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EFFECTIVE DATE AND APPLICABILITY
Original Pronouncements Statement of Auditing Standards (SAS) 1, November 1972; SAS 5, July 1975; SAS 25, November 1979; SAS 41, April 1982; SAS 43, August 1982; SAS 78, December 1995; SAS 82, February 1997; SAS 95, December 2001; SAS 98, September 2002; and SAS 99, October 2002.
Effective Date When issued, November 1972, except for amendments on quality control (November 1979), services other than audits of financial statements (August 31, 1982), and consideration of fraud (February 1997). SAS 95 is effective for audits of financial statements for periods beginning on or after December 15, 2001. The amendments for SAS 98 are effective upon issuance, and the amendment for SAS 99 is effective for audits of financial statements for periods beginning on or after December 15, 2002, with earlier application permitted.
Applicability All audits in accordance with generally accepted auditing standards and other services covered by SASs.
NOTE: All sections apply whether the financial statements are presented in conformity with GAAP or OCBOA unlessotherwise noted.
DEFINITIONS OF TERMS
Auditing standards. Measures of audit quality and the objectives to be achieved in an audit.
Auditing procedures. Acts to be performed by the auditor during the course of an audit to comply with auditing standards.
Professional skepticism. An attitude that includes a questioning mind and a critical assessment of audit evidence.
OBJECTIVES OF SECTION
Most of the discussion in Sections 100-230 can be traced to the combination of generally accepted auditing standards with statements on auditing procedure in 1963. It was issued as Statement on Auditing Procedure (SAP) 33. Some of the material dates all the way back to the original tentative statement of auditing standards in 1947 and is primarily philosophical.
In December 2001, the Auditing Standards Board issued SAS 95, Generally Accepted Auditing Standards. This SAS superseded Section 150, "Generally Accepted Auditing Standards" of SAS 1, Codification of Auditing Standards and Procedures. It established a GAAS hierarchy, identified the auditing publications that auditors should follow in performing the audit, and clarified the authority of such publications. In September 2002, SAS 98 amended SAS 95 to clarify that appendixes to SASs are interpretive publications.
In October 2002, SAS 99 amended Section 230, "Due Professional Care in the Performance of Work," to add a discussion about the characteristics of fraud and collusion.
Objective of Ordinary Audit
To express an opinion on the fairness, in all material respects, with which the financial statements present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles or another comprehensive basis of accounting.
In every audit, the auditor has to obtain reasonable assurance about whether the financial statements are free of material misstatement. Material misstatement includes
1. Material error. (See Section 312)
2. Material fraud. (See Section 316)
3. Certain illegal acts. (See Section 317)
The fairness of the representations made through financial statements is an implicit and integral part of management's responsibility. Management is responsible for
1. Adopting sound accounting policies.
2. Establishing and maintaining internal control that will, among other things, record, process, summarize, and report financial data that are consistent with management's assertions embodied in the financial statements.
The auditor's participation in preparing financial statements does not change the character of the statements as representations of management. In brief, management is responsible for the financial statements; the auditor is responsible for expressing an opinion on those financial statements.
Generally Accepted Auditing Standards (GAAS) and the GAAS Hierarchy
The auditor is responsible for planning, conducting, and reporting the results of an audit according to generally accepted auditing standards (GAAS). The hierarchy of GAAS consists of the following three tiers:
Tier 1: Auditing Standards (which include the Statements on Auditing Standards)
Tier 2: Interpretive publications
Tier 3: Other auditing publications
Tier 1: Auditing Standards
Tier 1 consists of (1) the ten general, fieldwork, and reporting standards, and (2) the Statements on Auditing Standards (SASs). As stated in AU 150.02 the generally accepted auditing standards (GAAS) approved by the American Institute of Certified Public Accountants (AICPA) membership are
A. General Standards
1. Training and proficiency. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
2. Independence. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.
3. Due care. Due professional care is to be exercised in the planning and performance of the audit and the preparation of the report.
B. Fieldwork Standards
4. Planning and supervising. The work is to be adequately planned, and assistants, if any, are to be properly supervised.
