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Generally Accepted Auditing Standards
This Article Discusses Generally Accepted Auditing Standards
In recent years the need for improved auditing standards has risen with the public’s demand for increased corporate accounting regulation. This paper discusses the nature and functions of auditing and addresses the elements of the Generally Accepted Auditing Standards (GAAS), how these standards apply to financial, operational, and compliance audits, the effect that the Sarbanes-Oxley Act of 2002 (SOX) and the Public Company Accounting Oversight Board (PCAOB) will have on audits of publicly traded companies, and the additional requirements that are placed on auditors from SOX and PCAOB.
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Statements on Auditing Standards (SASs)
The Elements of Generally Accepted Auditing Standards
In the late 1940s members of the American Institute of Certified Public Accountants (AICPA) developed a set of standards for auditing professionals. Known as the 10 generally accepted auditing standards, these standards were later incorporated into the Statements on Auditing Standards (SASs). The 10 generally accepted auditing standards fall under three main categories:
general standards – (i) audits are to be performed by a trained and proficient auditor, (ii) all matters relating to the assignment should be addressed with an independence in mental attitude, (iii) due professional care is to be exercised;
standards of field work – (i) work is to be adequately planned and properly supervised, (ii) to assess the risk of material misstatements, a sufficient understanding of the entity is necessary, (iii) competent audit evidence is to be obtained through auditing procedures performed to afford a reasonable basis for an opinion;
standards of reporting – (i) report whether the financial statements are presented in accordance with generally accepted accounting principles, (ii) report the circumstances in which principles have not been consistently observed in the current period, (iii) informative disclosures in the financial statements are to be reasonably adequate, (iv) report an expression or opinion regarding financial statements.
Compliance Equals Accordance with Rules
Financial, Operational and Compliance Audits
Financial statement audits are performed in coordination with GAAP and other established criteria when obtaining evidence about a company’s presentation of its financial position. Evidence evaluated includes results of operations and cash flows for the purpose of conveying an opinion for users of the financial data. To ensure independence in mental attitude, as noted under GAAS general standards, most states have enacted laws so that only certified public accountants (CPAs) can perform financial statement audits. To further enforce this GAAS element, many corporations hire an external audit firm.
An operational audit evaluates a company’s efficiency and effectiveness in regard to operational activities in relation to specified objectives. The standards of field work area of auditing plays an important role in operational audits. A high degree of importance is placed on the auditor’s efficiency and effectiveness reports and the auditor’s recommendations for improvement by the entity.
A compliance audit determines if a company is acting in accordance with rules and regulations in financial and operational activities. This type of audit demonstrates a standards of reporting element of GAAS and a requirement under SOX. “The Sarbanes-Oxley Act of 2002 requires companies to have a dual-purpose audit that audits both the financial statements and management’s assertion as to whether it has complied with criteria regarding an adequate system of internal control over financial reporting”.
PCAOB and SOX Act
Sarbanes-Oxley Act and the Public Company Accounting Oversight Board
SOX greatly affects how auditors are to perform their jobs. Most notably, specific procedures must be followed when obtaining evidence to opine on. In addition, SOX outlines how internal controls are audited, as the auditor’s job is to offer an opinion on the effectiveness of the entity’s internal control over financial reporting. In effort to enhance the efficiency and effectiveness of audits, auditing techniques used by many industry professionals prior to SOX, were no longer deemed acceptable. For example, when auditing some financial statements, auditors would often choose to perform procedures of practical importance rather than conducting a full test of the controls. Post SOX, the effectiveness of management’s internal control over financial reporting is reported on annually, whereas prior to SOX this function was often performed under cycle rotation.
The PCAOB currently has six auditing standards for auditors to comply with. Auditing conducted under PCAOB Auditing Standard No. 6 must properly evaluate consistency of financial statements. This standard affects today’s auditing procedures by ensuring auditors properly identify consistency matters which may affect the report. For example, when presented with several years of comparative financial statements prepared by different auditors, the successor auditor is to evaluate consistency between his or her report and the immediate preceding period.
Auditors Must Follow Requirements
Additional Requirements Placed On Auditors
In addition to PCAOB Auditing Standard No. 6, auditors must comply with other requirements, such as: auditing internal controls over financial reporting that is integrated with an audit of financial statements, presenting specific documentation to provide a written record of the basis for the auditor’s conclusions, and reporting on previously documented materials. Additional requirements by SOX include restricting auditing companies from providing additional, non-auditing, services.
The need for improved regulation over publicly traded corporations forced new laws to be passed and procedures to be followed by both management and auditors of an entity. Many of the standards required by auditors today are due to newly established criteria by the GAAS, the SOX act passing into law, and PCAOB standards. The introduction of this auditing criteria aids users of an entity’s financial data on not only making more informed decisions, but also instills a degree of confidence that was once lost with Wall Street corporate scandals.