Gaas and Sqc
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Red Sirug GENERALLY ACCEPTED AUDITING STANDARDS
Auditing Standards: • Popularly known as the Generally Accepted Auditing Standards (GAAS ) • The general guidelines that the auditors must follow in conducting the audit. • The minimum standards of auditor’s performance that must be achieved on each audit engagement • The guidance for measuring the quality of the auditor’s performance GAAP vs. GAAS: • GAAP : the principles for the preparation and presentation of financial statements that are used by the auditor as criteria in determining the overall fairness of the financial statements; foundation of accounting • GAAS: standards/measures/guidance that the auditors must follow when conducting an audit; foundation of auditing Auditing Standards vs. Auditing Procedures: a. Definition: • Auditing standards: the measures of the quality or minimum standard of auditor’s performance • Auditing procedures: the means used (or the acts to be performed) by the auditor to attain the quality or minimum standard of auditor’s performance b. Basic difference: "auditing procedures" relate to acts to be performed, whereas "auditing standards" deal with measures of audit quality and the objectives to be achieved in an audit. c. Relationship: Every independent audit engagement involves both auditing standards and auditing procedures. From one engagement to another engagement, auditing standards are applied uniformly but auditing procedures may vary. THE 10 GENERALLY ACCEPTED AUDITING STANDARDS (GAAS): GENERAL STANDARDS – standards/criteria which present guidance in the personal qualifications an auditor must possess to undertake the audit engagement
1. Adequate technical training and proficiency:
This standard refers to professional competence • Professional competence of the auditor is primarily met by having professional education/training and practical experience in auditing • Competence can also be acquired by the auditor through the following: Continuing professional development Consulting others if additional technical information is needed Coaching by more experienced staff Research to obtain knowledge of client business and industry • Competence does not include warranting the infallibility of the work performed.
2. Independence: This standard requires that the auditor must be impartial when dealing with the client or without bias with respect to the client entity. The auditor must be independent in fact and in appearance. a. Independence of mind – The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism; this is also known as “independence in fact ” or “independence in mental attitude .” b. Independence in appearance – The avoidance of facts and circumstances or situations that are so significant that would lead a reasonable and informed third party or the public to believe or conclude that the auditor is not independent. In other words, independence in appearance requires that activities or relationships that even suggest or imply a possible lack of independence must be avoided by the auditor.
Independence is often called the cornerstone of the profession since it is necessary to add credibility to the auditor’s work.
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Auditor strives to achieve independence in appearance in order to: maintain public confidence in the profession or to achieve public confidence. The audit opinion and the audit report would be of little or no value if auditor is not independent because of absence of public confidence. The auditor ultimately decides whether or not he/she is independent. Independence in mental attitude cannot be regulated. However, to encourage independence in fact and to maintain the appearance of independence, the auditor can have no direct financial interest in the client. “Direct” includes the auditor and members of immediate family. “Financial interest” is ownership of equity shares, other client financial instruments, or any other potential financial benefit. In addition, there can be no material indirect financial interest such as ownership through a mutual fund. To ensure independence, auditor cannot render an opinion on statements of one year until all fees from the prior year audit have been paid. To emphasize independence from management, auditor is usually appointed by audit committee of the board of directors. Independence may be impaired by performing consulting services, especially those that involve making management decisions.
3. Due professional care: This standard requires that an auditor, in fulfilling his duties, should act diligently and carefully, exercise reasonable prudence, and apply judgment in a conscientious manner, carefully weighing the relevant factors before reaching a decision.
Due professional care is often called the "average auditor" concept. The auditor should do what the average auditor would do and never less, including review of work performed by assistants and maintaining an attitude of professional skepticism. • Due professional care does not mean/imply infallibility or exercise of error-free judgment. The auditor is not and cannot be held responsible for losses because of errors of pure judgment. • Exercise of due professional care in the performance of the audit requires: a. Observance of the standards of field work and reporting b. Critical review of the audit work performed at every level of supervision c. Degree of skill commonly possessed by others in the profession d. Exercise of the same components of professional care as a reasonable auditor would exercise e. Exercise of professional skepticism STANDARDS OF FIELD WORK – the standards / criteria for planning and evidence-gathering
1. Adequate planning and proper supervision: • Planning involves establishing the overall audit strategy for the engagement and developing •
an audit plan. The auditor should also supervise the work of assistants. Supervision is critical because of assistants’ lack of experience. Audit programs are designed to enumerate appropriate action, and all work of staff auditors should be reviewed by a qualified auditor. Audit program is developed before substantive testing to ensure that adequate planning has occurred.
