BA 418 – Auditing
Dr. Charles Pineno
April 25, 2010
“Small Firms May Face Audit Music” (published in The Wall Street Journal on April 19, 2007) addresses the ending of the delay in applying portions of the Sarbanes-Oxley Act of 2002 to smaller companies. At the time of the article, some 6,000 smaller public companies had yet to be required to “make an annual assessment of their internal financial-reporting controls with further review by the company’s outside auditor of these systems designed to help prevent accounting mistakes and fraud.” The delay arose from complaints that compliance was overly costly and time consuming for larger companies. According to Mr. Cox, the SEC and the Public Company Accounting Oversight Board (PCAOB) are close to making less burdensome for all companies which would end the need to further exempt the smaller companies. The proposed changes would make realization of compliance in 2008 possible. Delays could again result if the new standards are not issued soon enough to meet the current deadlines. The chairman of PCAOB, Mark Olson, has blamed the high cost of complying on what is viewed as an overly cautious approach. PCAOB reports that progress is being made but there is still a way to go as some auditing firms still have not fully integrated an audit of the company’s financial statements with an audit of the company’s internal controls which are interrelated.
PART 2 --RISK ASSESSMENT STANDARDS:
Standard 1 – Reasonable Assurance, Evidence
SAS No. 104 (“Amendment to SAS No. 1, Codification of Auditing Standards and Procedures) addresses “the attributes of audit evidence and the concept of reasonable assurance.” This particular standard is closely related to General Standard 3: The auditor must exercise due professional care in the performance of the audit and the preparation of the report. Chapter 1: The Role of the Public Accountant in the American Economy The two forms of assurance services that CPAs perform with particular emphasis on “those that increase the reliability of information.” Since reliability enhancement is such a huge part of assurance services, this standard is fundamental because proper assessment and testing of risk plays a critical role in the reliability of information. Chapter 2: Professional Standards
This chapter introduced the 10 Generally Accepted Auditing Standards as set forth by the AICPA. As previously stated, there is a close relationship between Standard 1 and General Standard 3. Also, this standard also has a close relationship with Standard of Fieldwork 3 which reads: The auditor must obtain “sufficient appropriate audit evidence” by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. The gathering of evidence regarding risk falls into this standard of fieldwork. Chapter 3: Professional Ethics
Within the chapter on “Professional Ethics,” we learned that Article V of the AICPA Code of Professional Conduct addresses “Due Care” and states: “A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability.” Reasonable assurance and proper evidence regarding risk assessment would fall under the “Due Care” responsibility. Chapter 4: Legal Liability of CPAs
Chapter 4 described the sources of CPA liability as: Contract, Negligence, and Fraud. Should the CPA not incorporate the appropriate levels of reasonable assurance and evidence regarding risk assessment, they could be found liable for at least ordinary or simple negligence. If there was a blatant disregard for this standard, the possibility of gross negligence could also exist. Chapter 5: Audit Evidence and Documentation
The chapter detailed relationships among audit risk, audit evidence, and financial statement assertions and...