aimed to expand an auditor's obligation to actively identify, evaluate, & report potential corporate illegal acts & regulatory violations. Never put into place |
| Required Documentation of Risk Assessment | Discuss with engagement personnel, procedures to identify & assess risk, significant decisions, specific risks & audit responses, revenue recognition explanation, mgmt override, other conditions, & communicate to mgmt & those charged with governance |
| Audit Strategy Memorandum | Scope, timing, & direction for auditing each relevant assertion based on results of audit risk model |
| Reporting objectives & required communications Factors directing the engagement team Preliminary engagement activities & risk assessment results | Factors to be considered regarding establishing overall audit strategy |
| Nature, timing, & extent of resources Planned tests of controls & substantive procedures | Additional audit strategy memorandum considerations |
| Written audit plan | Audit strategy memorandum requires what? |
| Issuers are public Non-issuers are private | Issuers vs Non-Issuers |
| SEC enforcement for unremediated material weaknesses | Cease & desist, civil monetary penalties, independent compliance monitors, officer & director bars, & SOX 304 clawbacks |
| Internal Control | Set of policies & procedures designed to achieve management objectives in 3 categories |
| Reliability of financial reporting Effectiveness & efficiency of operations Compliance with applicable laws & regulations | What are the 3 categories/objectives/goals of internal controls regarding COSO Framework? |
| Committee of Sponsoring Organizations | Responsible for defining what is meant by internal control effectiveness |
| Enterprise Risk Management | Culture, capabilities, and practices, integrated with strategy-setting and its performance, that organizations rely on to manage risk in creating, preserving, and realizing value |
| Entity Division Operating Unit Department | What are the 4 organization structures regarding COSO Framework? |
| Control Environment Risk Assessment Control Activities Information & Communication Monitoring | What are the 5 components regarding COSO Framework? |
| Resonable Assurance, Not Absolute Human Error Management Override Collusion Cost-Benefit Considerations | What are the limitations of IC? |
| Process | Think of IC as a _________ |
| Management Responsibilities Regarding IC | Establish & maintain IC, assess risks, & maintain documentation |
| Auditors Responsibilities Regarding IC | Understand & document IC on every audit, preliminary RMM assessment, & evaluate fraud-specific controls |
| Use substantive tests of details designed to obtain evidence at or near entity's fiscal year-end with large sample sizes | When control risk is high and could not be relied upon, what should happen considering nature, timing, & extent of further procedures? |
| Use substantive analytical procedures to obtain evidence at an interim date before entity's year-end with much smaller sample sizes | When control risk is low and could possibly be relied upon, what should happen considering nature, timing, & extent of further procedures? |
| Control Environment | Sets tone of organization & is foundation for all other components of IC. Integrity/ethical values, BoD, mgmt's philosophy, org structure, fin. reporting competencies, authority/responsibility, HR policies/practices, audit committee, & small/mid entities |
| 3-6 independent members & each member is financially literate & 1 must be a financial expert | Audit Committee Composition |
| Control Activities | Preventive/detective controls, mgmt review controls, info processing controls, system-generated reports, physical security controls, access controls, cybersecurity, separation of duties, levels of automation, & selection & development of controls |
| Preventive Controls | Procedures that prevent misstatements before they happen; preferred |
| Detective Controls | Procedures that detect misstatements after they happen |
| Authorization Recording Custody of Assets Periodic Reconciliation Incompatible Responsibilities | Separation of duties components |
| Incompatible Responsibilities | Combinations of responsibilities that place a person alone in a position to create & conceal misstatements due to errors/frauds in their normal job |
| Purely manual controls Manual controls relying on system-generated report Entirely automated controls | Levels of Automation |
| Appropriate Timely Accurate Accessible | What must the quality of information be (4 adjectives)? |
| Internally & Externally | How must communication happen (2 ways)? |
| Upstream Communication | Flow of information, operational feedback, exception reports, and concerns from lower-level employees up through management to senior leadership and the BoD/Audit Committee |
| Testing | Reliance on company-produced information requires ____________ |
| Monitoring | Ongoing & separate evaluations & reporting deficiencies. Does not include regular management & supervisory control activities & other actions that employees take in performing their every day duties |
