Generally Accepted Auditing Standards
Generally Accepted Auditing Standards
???Auditing plays a vital role in business, government, and our economy??? [ (Boynton, W. C., & Johnson, R. N., 2006, p. 5) ]. Investors and creditors rely on the assurances provided by both internal and external audits that use the Generally Accepted Auditing Standards (GAAS), the Sarbanes-Oxley Act of 2002 (SOX), and the Public Company Accounting Oversight Board (PCAOB). These standards and regulations define both the audit and the auditor whether performing financial, operational, or compliance audits.
The three main types of audits are financial statement, compliance, and operational. Financial statement audits require obtaining and evaluating evidence regarding presentation of financial position, operations result, and cash flows in an attempt to express an opinion regarding their conformity to GAAP. Compliance audits require obtaining and evaluating evidence regarding certain financial or operational activities in an attempt to express an opinion regarding their conformity to specified rules, regulations, or conditions. Operational audits require obtaining and evaluating evidence regarding the efficiency and effectiveness of operational activities in relation to specified objectives.
Generally Accepted Auditing Standards (GAAS)
The 10 generally accepted auditing standards (GAAS) were originally created by the American Institute of Certified Public Accountants (AICPA) in the late 1940s, having since been incorporated into the Statements on Auditing Standards (SAS), were created to provide guidance and a conceptual framework for conducting audits. The GAAS are sorted into three categories: General Standards, Standards of Field Work, and Standards of Reporting.
Adequate Technical Training and Proficiency has three factors: formal university education, practical training and experience in auditing, and continuing professional education throughout the professional career. ???Most states require candidates for the CPA Exam to earn the equivalent of 150 semester units of college credit??? while ???continuing professional education requirements mandated by many state boards of accountancy, the AICPA, and state societies??? [ (Boynton, W. C., & Johnson, R. N., 2006, p. 50) ].
Independence in Mental Attitude means ???competency alone is not sufficient??? (Boynton, W. C., & Johnson, R. N., 2006, p. 51). The auditor must maintain freedom from management in order to perform both an independent audit and the associated reports. In addition, the auditor must meet the independence requirements set forth by the AICPA??™s Code of Professional Conduct.
Due Professional Care requires that an auditor be diligent and careful when performing an audit and when issuing the associated reports. This includes a critical review of work performed and judgments exercised by less experienced personnel participating in the audit. The auditor must act on good faith and not be negligent both while performing the audit and when reporting the findings.
Standards of Field Work
Adequate Planning and Proper Supervision is self-explanatory. Adequate planning involves developing audit strategies and designing audit programs for the audit process. Proper supervision in essential because less experienced participants may execute major parts of the audit process. Both their work and judgments need to be checked for consistency with GAAP.
Understanding the Entity and Its Environment, Including Internal Control is important because of the series of factors that influence the risk of material misstatement. An auditor needs to understand the objectives, strategies, and business risks associated with material misstatement in financial statements. According to the text, the auditor must understand:
* ???The entity??™s industry, regulatory, and other external factors
* The nature of the entity, including its application of accounting policies
* The entity??™s objectives and strategies and related business risks, as well as its risk assessment process
* The entity??™s measurement and review of financial performance
* The entity??™s system of internal control??? [ (Boynton, W. C., & Johnson, R. N., 2006, p. 52) ].
Knowledge of the entity??™s internal control system is very important. The auditor must assess if the entity has effective or ineffective internal controls in order to properly assess the risk of material misstatement.
Sufficient Competent Audit Evidence requires the auditor to have a ???reasonable basis for expressing an opinion on the entity??™s financial statements??? (Boynton, W. C., & Johnson, R. N., 2006, p. 52). The auditor must have both sufficient and competent evidence to support his/her findings.
Standards of Reporting
The first two standards require (1) Financial Statements [are] Presented in Accordance with GAAP and (2) Consistency in the Application of GAAP. The GAAP is the established criteria for ???evaluating management??™s financial statement assertions??? [ (Boynton, W. C., & Johnson, R. N., 2006, p. 53) ]. The auditor must report in its findings any occurrence where GAAP is not constantly followed between the current period and the preceding period.
Adequacy of Informative Disclosures requires the auditor to check the notes to the financial statements and include any necessary disclosures in their findings. Disclosures are an important part of the financial statements. This standard only affects the auditor??™s report if the disclosures by management are inadequate.
Expression of Opinion requires the auditor to express an opinion on the financial statements as a single unit or to state ???an opinion cannot be expressed???. The financial statements must be viewed as a whole in order to express an opinion. There are several types of opinions that an auditor may express.
SOX and PCAOB
The Sarbanes-Oxley Act of 2002 (SOX) and Public Companies Accounting Oversight Board (PCAOB) influenced the auditing environment in both the public and private sectors. Sox made it illegal to provide certain nonattest service while performing auditing services. Sox also increased the penalty for fraudulent financial reporting. The PCAOB ???establish[es], among other things, auditing and related attestation standards to be followed by public accounting firms when auditing public companies??? [ (Boynton, W. C., & Johnson, R. N., 2006, p. 54) ]. The rules, regulations, and penalties set forth by SOX, PCAOB, and other financial regulatory committees has made public and private companies, whether traded or not, produce more accurate and reliable financial statements.
Whether performing a financial statements audit, an operational audit, or a compliance audit, the GAAS are the guiding framework for a successful and compliant audit. The General Standards guide the qualifications of the auditor and the quality of the work. The Standards of Field Work guide the auditors conduct in the field. The standards of Reporting guide the four reporting standards that must be met. Combined with SOX and the PCAOB, plus the multitude of financial regulatory groups and committees, auditing has been revolutionized, with its honor being restored through regulations, rules, and penalties.
Boynton, W. C., & Johnson, R. N. (2006). Modern auditing: Assurance services and the integrity of financial reporting (8 ed.). Hoboken, NJ: John Wiley & Sons.