PCAOB
- created in 2002 by SOX, oversees CPAs and public acct firms who audit other public companies
- 5-member board (only 2 are CPAs), under the authority of the SEC
- orig adopted AICPA ASB's Statements on Auditing Standards as interim standards, began issui
Dodd-Frank Act
expanded PCAOB's scope of responsibility to include overseeing audits of securities brokers and dealers
Best describes role of corporate governance...
- rules, processes, and laws by which businesses are operated, regulated and controlled
- effective corp gov requires that interest of company's management, shareholders, creditors, and other stakeholders be properly balanced
- shareholders elect BOD to o
Why be independent in appearance
- CPA's product is credibility
- AICPA established code of conduct that provides practical guidance to the individual member in maintaining a professional attitude; designed to produce assurance to clients and to the public that the profession intends to
independence in appearance
avoidance of circumstances that might cause a reasonable and informed third party, aware of all relevant information, including safeguards applied ,to reasonably conclude that the integrity, objectivity, or professional skepticism of an audit firm or memb
Who sets auditing standards for public company audits? For private company audits?
Public: PCAOB
Private: AICPA
Know actions of auditor to obtain REASONABLE assurance for their audit opinion
- plans the work and properly supervises assistants
- determines and applies appropriate materiality level or levels throughout the audit
- identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of
Primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client
- provide reasonable assurance that the firm and its personnel comply with relevant ethical requirements (minimize likelihood of association with clients whose mgt lacks integrity)
- thorough investigation of prospective clients is necessary in deciding w
Instances that impair independence of the CPA - requirements for all partners and staff
- no partner or professional employee of CPA firm or immediate family may own more than 5% of an attest client's outstanding equity securities during period of professional engagements (no group of persons acting together may own more than 5%)
- if a part
Instances that impair independence of the CPA - requirements for covered members
- all direct financial interests are prohibited, regardless of amount (owning capital stock or providing loans to client)
- loans to or from an attest client, officer, or individual owning 10% or more of the attest clients equity also present an independe
covered member
- individual, firm, or entity that is capable of influencing an attest engagement
- IF A COVERED MEMBER'S INDEPENDENCE IS IMPAIRED, THE FIRM'S INDEPENDENCE IS IMPAIRED
Types:
- individual on attest engagement team
- in a position to influence the attest e
Instances that impair independence of CPA when auditing a public company (SEC / PCAOB rules) - p. 90
- SOX makes it unlawful for a registered public accounting firm that audits a public company to "provide a variety of non attest services to that client"
- may provide allowed nonattest services ONLY if they are approved in advance by the audit committee
Why public traded corporations follow the practice of having the outside auditor appointed by the board of directors (or audit committee of the board) or elected by the stockholders
- NYSE, American Stock Exchange, and NASDAQ All require independent audit committees by listed companies
- audit committees must have at least 3 independent, non-management, financially literate individuals, and the chair must have accounting or financial
Who ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting?
State Board of Accountancy
Definition of individuals in a position to influence an attest engagement according to the Code of Professional Conduct
Covered Member
- individual on attest engagement team
- in a position to influence the attest engagement (partner directly supervising partner in charge of engagement)
- partner or partner equivalents or managers who provide non attest services to client
Additional independence requirements for covered members
- financial relationship: all direct financial interests are prohibited, regardless of amount; material indirect financial interests are prohibited
- a covered member's immediate family members are subject to the same independence requirements as the cove
AICPA Code of Professional Conduct in determining a fee for service (what isn't allowed?)
contingent fee services are prohibited (as well as commission?)
Ethics to refrain from disclosing any confidential client information (know the exceptions)
1) to meet disclosure and performance requirements under GAAP & GAAS
2) to comply with a valid subpoena
3) allow a review of a member's professional practice under the authority of the AICPA, a state CPA society, or a state board of accountancy
4) to comp
Requirements under the law apply when the client has committed an illegal act and:
- has a material effect on financial statements, senior mgt and BOD have not taken appropriate remedial action, failure to take remedial action is reasonably expected to warrant a departure from a standard audit report or resignation by the auditors
- whe
Ultramares - known user approach, privity vs. near privity
- auditors knew that audited FS were for use for a particular purpose by a known user (3rd party beneficiary)
- auditors should be held liable to their client and any IDENTIFIED third-party ben as a user of the CPA's report of the audit report for ordinar
Restatement of Torts - foreseen 3rd party approach
auditors knew the audited FS were for use for a particular purpose, but didn't know necessarily who the specific user was (FS were known to be for use in helping to sell the business to an unidentified purchaser)
Rosenblum - reasonably foreseeable 3rd party approach
auditors should have realized that it was reasonably foreseeable that the financial statements would be used by this user
- widest range of liability for auditors
Best defense a CPA firm can assert in a suit for common law fraud based on its unqualified opinion on materially false financial statements
CPAS are not liable to any party if they can prove that they performed their services with DUE PROFESSIONAL CARE - complete defense against any charge of improper conduct
- Private Securities Litigation Reform Act of 1995: designed to limit frivolous secu
scienter
intent to deceive, manipulate, or defraud (Hochfelder case)
What is an investor required to prove to recover from a CPA under Rule 10b-5 under Section 10(b) of the Securities Exchange Act of 1934?