| Monitoring Examples | Internal audit evaluations, operating reports & metrics, supervisory review, self-assessments, audit committee inquiries, quality assurance reviews of internal audit |
| Monitoring: oversight evaluations performed after the fact to verify that those control activities are actually functioning as designed Control Activities: first-line policies and procedures built directly into daily transactions to prevent/detect errors | Monitoring vs. Control Activities |
| Understand & document client's IC Assess control risk Identify controls to test & perform tests of controls | What are the 3 phases of the IC evaluation? |
| Entity-Level Controls | Controls that are pervasive to IC system & reliability of financial statements taken as a whole. |
| Transaction-Level Controls | Controls that pertain to specific classes of transactions, account balances, & disclosures |
| Walkthrough | Tracing one or more transactions through audit trail from initiation of transaction to its inclusion in financial statements |
| Design Effectiveness | Determines whether IC over financial reporting, if operating effectively, would be expected to prevent/detect errors/frauds that could result in a material misstatement in financial statements |
| Operating Effectiveness | Refers to whether control is operating as designed & whether person performing control possesses necessary authority & qualifications to perform control effectively |
| Narrative Flowchart IC Questionnaire | What are 3 documentation methods? |
| Narrative | Describe environmental elements, process flow of transactions through accounting system, & all of control activities that have been implemented |
| Flowchart | Audit documentation that provides visual display of accounting system & control activities in entity's IC system |
| IC Questionnaire | Audit documentation that uses a checklist of IC-related questions to gain & document understanding of client's IC |
| Controls are ineffective | Reason to test controls |
| Testing costs exceed substantive testing costs | Reason to not test controls |
| Issuers: must Non-Issuers: may choose not to | Who must and who may not test controls? |
| Categorizing Controls | Preventive or detective, automated or manual, & frequency |
| Relied upon | Only controls that are ____________________ are tested |
| Exception Testing | Designed to identify violation of particular control activity through use of automated test procedure designed to test all items in a population |
| Professional judgement Acceptable rate of deviation | Required level of effectiveness (2) |
| Throughout period, interim testing, or reliance on prior-year tests | How often can testing occur? |
| Inquiry Observation Inspection/Examination of Documents Reperformance | What are the 4 methods of testing controls from least to most persuasive? |
| Upward | Reassessing risk can only go _____________ |
| Dual-Purpose Tests | Audit procedure used as both test of controls & substantive test |
| IC Deficiency | Exists when IC design or operation of control activity under consideration does not allow entity's management/employees to detect or prevent misstatements in a timely fashion |
| Design Deficiency | Problem relating to control activity that is missing , or existing control activity that is so poorly designed that it fails to satisfy control's objective |
| Operating Deficiency | Occurs when control does not operate as it was designed to or when person responsible for completing control does not possess authority or competence to perform control in an effective manner |
| Control Deficiency Significant Deficiency Material Weakness | Levels of Deficiency |
| Significant Deficiency | Deficiency or deficiencies that is less severe than material weakness yet important enough to merit attention by those charged with governance |
| Material Weakness | Deficiency or deficiencies that results in reasonable possibility that material misstatement would not be prevented or detected on timely basis |
| Writing | Auditors' IC communication must be in __________ & presented to management, BoD, or audit committee |
| Management Letter | May contain commentary & suggestions on variety of matters in addition to IC matters, not required |
| Clients & Third-Party Users | Auditors have a responsibility to whom (2)? |
| Sources of Client Losses | Breach of contract. failure to detect fraud or misappropriation that a GAAS audit should have found |
| Third-Party Losses | Reliance on financial statements not presented under GAAP |
| "Deep Pockets" Theory | Concept that lawsuits may be brought against auditors not because they are necessarily at fault but because they are only party with resources against which recovery can be made |
| Expectation Gap | Difference between actual work & assurance required by GAAS & expectation of that work by general public |
| Common Law | Uses legal precedent to identify fault & responsibility of parties when there is no violation of written law/statute; clients can sue |
