2-1The Sarbanes-Oxley Act of 2002 created the PCAOB and gave this body authority to develop auditing standards for the audits of public companies. The AICPA has the authority, based on general acceptance (and adoption by state boards of accountancy and other regulatory bodies), to develop auditing standards for audits of nonpublic companies.
2-2Generally accepted accounting principles are accounting principles which have substantial authoritative support, such as approval by the Governmental Accounting Standards Board or the Financial Accounting Standards Board. These standards provide the criteria (financial reporting framework) for financial reporting, including the nature and content of financial statements. Generally accepted auditing standards are those issued by the AICPA’s Auditing Standards Board (ASB). GAAS are the standards for the auditor’s work in fulfilling the overall objectives of a financial statement audit. GAAS address the general responsibilities of the auditor, as well as the auditor’s further considerations relevant to the application of those responsibilities.
2-3A financial reporting framework is a set of criteria used to determine measurement, recognition, representation, and disclosure of all material items appearing in the financial statements; for example United States GAAP or IFRS. It is important to an audit because it is through consideration of that framework on which the auditor basis his or her opinion on the financial statements.
2-4Generally accepted auditing standards are the Statements on Auditing Standards issued by the Auditing Standards Board.
2-5In the context of the audit of financial statements, professional skepticism includes maintaining a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence. Throughout the audit the auditors should be alert for: (1) audit evidence that contradicts other audit evidence, (2) information that raises a question about the reliability of documents and responses to inquiries, (3) conditions indicating possible fraud, and (4) circumstances suggesting the need for additional audit procedures beyond those ordinarily required.
2-6The auditors' responsibilities concerning the detection of noncompliance with laws by clients depends on the relationship of the law or regulation to the financial statements. Certain laws and regulations, such as income tax laws, have a direct effect on the amounts and disclosures included in the financial statements. The auditors have a responsibility to design their audit to obtain reasonable assurance of detecting material violations of these laws and regulations. Many other laws and regulations, such as occupational safety and health laws, do not have a direct effect on the amounts included in the financial statements. An audit carried out in accordance with generally accepted auditing standards is not designed to detect client noncompliance with these other laws. Although an audit is not designed to provide reasonable assurance of detecting noncompliance with other laws, the CPAs should be aware of the possibility that they have occurred and investigate those identified. When they become aware of noncompliance with laws, the auditors should communicate the situation to the audit committee of the board of directors to remedy the situation and make appropriate modifications to the financial statements. If management fails to take appropriate action, the auditors should consider withdrawing from the engagement.
2-7The first sentence of the quotation is correct. The completion of an audit of financial statements by a CPA following generally accepted auditing standards and satisfying the CPA provides the basis for expression of an unmodified opinion on the fairness of financial...