5. Internal control. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.
6. Evidential matter. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.
C. Reporting Standards
7. GAAP. The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.
8. Consistency. The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.
9. Disclosure. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.
10. Reporting obligation. The report shall contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons should be stated. In all cases where an auditor's name is associated with financial statements, the report should contain
a. A clear-cut indication of the character of the auditor's work, if any.
b. The degree of responsibility the auditor is taking.
NOTE: Materiality and audit risk underlie the application of the ten standards and the SASs (see Section 312).
The preceding ten formal standards apply to all other services covered by SASs unless they are clearly not relevant or the SAS specifies that they do not apply.
These ten general, fieldwork, and reporting standards provide the framework for the SASs promulgated by the Auditing Standards Board (ASB). Auditors are required under Rule 202, Compliance with Standards, of the AICPA Code of Professional Conduct to comply with these standards. Auditors should have sufficient knowledge of the SASs to determine when they apply and should be prepared to justify departures from the SASs.
Tier 2: Interpretive Publications
Interpretive publications are recommendations, issued under the authority of the ASB, on how to apply the SASs in specific circumstances, including engagements for entities in specialized industries. Interpretive publications are not auditing standards. They consist of the following:
Auditing Interpretations of SASs
Auditing guidance in AICPA Audit and Accounting Guides
Auditing Statements of Positions
Appendixes to the SASs
NOTE: SAS 95 notes that certain "previously issued appendices to original pronouncements" that modified other SASs are Tier 1 publications, not interpretative publications.
Auditors should be aware of and consider interpretive publications that apply to their audits. Auditors who do not follow the guidance in an applicable interpretive publication should be prepared to explain how they complied with the relevant SAS requirements addressed by such guidance.
NOTE: Any "should" statements in audit guides now have a formal level of authority in the GAAS hierarchy. Auditing Interpretations are presented in this book in the related sections. A list of AICPA Audit and Accounting Guides and auditing Statements of Position are presented in Appendix B.
Tier 3: Other Auditing Publications
Other auditing publications are not authoritative but may help auditors to understand and apply SASs. Such publications include all AICPA auditing publications not included under Tier 1 or Tier 2 and other auditing publications, including
Auditing articles in the Journal of Accountancy and other professional journals
Auditing articles in AICPA CPA Letter
Continuing professional education programs and other instructional materials
Other auditing publications from state CPA societies, other organizations, and individuals
An auditor should evaluate such guidance to determine whether it is both (1) relevant for a particular engagement and (2) appropriate for the particular situation. When evaluating whether the guidance is appropriate, the auditor should consider whether the publication is recognized as helpful in understanding and applying SASs, and whether the author is recognized as an auditing authority. (AICPA auditing publications that have been reviewed by the AICPA Audit and Attest Standards staff are presumed to be appropriate.)
NOTE: The auditor is not required to be aware of the full body of other auditing publications. However, the authors believe that some of the most important Tier 3 publications are AICPA PITF Practice Alerts. All auditors of public companies should be familiar with these. A list of all Practice Alerts is included in Appendix C.
Quality Control Standards
An audit firm should establish a quality control system to provide it with reasonable assurance that its staff meet the requirements of GAAS in its audit engagements.
Training and Proficiency
The auditor holds out himself or herself as being proficient in accounting and auditing. Attaining proficiency begins with formal education and continues through later experience. The auditor must be aware of and understand new authoritative pronouncements on accounting and auditing.
According to AU 230.03, to be independent, the auditor must be intellectually honest; to be recognized as independent, he or she must be free from any obligation to or interest in the client, its management, or its owners. For specific guidance, the auditor should look to AICPA and the state society rules of conduct and, if relevant, the requirements of the Securities and Exchange Commission (SEC) and the Independence Standards Board (ISB).
The auditor should observe the standards of fieldwork and reporting, possess the degree of skill commonly possessed by other auditors, and should exercise that skill with reasonable care and diligence. The auditor should also exercise professional skepticism, that is, an attitude that includes a questioning mind and a critical assessment of audit evidence. However, the auditor is not an insurer and the audit report does not constitute a guarantee because it is based on reasonable assurance. The auditor should be alert to the possibility of collusion when performing the audit and how management may override controls in a way that would make the fraud particularly difficult to detect.
There are no interpretations for this section.