| Statutory Law | Based on laws passed by legislation bodies & compiled in federal, state, & municipal codes; investors/shareholders or regulators can sue |
| Auditors' Main Defense | GAAS audit performed with due professional care |
| Breach of Contract Tort | Bases of suit under common law |
| Breach of Contract | Claim that accounting or auditing services were not performed in manner described in contract |
| Tort Action | Cover civil complaints (fraud, deceit, injury) arising from auditors' failure to exercise appropriate level of professional care |
| Privity of Contract | Situation in which parties have a contractual relationship |
| Ordinary Negligence Gross Negligence Fraud | What are the 3 levels of substandard performance (least to most severe)? |
| Ordinary Negligence | Unintentional breach of duty owed to another party because of a lack of reasonable care |
| Gross Negligence | Breach of duty owed to another party because of a lack of minimal care |
| Fraud | Misrepresentation of facts that individual knows to be false with intention to deceive |
| Constructive Fraud | Characterized by reckless disregard for the truth |
| Plaintiff must show these for clients under common law | Economic loss, breach of contract or failure to exercise appropriate professional care, & causation |
| Auditors' defenses for client claims under common law | Appropriate care/contract performed, causation, & contributory negligence |
| Contributory Negligence | Action on part of client were in part responsible for loss |
| Plaintiff must show these for third parties under common law | Economic loss, failure of professional care, material misstatement, & reliance |
| Liable | Gross negligence & fraud is __________ to all third parties |
| Varies | Ordinary negligence ___________ by jurisdiction |
| Primary Beneficiary | Person known by name to auditor for whose primary benefit audit or other accounting service is performed |
| Foreseen Party | Limited class of individuals/organizations that could be reasonably expected to rely on auditors' work; ordinary negligence |
| Foreseeable Party | Third party that independent auditor could reasonably anticipate/foresee relying on audited financial statements for routine business decisions, even if auditor had no specific knowledge of that party's identity or transaction when conducting the audit. |
| Privity Approach | Ultramares Corp vs. Touche (1931) established what approach? |
| Primary Beneficiary & 3-Pronged Test | Credit Alliance vs. Arthur Andersen (1985) established what approach? |
| Foreseen Parties (Restatement of Torts) | Rusch Factors vs. Levin (1968) & Fleet National Bank vs. Gloucester Co (1994) established what approach? |
| Foreseeable Parties | Rosenblum Inc vs. Adler (1983) established what approach? |
| Auditors' defenses for third parties under common law | Lack of standing, causation, & work performed in accordance with professional standards |
| Junior Auditor Practices | Documentation, professional skepticism, avoid same as last year, & resolve differences |
| Compilation & Review Services | Engagement letters & clear communication of service level |
| Federal False Statements Statute | Makes it a federal crime to knowingly and willfully lie to, conceal material facts from, or submit false documentation to the federal government |
| Conspiracy Statute | Allows government to prosecute agreements between two or more people to break federal law or interfere with government functions |
| Securities Act of 1933 | Regulates initial issuance of securities by registrants to investing public through a market (including IPOs), no person may lawfully buy, sell, offer to buy, or offer to sell any security by interstate commerce unless registration statement is effective |
| Registration Statement | Set of documents filed with SEC prior to offering of securities |
| Prospectus | Legal document offering securities for sale & includes significant information about issuing entity, including historical financial statements, & other necessary disclosures |
| SA of 1933 Section 11a Civil Liability | Notes that number of parties involved in registration & sale process might be liable to persons acquiring securities |
| Sections 3 & 4, Regulation D | Exemptions of SA 1933 |
| Any person | Who may sue under SA 1933 Section 11? |
| Signers, directors, accountants, underwriters | Who may be sued under SA 1933 Section 11? |
| Economic loss & material misstatement | Plaintiff proves what under SA 1933 Section 11? |
| Auditors | Liable for ordinary negligence, burden of proof on _____________ |
| Comfort Letter | Letter issued by auditors to underwriters of securities that provides opinion on fairness of issuers' financial statements |
| Due diligence & causation | Auditor defenses under SA of 1933 Section 11 |
| SA of 1933 Section 13 Statute of Limitations | Requires any suits to be brought within 1 year after discovery of materially misstated statement or omission or within 3 years after public offering |
| SA of 1933 Section 17 Antifraud | Makes it unlawful to "use mails or instruments of transportation in interstate commerce" in an effort to defraud others |