SEA 1934: offers protection to both original and subsequent purchasers and sellers of securities
Plaintiff must prove:
- sustained losses
- financial statements were misleading
- relied upon financial statements
Requires plaintiffs must prove scienter on
To prevail under Section 11 of the Securities Act of 1933 for the misstatements contained in the financial statements, a third party must prove...
A loss and misleading FS/registration statement (no reliance needed)
- auditor's defense would be due diligence
Who is included/excluded from the class of "foreseen users" under the Second Restatement approach?
includes third parties who are foreseen users of the audited FS (specific identity need not be known to the CPAs)
What provides motivation to bring actions under RICO?
Accountants can't be held liable under RICO unless they actually participated in the operation or management of the organization
Main goals of internal auditing profession
- Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations
- Helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate
IIA's explicit definition of internal auditing
- Institute's Code of Ethics extends definition to include 2 essential components: principles that are relevant to the profession and practice of internal audition, and rules of conduct that describe behavior norms expected of internal auditors (these are
Basic Components of a review report of a CPA on NON-PUBLIC financial statements
1. level of assurance provided: moderate (limited)
2. risk of material misstatement: moderate
3. nature of assurance in report: "we are not aware of any material modifications that should be made..."
4. procedures: generally limited to inquiry and analyti
What types of engagements require independence?
Independence is critical when performing audits and other assurance services
General standards - Yes
Standards on fieldwork - No
Standards of reporting - No
Identify the broad categories of Threats to Independence
1. Adverse interest: actions between public acct and the client that are in opposition (threatened or actual litigation between them)
2. Advocacy: actions promoting an attest client's interest or position (promoting client securities as part of an IPO, re
In the context of agency theory (information asymmetry), be able to distinguish between various risks that creates the demand for audits
- business risk: risk assoc with company's survival and profitability, includes risk the company won't make interest pmts and replay the principal of the loan bc of economic conditions or poor management decisions (assess factors such as: financial positi
Concept of audit risk
risk that the audit may UNKNOWINGLY fail to appropriately modify the opinion on financial statements that are materially misstated
- when audit risk is at an acceptably low level, reasonable assurance is achieved
Evidence is reliable if it ...
Only if sufficient evidence is gathered in all of these significant assertions can the auditor provide an opinion on whether the financial statements are presented in accordance with GAAP:
- Assets listen on balance sheet really exist, company has rights
The basic purpose of a financial statement audit
Provide financial statement users with an opinion by the auditor whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework
- Enhances degree of confidence that intended
Conditions for various audit opinions - Unqualified (unmodified)
- Audit was adequate in scope and the FS present fairly the financial position, results of operations, and cash flows in conforming with GAAP
- taking no exceptions and inserting no modifications or qualifications
- information may be added to what remain
Conditions for various audit opinions - Qualified
- States that "except for the effects of the matter to which the qualification relates - the issue", the financial statements are fairly presented
- May be due to limitation on the scope of their audit, or due to one or more items in the fin st that aren'
Conditions for various audit opinions - Adverse
- States financial statements are not fairly presented
- Rare, because this situation would be discussed among the auditor's and clients management so they can make changes to avoid this opinion
- Alternatively, they may decide to terminate the audit enga
Conditions for various audit opinions - Disclaimer of opinion
- Unable to determine the overall fairness of the financial statements
- Results from very significant limitations on the scope of the auditors' examination
Materiality definiton; and concept of materiality is a matter...
- Material can be defined as "sufficiently important to influence decisions made by reasonable users of FS"
- Materiality is influenced by the size of the organization that is being audited
- One of the most significant elements of professional judgment i
Auditor's unqualified report means...
- Unqualified opinion indicates that the audit was adequate in scope and that the financial statements present fairly the financial position, results of operations, and cash flows in conformity with GAAP
- Under these circumstances, the auditors are takin
Conceptual differences between the attestation standards and generally accepted auditing standards; difference between an examination, attest services, and audit services
- Exam is a form of attestation (including review and agreed-upon procedures)
- An audit that involves historical financial statements, highest form of assurance that CPAs can offer
- Attestation services are a type of assurance service; although, there a
Requirements of the Sarbanes-Oxley Act, aspects of the act; identify an item that isn't part of the act
- Included a set of reforms that toughened penalties for corporate fraud, restricted the types of consulting CPAs may perform for public company audit clients, and created the Public Company Accounting Oversight Board to oversee the accounting profession
PCAOB was established in 2002 (SOX) with the following functions:
- Register public accounting firms that prepare audit reports for financial statement issuers
- Establish or adopt auditing, quality control, ethics, independence, and other standards relating to audit reports for issuers
- Conduct inspections of register
Statements on Auditing Standards (SASs)
Established by Auditing Standards Board - responsible for establishing auditing standards for NONpublic companies
- Statements on Standards for Attest Engagements (SSAEs): guidance for attesting to information other than FS
- Statements on Standards for A
Audit with an attitude of...
Professional skepticism: questioning mind, being alert to conditions that may include possible misstatement due to fraud or error, and a critical assessment of audit evidence
All sections/elements of the PUBLIC (PCAOB) company audit report
SOX requires that auditors of large publicly traded companies in the US perform an integrated audit that provides assurance on both the financial statements and the effectiveness of internal control over financial reporting (can issue separate or combined