2. Sufficient understanding of the entity and its environment, including internal control: • As part of the planning activities, the auditor is required to obtain sufficient
understanding of the entity and its environment. This means that the auditor should obtain a more detailed knowledge of the client's business and the environment/industry in which the entity operates. • A sufficient understanding of internal control is to be obtained to plan the audit. Appropriate internal controls provide the auditor with confidence that material misstatements will be prevented or detected on a timely basis. Strong internal control implies that the auditor will require less evidence. Weak internal control implies that the auditor will require more evidence.
3. Sufficient appropriate audit evidence: • The auditor should obtain sufficient appropriate audit evidence by performing audit procedures to be able to draw reasonable conclusions on which to base the opinion regarding the financial statements under audit.
Evidence gathering is sometimes called substantive testing. Any testing that confirms the ending balance of an account is known as a test of a balance. Evidence gathered to support an account by looking at the various transactions that have affected it during the period is called a test of details. All specific audit work is performed in order to gather evidence. The quantity and quality of evidence to be gathered depends on the judgment of the auditor. The decision as to how much evidence to be accumulated requires professional judgment; not provided in the PSAs; the rule is, evidence must be sufficient to afford a reasonable basis for opinion
STANDARDS OF REPORTING – standards on auditor’s expression of audit opinion through a medium known as the auditor’s report
1. Whether the financial statements are in accordance with GAAP/PFRS: Conformity with GAAP/PFRS is explicit in the auditor’s report • Explicit statement means that the auditor should state whether or not the financial statements subject to audit are prepared in accordance with GAAP/PFRS. • When an overall opinion cannot be expressed, as where the auditor disclaims an opinion, the reasons therefore should be stated.
2. Consistent application of GAAP/PFRS: Consistency is implicit in the auditor’s report • If there is no material consistency as to application of GAAP/PFRS, no statement as to
consistency is required in the auditor’s report. However, if a material inconsistency exists, auditor shall identify such inconsistency in the auditor’s report.
If GAAP/PFRS is consistently applied: no express statement as to consistency is necessary because consistency is implicit in the auditor’s report • If GAAP/PFRS is not consistently applied: auditor shall identify in the auditor’s report such inconsistency
3. Adequacy of informative disclosures: Adequacy of disclosure is implicit in the auditor’s report. If informative disclosure is adequate, no statement as to adequacy of disclosure is required in the auditor’s report. However, if informative disclosure is inadequate, auditor must state such inadequacy in the auditor’s report.
If disclosure is adequate: no statement as to adequacy of disclosure is necessary because adequacy of disclosure is implicit in the auditor’s report If disclosure is inadequate : auditor must state in the audit report such inadequacy
4. Opinion regarding the financial statements taken as a whole: expression of audit opinion is explicit in the auditor’s report Objective of 4 th standard of reporting: • To indicate the character of the engagement and the degree of responsibility assumed by the auditor. This would prevent FINANCIAL STATEMENTS users from misinterpreting the degree of responsibility the auditor is assuming/taking. • Reference to the expression "taken as a whole" in the fourth generally accepted auditing standard of reporting means that the audit opinion applies equally to a complete set of financial statements and to each individual financial statement. Philippine Standards on Auditing (PSAs): • The PSAs are interpretations of GAAS, meaning, they are intended to clarify the meaning of "generally accepted auditing standards." • The PSAs contains basic audit principles and essential procedures together with related guidance in the form of explanatory and other material which the auditor should follow when conducting financial statements audit. • Application of PSAs: PSAs apply to independent examination of (historical) financial statements of any entity conducted for the purpose of expressing an opinion. • Compliance with PSA: The auditor should conduct an audit in accordance with PSA. Compliance with PSAs means application of basic audit principles and performance of essential audit
procedures. Compliance with relevant PSAs is mandatory. Only in exceptional instances where departure from relevant PSA is allowed such as when the auditor believes that the: Amount involved is insignificant; or Requirement of the PSA is impractical to perform; or Requirement of the PSA is impossible to perform.
NATURE OF SYSTEM OF QUALITY CONTROL:
One of the recognized objectives of the accountancy profession is to attain the highest levels of performance. To achieve this objective, there is a need for assurance that all professional services provided by CPAs are carried out to the highest quality or standards of performance. Reasonable assurance of meeting such need is provided through a system of quality control. A system of quality control refers to quality control policies and procedures adopted by CPA firms that are designed to provide reasonable assurance that the firm and its personnel comply with professional standards and regulatory and legal requirements and that reports issued by the firm or engagement partners are appropriate in the circumstances.
