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2 of 2 DOCUMENTS Copyright 2007 CCH. All Rights Reserved GAAS Guide AU 100 Introduction SECTION 150 Generally Accepted Auditing Standards COMMENTARY GAAS Guide (CCH) Overview Auditing standards deal with the quality of an audit performed by an independent auditor. The members of the American Institute of Certified Public Accountants (AICPA) have approved and adopted ten generally accepted auditing standards (GAAS) that apply to the audits of nonpublic entities. These standards are divided into three groups: (1) general standards, (2) standards of fieldwork, and (3) standards of reporting. Under Rule 202 of the Code of Professional Conduct, every member of the AICPA who audits a nonpublic company must comply with GAAS. OBSERVATION: Many state boards of accountancy require CPAs licensed in their state to comply with the AICPA Code of Professional Conduct and other AICPA authoritative standards even if those CPAs are not members of the AICPA. General standards The most important factor in any profession is the people who make up the profession. The personal characteristics of an auditor are described below in a discussion of the three general standards. Desirable traits are difficult to describe in any individual, much less a profession. Therefore, these general standards are quite broad and are open to a considerable degree of reasonable interpretation. . General Standard No. 1 -- The audit must be performed by a person or persons having adequate technical training and proficiency as an auditor. . General Standard No. 2 -- In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors. . General Standard No. 3 -- Due professional care is to be exercised in the planning and performance of the audit and the preparation of the report. Standards of fieldwork . Standard of Fieldwork No. 1 The auditor must adequately plan the work and must properly supervise any assistants. . Standard of Fieldwork No. 2 The auditor must obtain a sufficient understanding of the entity, and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures. . Standard of Fieldwork No. 3 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.
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Standards of reporting . Reporting Standard No. 1 -- The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP). . Reporting Standard No. 2 -- 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. . Reporting Standard No. 3 -- Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. . Reporting Standard No. 4 -- 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 therefore should be stated. In all cases where an auditor's name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor's work, if any, and the degree of responsibility the auditor is taking. Statements on Auditing Standards The AICPA's Auditing Standards Boards issues Statements on Auditing Standards (SASs) that apply to the audits of nonpublic entity financial statements. An auditor must be familiar with all SASs to determine which are appropriate for a particular engagement. In applying the SASs, the auditor is expected to use professional judgment, including considering materiality and audit risk. In addition, SAS-102 defines an auditor's professional requirements in applying the SASs (see AU Section 120). An auditor may, in rare circumstances, depart from a presumptively mandatory requirement. In these situations, the auditor must document why he or she departed from the presumptively mandatory requirement and how he or she accomplished the objective of the presumptively mandatory requirement through other procedures. ENGAGEMENT STRATEGY: An engagement planning strategy is to start with the assumption that all SASs apply, given that most are relevant in every audit. As planning proceeds, the auditor might identify exceptions that exist for unique situations. For example, the use of specialists, audits of service organizations, or the audit of derivative instruments might not be applicable. Auditors may wish to identify a list of the most frequent exceptions, which could be used when planning all audit engagements, and assume that all other SASs are applicable. Interpretative publications Interpretative publications are issued under the authority of the Auditing Standards Board and include the following: . Appendixes to SASs (does not include previously issued appendixes to original pronouncements that when adopted modified other SASs) . Auditing Interpretations of the SASs . AICPA Audit and Accounting Guides . AICPA Auditing Statements of Position Guidelines established in interpretative publications are not auditing standards but, rather, provide specific direction
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on how auditing standards are to be observed in particular situations, especially for clients who operate in specialized industries. An auditor is expected to be aware of interpretative publications and, if they are relevant, follow their guidance in a particular engagement. Auditing Interpretations are discussed throughout this text. AICPA Audit and Accounting Guides are listed below and may be purchased from the AICPA: . Analytical Procedures . Audit Sampling . Auditing Derivative Instruments, Hedging Activities, and Investments in Securities . Auditing Revenue in Certain Industries . Audits of Agricultural Producers and Agricultural Cooperatives . Audits of Airlines . Audits of Casinos . Audits of Employee Benefit Plans . Audits of Entities with Oil and Gas Producing Activities . Audits of Federal Government Contractors . Audits of Investment Companies . Audits of Property and Liability Insurance Companies . Audits of State and Local Governmental Units . Brokers and Dealers in Securities . Common Interest Realty Associations . Consideration of Internal Control in a Financial Statement Audit . Construction Contractors . Depository and Lending Institutions: Banks and Savings Institutions, Credit Unions, Finance Companies, and Mortgate Companies . Government Auditing Standards and Circular A-133 Audits . Guide for Prospective Financial Information . Guide for the Use of Real Estate Appraisal Information . Health Care Organizations . Life and Health Insurance Entities . Not-for-Profit Organizations
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. Service Organizations: Applying SAS No. 70, as Amended . Personal Financial Statements Guide AICPA Statements of Position (Auditing and Attestation), which address specific auditing and accounting issues, may be purchased from the AICPA. Other auditing publications Auditing guidance is also provided in a variety of other publications including textbooks, articles, and various instructional materials. An auditor is not "expected to be aware of the full body of other auditing publications"; however, if such guidance is followed, the auditor is responsible for determining whether the guidance is relevant to a particular engagement. PUBLIC COMPANY IMPLICATIONS: SOX authorizes the Public Company Accounting Oversight Board (PCAOB) to issue auditing standards for audits of public company financial statements. In April 2003, the PCAOB adopted existing auditing standards previously issued by the Auditing Standards Board as the PCAOB's "Interim Auditing Standards." Thus, GAAS promulgated by the Auditing Standards Board as of April 16, 2003 constitute the "Interim Auditing Standards." Since then, the PCAOB has begun to issue PCAOB Auditing Standards that amend or supersede portions of the "Interim Auditing Standards." IMPORTANT NOTICE FOR 2007: In December 2005, the Auditing Standards Board issued SAS-102 (Defining Professional Requirements in Statements on Auditing Standards), which defines the degree of responsibility imposed on a practitioner when the words "must," "is required," or "should" appear in a SAS. The words "must" or "is required" indicate mandatory obligations of a practitioner, assuming the circumstances that the requirement applies to exist. The word "should" indicates a presumptive requirement. In rare circumstances, a practitioner may justify departure from a presumptive requirement if (1) he or she documents the reasons for the departure and (2) documents how alternative procedures he or she performed accomplished the objectives of the presumptive requirement. SAS-102 does not apply to Auditing Interpretations issued by the Auditing Standards Board or to any other interpretive guidance. IMPORTANT NOTICE FOR 2007: SAS-105, issued in March 2006, amends the three fieldwork standards of GAAS, among other changes. The most notable change to the fieldwork standards is the amendment of the second fieldwork standard. That change now requires the auditor to obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements and to design further audit procedures. By stating explicitly in the second fieldwork standard that the purpose of understanding the entity and its internal control is part of assessing the risk of material misstatement, the fieldwork standard is now considering this understanding to provide audit evidence that ultimately supports the opinion on the financial statements. This is emphasized through the use of the term "further audit procedures." Further audit procedures consist of tests of controls and substantive procedures. The reference to "further audit procedures" now recognizes that risk assessment procedures are also performed to provide a basis for the opinion on the financial statements. SAS-105 also replaces the term "evidential matter" with "audit evidence." UPDATE-DATE: February 07, 2007