| SA of 1933 Section 24 Criminal Liability ("willful") | Monetary fines, prison terms, or both; keywords are "willful or willfully" |
| Elements of Exposure under Statutory Law | Investors buy/sell securities, economic loss, material misstatement, & class-action litigation |
| SA of 1933 Section 11b Civil Liability | Limits liability to issuers of securities with some exceptions; imposes liability for auditors for acts representing ordinary negligence |
| Securities Exchange Act of 1934 | Trading of securities; registration criteria Filings 10-K, 10-Q, & 8-K |
| Regulation S-X | Covers annual & interim financial statements |
| Regulation S-K | Covers other supplementary disclosures |
| Financial Reporting Releases | Express new rules & policies about disclosure |
| Staff Accounting Bulletins | Provide unofficial, but important, interpretations of Regulations S-X & S-K |
| SEA of 1934 Section 10 Antifraud | Makes it unlawful for persons to use manipulative or deceptive devices in connection with purchase or sale of securities |
| SEA of 1934 Rule 10b-5 Antifraud | Plaintiffs must prove scienter to impose liability |
| Scienter | Mental state embracing intent to deceive, manipulate, or defraud |
| Under SEA of 1934 Section 18 Civil Liability plaintiff must prove | Economic loss, material misstatement, reliance/causation, & auditor awareness (scienter). Burden of proof on plaintiff |
| Under SEA of 1934 Section 18 Civil Liability auditors' defenses | Good faith & no knowledge of misstatement |
| SEA of 1934 Section 32 Criminal Liability | "Willfully & knowingly", 5M & imprisonment up to 20 years |
| Foreign Corrupt Practices Act (FCPA) | Made it illegal for corporations or their officers to knowingly bribe foreign officials or participate in bribery schemes involving foreign officials to obtain or retain business. Required entities to develop & maintain effective ICs |
| Factors increasing exposure of auditors' liability | Publicized audit failures, litigation as a recovery avenue, complex standards, joint & several liability, & class actions |
| Joint & Several Liability | Where multiple defendants are named, full amount of damage award may be collected from any of defendants named in lawsuit even though they may be only partially at fault |
| Class-Action Suits | Relatively small number of aggrieved plaintiffs with small individual claims can bring suit for large damages in name of extended class |
| Sarbanes-Oxley Statute of Limitations | 2 year discovery, 5 year repose rule, & 180 day whistleblower deadline |
| Sarbanes-Oxley Penalties | Section 906 knowing ($1M / 10 yrs) vs. willful ($5M / 20 yrs) false certifications, plus Section 807 securities fraud (25 yrs) |
| Sarbanes-Oxley Mail & Wire Fraud | Section 903 quad-multiplier from 5 to 20 years, along with the 30-year bank-affecting ceiling and Section 902 attempt/conspiracy parity |
| Sarbanes-Oxley Document Destruction | Section 802 / 18 U.S.C. § 1519 "anti-shredding" standard (20 yrs) without requiring an existing pending proceeding |
| Sarbanes-Oxley 7-year Retention | Section 802 / 18 U.S.C. § 1520 and SEC Rule 2-06, including differing opinions/dissent notes and the 10-year criminal failure-to-retain penalty. Must retain documents for how long? |
| Sarbanes-Oxley PCAOB Enforcement | Title I authority, registration revocations, cooperation requirements, SEC supervisory relationship, and evidentiary thresholds |
| Racketeer Influence & Corrupt Organizations Act (RICO) | Enacted to combat organized crime in business/organization by providing for extended criminal penalties & civil courses of action for various offenses |
| Aiding & Abetting | Plaintiffs have ability to include parties in legal actions who were indirectly involved with particular offenses |
| Proportionate Liability | Payment of share of court's damage award be based on extent of fault exhibited by convicted defendant |
| Private Securities Litigation Reform Act (1995) | Federal statute enacted by the U.S. Congress to curb abusive, frivolous, and speculative class-action lawsuits filed against public companies, their executives, and auditors under the federal securities laws |
| Class Action Fairness Act (2005) | Federal law enacted to curb forum shopping by expanding federal jurisdiction over large, multistate class and mass actions |
| Securities Litigation Uniform Standards Act (1998) | Federal statute enacted to prevent plaintiffs from evading the PSLRA by shifting securities fraud class actions to state court |
| Alternative Dispute Resolution | Considered a liability cap. Limits a company's right to sue its auditor by requiring company to seek arbitration/mediation in event of disagreement over books |
| In pari delicto | In equal fault, the position of the defendant is the stronger |
| Factors affecting litigation risk | Market & financial, financial reporting, governance & conduct, & industry & transactions |
| Ethics | According to Wheelwright, it can be thought of as "that branch of philosophy which is the systematic study of reflective choice, of standards of right and wrong by which it is to be guided, & of good toward which it may ultimately be directed" |