TECHNIQUES FOR APPLICATION
Many times, clients do not understand their responsibilities for the audited financial statements. These financial statements are management's. They contain management's representations. The form and content of the financial statements are management's responsibility even though the auditor may have prepared them or participated in their preparation. The SEC has stated
The fundamental and primary responsibility for the accuracy of information filed with the Commission and disseminated among the investors rests upon management. Management does not discharge its obligations in this respect by the employment of independent accountants, however reputable (Accounting Series Release No. 62, June 27, 1947; emphasis added).
Management Representation Letter
Generally accepted auditing standards require the auditor to obtain a management representation letter (see Section 333).
Excerpted from Wiley Practitioner's Guide to GAAS 2004 by Dan M. Guy D. R. Carmichael Linda A. Lach Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
About the Authors.
Update on the PCAOB and the Sarbanes-Oxley Act/New Exposure Drafts.
100-230 The Auditor?s Responsibilities and Functions, Introduction to GAAS and the General Standards.
310 Appointment of the Independent Auditor.
311 Planning and Supervision.
312 Audit Risk and Materiality in Conducting an Audit.
313 Substantive Tests prior to the Balance Sheet Date.
315 Communications between Predecessor and Successor Auditors.
316 Consideration of Fraud in a Financial Statement Audit.
316A Consideration of Fraud in a Financial Statement Audit.
317 Illegal Acts by Clients.
319 Consideration of Internal Control in a Financial Statement Audit.
322 The Auditor?s Consideration of the Internal Audit Function in an Audit of Financial Statements.
324 Service Organizations.
325 Communication of Internal Control Related Matters Noted in an Audit.
326 Evidential Matter.
328 Auditing Fair Value Measurements and Disclosures.
329 Analytical Procedures.
330 The Confirmation Process.
332 Auditing Derivative Instruments, Hedging Activities, and Investments in Securities.
333 Management Representations.
334 Related Parties.
336 Using the Work of a Specialist.
337 Inquiry of Client?s Lawyer Concerning Litigation, Claims, and Assessments.
339 Audit Documentation.
341 The Auditor?s Consideration of an Entity?s Ability to Continue as a Going Concern.
342 Auditing Accounting Estimates.
350 Audit Sampling.
380 Communication with Audit Committees.
390 Consideration of Omitted Procedures After the Report Date.
410/411 Adherence to GAAP (410) and the Meaning of ?Present Fairly in Conformity with GAAP? (411).
420 Consistency of Application of Generally Accepted Accounting Principles.
431 Adequacy of Disclosure in Financial Statements.
504 Association with Financial Statements.
508 Reports on Audited Financial Statements.
530 Dating of the Independent Auditor?s Report.
532 Restricting the Use of an Auditor?s Report.
534 Reporting on Financial Statements Prepared for Use in Other Countries.
543 Part of Audit Performed by Other Independent Auditors.
544 Lack of Conformity with Generally Accepted Accounting Principles.
550 Other Information in Documents Containing Audited Financial Statements.
551 Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents.
552 Reporting on Condensed Financial Statements and Selected Financial Data.
558 Required Supplementary Information.
560 Subsequent Events.
561 Subsequent Discovery of Facts Existing at the Date of the Auditor?s Report.
623 Special Reports.
625 Reports on the Application of Accounting Principles.
634 Letters for Underwriters and Certain Other Requesting Parties.
711 Filings under Federal Securities Statutes.
722 Interim Financial Information.
722A Interim Financial Information.
801 Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance.
901 Public Warehouses: Controls and Auditing Procedures for Goods Held.
2101 Attestation Standards.
2201 Agreed-upon Procedures Engagements.
2301 Financial Forecasts and Projections.
2401 Reporting on Pro Forma Financial Information.
2501 Reporting on an Entity?s Internal Control over Financial Reporting.
2601 Compliance Attestation.
2701 Management?s Discussion and Analysis (MD&A).
3100 Compilation and Review of Financial Statements.
3200 Reporting on Comparative Financial Statements.
3300 Compilation Reports on Financial Statements Included in Certain Prescribed Forms.
3400 Communications between Predecessor and Successor Accountants.
3600 Reporting on Personal Financial Statements Included in Written Personal Financial Plans.
Appendix A: Cross-References to SASs, SSAEs, and SSARSs.
Appendix B: List of AICPA Audit and Accounting Guides and Statements of Position.
Appendix C: Other Auditing Publications in the GAAS Hierarchy.