System of Quality Control in an Audit Engagement: Policies and procedures to provide reasonable assurance that all audits are conducted in accordance with PSAs and that audit reports issued are appropriate in the circumstances QC policies vs. QC procedures: a. Quality control policies – are the objectives and goals to be achieved b. Quality control procedures – are steps/procedures to be taken to: • accomplish the policies adopted, or • implement and monitor compliance with those policies Mandatory requirement for CPA firms to establish SQC: Under Philippine Standard on Quality Control 1 (PSQC 1) CPA firms are required to establish and implement a system of quality control. Nature and Extent of a System of Quality Control: The nature and extent of the SQC developed by CPA firms vary from firm to firm due to various factors such as: a. Size of the CPA firm b. Nature of its practice c. Operating characteristics d. Its organization e. Geographical dispersion f. Cost-benefit consideration g. Whether it is part of a network Elements of System of Quality Control: Although the nature and extent of the system of quality control developed by CPA firms vary from one firm to another, a system of quality control must have the following elements: 1. Leadership responsibilities for quality within the firm – The CPA firm should establish policies and procedures that: • Promote an internal culture based on recognition that quality is essential in the performance of the engagements • Require CPA firm’s leader (CEO/ managing board of partners or its equivalent), to assume ultimate responsibility for the firm’s system of quality control. 2. Ethical requirements, including independence – • The CPA firm should establish policies and procedures to provide reasonable assurance that the firm and its personnel comply with relevant ethical requirements (including independence): 3. Acceptance and continuance of client relationships and specific engagements – The CPA firm should establish policies and procedures to provide reasonable assurance that the CPA firm will only undertake or continue relationships and engagements where it: a. Has considered the client’s integrity
b. Is competent to perform the engagement and has the capabilities, time and resources to do so; and c. Can comply with ethical requirements Human resources – The CPA firm should establish policies and procedures to provide reasonable assurance that it has sufficient personnel with the capabilities, competence, and commitment to ethical principles necessary to perform the engagement. Engagement performance – The CPA firm should establish policies and procedures to provide reasonable assurance that engagements are performed in accordance with professional standards and regulatory and legal requirements, and that the firm or engagement partner issue reports that are appropriate in the circumstances. Monitoring – The CPA firm should establish policies and procedures to provide reasonable assurance that quality control are relevant, adequate and operating effectively and complied with in practice and should include an ongoing consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a selection of completed engagements.
The purpose of monitoring compliance with quality control policies and procedures is to provide an evaluation of: a. Adherence to professional standards and regulatory and legal requirements; b. Whether the quality control system has been appropriately designed and effectively implemented; and c. Whether the firm’s quality control policies and procedures have been appropriately applied, so that reports that are issued by the firm or engagement partners are appropriate in the circumstances. The following shall also be included in the CPA firm’s SQC: 1. Complaints and Allegations: The firm should establish policies and procedures designed to provide it with reasonable assurance that it deals appropriately with: a. Complaints and allegations that the work performed by the firm fails to comply with professional standards and regulatory and legal requirements; and b. Allegations of non-compliance with the firm’s system of quality control. 2. Documentation: The firm should establish policies and procedures requiring appropriate documentation to provide evidence of the operation of each element of its system of quality control. Distinction between GAAS/PSA and SQC: GAAS/PSAs relate to each individual audit engagement, whereas SQC relates to all professional activities/services of the firms practice as a whole. QUALITY REVIEW COMMITTEE: • To ensure that CPAs work to the highest standards, the government thru the Professional Regulatory Board of Accountancy (BOA) has required all CPA firms and individual CPAs in public practice to obtain a certificate of accreditation to practice public accountancy. Such certificate is valid for three (3) years and can be renewed after complying with the requirements of the BOA. • As a condition to the renewal of the certificate of accreditation to practice public accountancy, the BOA requires individual CPAs and CPA firms to undergo a quality control review to ensure that these CPAs comply with accounting and auditing standards and practices. • The BOA has created a Quality Review Committee (QRC) which shall conduct a quality review on applicants for registration to practice public accountancy. Functions of the Quality Review Committee: • Conducts quality review on applicants for registration, or renewal thereof, to practice public accountancy • Render a report on such quality review, which shall be attached to the application for registration • Recommend to BOA revocation of registration and professional ID cards of CPAs for not observing the SQC requirements
Quality review – an oversight into (or study or appraisal of) the quality of audit of FS through a review of quality control measures established by CPA firms and individual CPAs in public practice to ensure compliance with accounting and auditing standards and practices