| Decision Problems Moral Principles Good or Bad | What are the 3 key elements of ethics? |
| Problem Situation | Exists whenever individual must make choice among alternative actions & right choice is not absolutely clear |
| Ethical Behavior | That which produces the greatest good, &/or conforms to moral rules & principles, &/or best demonstrates virtues you value most; most difficult problem situations arise when 2 or more rules conflict or when rule & criterion of greatest good conflict |
| Code of Professional Ethics | Provide guidance in addressing situations that may not be specifically available in general ethics theories |
| Code | Public declaration of principled conduct & a means of facilitating enforcement of standards of conduct |
| Milgram Experiment (Yale) | Found subordinating judgement to authority figures |
| Reflective Choice Sequence | Recognize decision problem, collect evidence, analyze, & act |
| Questions in Professional Ethics Decisions | What written & unwritten rules govern my behavior? What are the consequences & whom does my decision affect? |
| 3 Step Ethical Decision Framework | Define facts & circumstances (who, what, where, why, how), identify actor Specify major alternative actions & their consequences Choose a course of action & justify it |
| Titus & Keeton | Who says moral responsibility rests with individual |
| Imperative Principle Utilitarianism Generalization Argument | Professionals apply principles in which order? |
| Virtue | Decision must align with own _________ |
| Imperative Principle | Immanuel Kant: Actions are inherently right or wrong based on duty and universal rules, independent of the consequences. n act is moral only if you would want everyone to follow that rule in all circumstances |
| Principle of Utilitarianism | Moral rightness of an action is determined solely by its consequences, "good for the greatest number of people" |
| Generalization Argument | If the collective consequence of everyone performing the act is unacceptable or destructive, the individual cannot perform the act—even if doing it in isolation harms no one. What would happen if everyone acted that way? |
| Virtue Ethics | Aristotle & Plato, Four Cardinal Virtues (wisdom, justice, fortitude, & temperance). What action will help me become my ideal self? What action would I be proudest of? |
| Categorical Imperative (rules) Utilitarianism (outcomes) Virtue Ethics (character) | What are the 3 major approaches? |
| Advance | Decide in ___________ what ethical principle you will follow |
| SEC | Persons who practice before the SEC |
| PCAOB | Registered firms & individuals among auditing issuers |
| IFAC (IESBA Code of Ethics) | Firms & CPAs on multinational audits |
| AICPA (PEEC) | AICPA members |
| State Society of CPAs | Society members |
| State Board of Accountancy | Persons licensed by state |
| Two Purposes of US SEC | Jurisdiction over issuers & oversees PCAOB under Sarbanes-Oxley Act (2002) |
| PCAOB | Standards, quality control, ethics, independence for issuer auditors, SEC approves their rules, & has influence beyond public entities |
| International Federation of Accountants (IFAC) | International Ethics Standards Board for Accountants; IESBA Code, comply with the more restrictive standard; AICPA convergence & codification project |
| Professional Ethics Executive Committee (PEEC) of AICPA | Applies to even non-members; states incorporate the code into statutes, 2014 recodification; conceptual framework approach |
| Responsibilities Public Interest Integrity Objectivity & Independence Due Care Scope & Nature of Service | What is the set of 6 positive essays expressing profession's high ldeals? |
| Structure of AICPA Code of Professional Conduct | Preface (applicable to all members), Preface Sections, Part 1 Sections, Part 2 Sections, & Part 3 Sections |
| Principles | Aspirational goals of behavior |
| Rules | Enforceable ethical regulations that CPAs must follow |
| Interpretations | Applications of rules to specific business situations |
| Covered Member | Who cannot have a direct financial interest, have a material indirect financial interest, be trustee/administrator of estate with such interest, have material joint investment, have a loan to or from, participate in engagement if formerly employed |
| Covered Member's Immediate Family | Who cannot have a direct financial interest, have material indirect financial interest, have financial interest allowing significant influence, or be in a position to influence audit |
| Partner or Professional Employee | Who cannot be associated with client as director, officer, employee, promoter, underwriter, voting trustee, or pension trustee |
| Code of Conduct Conceptual Framework Steps | Identify & evaluate threats Determine whether safeguards eliminate or sufficiently mitigate them Determine whether independence is impaired |
| Code | Used only when the __________ gives no specific guidance; cannot override rules or interpretations |
| Safeguards | Training on independence, threats of disciplinary action, hotlines, tone at top, & using different offices or firms |
| 7 Threats to Independence | Adverse Interest Undue Influence Advocacy Management Participation Familiarity Self-Interest Self-Review |
| Adverse Interest & Undue Influence Threats | CPAs acting in opposition to clients (through litigation) & attempts to coerce or influence CPA member |
| Advocacy & Management Participation Threats | CPAs promoting client's interests or position & CPAs taking on role of client management or otherwise performing management functions |
| Familiarity Threat | CPAs becoming too synthetic to client interests because of a long-standing or close relationships |
| Financial Self-Interest Threat | CPAs having financial relationship with client |
| Self-Review Threat | CPAs reviewing their own work |
| Independence in Fact Independence in Appearance | What are the 2 SEC comprehensive rule premises? |
| 4 SEC Principles | Creates mutual or conflicting interest Places firm in position of auditing its own work Results in firm personnel acting as management/employees Places firm in position of advocate |
| Other Effects of Sarbanes-Oxley on Independence | Audit committee responsible for independence in appearance, scope of services, preapproval Partner Rotation 1- year Cooling Off |
| Integrity & Objectivity Rule | Applies to CPAs in public practice & in business, client advocacy acceptable if maintained, business CPAs & their employer's external auditor |
| 3 Emphases of Integrity & Objectivity Rule | Free from conflicts of interest Not knowingly misrepresent facts Not subordinate judgement to others |
| General Standards Rule | Professional Competence Due Professional Care Planning & Supervision Sufficient Relevant Data |
| Compliance with Standards Rule | Make noncompliance with technical standards subject to disciplinary proceedings |
| Accounting Principles Rule | Requires adherence to official pronouncements unless such adherence would be misleading |
| Acts Discreditable Rule | Moral Clause of Code; only occasionally basis for disciplinary action |
| Contingent Fee | Type of compensation established for performance of any service in arrangement in which no amount will be charged unless specific finding or result is attained or fee otherwise depends on result |
| Commission Fee | Percentage fee charged for professional services in connection with executing transaction or performing some other business activity |
| Referral Fee | Compensation CPA receives for recommending another CPA's service & that CPA pays to obtain client |
| Advertising & Other Forms of Solicitation Rule | Prohibit false or unjustified expectations of favorable results, imply ability to influence court, tribunal, or agency, fee estimate likely to increase without notice, & any representation likely to deceive |
| Confidential Client Information Rule | Rules are based on belief that they facilitate free flow of information between parties to relationship. Auditors are not legally obligated to blow whistle on clients |
| Form of Organization & Name Rule | Allows CPAs to practice public accounting in any form of organization permitted by state board of accountancy & authorized by law |
| Characteristics of Accounting Organization | Majority ownership & voting rights held by CPAs Non-CPA owners active in firm CPA has ultimate responsibility for firm's services Non-CPA owners may use titles but cannot hold out as CPA Continuing education requirements Non-CPA owners abide by Code |
| Self-Regulation | Quality control reviews & disciplinary actions conducted by fellow CPAs - professional peers |
| Self-Regulatory Discipline | Internal disciplinary process conducted by voluntary professional associations (AICPA / JEEP) to enforce the Code of Professional Conduct. Penalty: expulsion or suspension, cannot revoke license, & names published |
| Public Regulation Discipline | Legal disciplinary enforcement conducted by government/statutory authorities. Can revoke license, bar/suspend accountants from practicing, & can revoke public firm registrations |
| CPAs in Business | Applicability of AICPA Code: Integrity & Objectivity, General Standards, Compliance with Standards, & Accounting Principles |
| CPAs in Public Practice | Applicability of AICPA Code: Independence, Fees & Other Types of Remuneration, Advertising & Other Forms of Solicitation, Confidential Information, & Form of Organization & Name |
| All CPAs (including unemployed & retired) | Applicability of AICPA Code: Acts Discreditable |
| Integrity & Objectivity | What are the larger components of AICPA Code? |
| Independence | Is a special condition (required for audit & attest services) in AICPA Code |
| Imperative | Rules take an ______________ form |
| Utilitarianism & Generalization Rationale | What underlies most rules? |
| AICPA, Professional Organizations, & Firms | There is an anonymous hotline where? |
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MOWGaming04
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