One of an accounting firm’s basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following
Generally accepted auditing standards.
Standards within a system of quality control.
Generally accepted accounting principles.
International auditing standards.
2.29
Which of the following best demonstrates the concept of professional skepticism?
Relying more extensively on external evidence rather than internal evidence.
Focusing on items that have a more significant quantitative effect on the entity’s financial statements.
Critically assessing verbal evidence received from the entity’s management.
Evaluating potential financial interests held by auditors in the client.
2.30
The primary purpose for obtaining an understanding of the entity’s environment (including its internal control) in a financial statement audit is
To determine the nature, timing, and extent of substantive procedures to be performed.
To make consulting suggestions to the entity’s management.
To obtain direct sufficient appropriate audit evidence to afford a reasonable basis for an opinion on the financial statements.
To determine whether the entity has changed any accounting principles.
2.31
Ordinarily, what source of evidence should least affect audit conclusions?
External documentary evidence.
Inquiry of management.
Documentation prepared by the audit team.
Inquiry of entity legal counsel.
2.32
The most reliable evidence regarding the existence of newly acquired computer equipment is
Inquiry of management.
Documentation prepared externally.
Evaluation of the client’s procedures.
Physical observation.
2.33
Which of the following procedures would provide the most reliable audit evidence?
Inquiries of the client’s internal audit staff.
Inspection of prenumbered client purchase orders filed in the vouchers payable department.
Inspection of vendor sales invoices received from client personnel.
Inspection of bank statements obtained directly from the client’s financial institution.
2.34
Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following?
Independence.
Adequate competence and capabilities.
Adequate planning and supervision.
Gathering sufficient appropriate evidence.
2.35
Which of the following concepts is least related to the standard of due care?
Independence in fact.
Professional skepticism.
Prudent auditor.
Reasonable assurance.
2.36
The evidence considered most appropriate by auditors is best described as
Internal documents such as sales invoice copies produced under conditions of strong internal control.
Written representations made by the president of the entity.
Documentary evidence obtained directly from independent external sources.
Direct personal knowledge obtained through physical observation and mathematical recalculation.
2.37
Auditors’ understanding of the internal control in an entity provides information for
Determining whether members of the audit team have the required competence and capabilities to perform the audit.
Ascertaining the independence in mental attitude of members of the audit team.
Planning the professional development courses the audit staff needs to keep up to date with new auditing standards.
Planning the nature, timing, and extent of substantive procedures on an audit.
2.38
Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients?
Acceptance and continuance of client relationships and specific engagements.
Engagement performance.
Monitoring.
Relevant ethical requirements.
2.39
Which of the following is most closely related to the responsibilities principle?
The auditors’ responsibility to issue a report as a result of their examination.
The requirement that auditors gather sufficient, appropriate evidence upon which to base an opinion on the financial statements.
The auditors’ compliance with relevant ethical requirements of independence and due care.
The auditors’ responsibility to plan the audit and properly supervise assistants.
2.40
Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not-for-profit museum. Consultation with the appraiser in this case would
Be considered as exercising proper due care.
Be considered a failure to follow generally accepted auditing standards because Kramer should have known how to value fine art before accepting the engagement.
Not be considered a violation of generally accepted auditing standards because generally accepted auditing standards does not apply to not-for-profit entities.
None of the above.
2.41
Which of the following topics is not addressed in the auditors’ report for a public entity?
Responsibilities of the auditor and management in the financial reporting process.
Absolute assurance regarding the fairness of the entity’s financial statements in accordance with GAAP.
A description of an audit engagement.
A summary of the auditors’ opinion on the effectiveness of the entity’s internal control over financial reporting.
2.42
Which of the following recognizes that an audit conducted under generally accepted auditing standards may not detect all material misstatements?
Absolute assurance.
Professional judgment.
Reliability of audit evidence.
Reasonable assurance.
2.43
Which of the following combinations would provide the auditor the most reliable evidence?
Source of Evidence Effectiveness of Internal Control
a. Internal More effective
b. Internal Less effective
c. External More effective
d. External Less effective
2.44
Which of the following is most closely related to the relevance of audit evidence?
Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian.
In addition to confirmations of accounts receivable, auditors perform an analysis of the aging of accounts receivable to evaluate the collectability of accounts receivable.
In response to less effective internal control, auditors increase the number of customer accounts receivable confirmations mailed compared to that in the prior year.
Because of a large number of transactions occurring near year-end, auditors decide to confirm a larger number of receivables following year-end instead of during the interim period.
2.45
Which of the following statements is not true with respect to the performance principle?
Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits.
Audit teams consider materiality in planning the audit, performing the audit, and evaluating the effect of misstatements on the entity’s financial statements.
In assessing the risk of material misstatements, the audit team considers the effectiveness of the entity’s internal controls in preventing and detecting misstatements.
Auditors are required to consider both the relevance and the reliability of evidence in evaluating whether the evidence they have gathered is appropriate.
2.46
Which of the following is true with respect to PCAOB inspections of accounting firms?
All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB.
PCAOB inspections review a sample of audits conducted by firms as well as the firm’s systems of quality control.
All results of PCAOB inspections are made available to the public following the inspection.
Firms performing audits of 100 or fewer public entities may elect to have a peer review conducted through the AICPA in lieu of a PCAOB inspection.
2.47
The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as
Audit procedures.
Audit standards.
Interpretive publications.
Statements on Auditing Standards.
2.48
Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board?
Develop Auditing Standards for the audits of nonpublic entities.
Develop Auditing Standards for the audits of public entities.
Develop Statements on Auditing Standards for the audits of nonpublic entities.
Develop Statements on Auditing Standards for the audits of public entities.
2.49
Which of the following best describes the general contents of the introductory paragraph of the auditors’ report?
A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB.
The auditors’ conclusion with respect to the fairness of the entity’s financial statements.
Statements identifying the responsibility of auditors and management in the financial reporting process.
The auditors’ conclusion with respect to the effectiveness of the entity’s internal control over financial reporting.
2.50
Which of the following opinions would be issued if auditors believed that the entity’s financial statements were not presented in conformity with GAAP?
Adverse opinion.
Disclaimer of opinion.
Qualified opinion.
Unmodified opinion.
2.51
Which of the following principles is most closely associated with the auditors’ conclusion as to the fair presentation of the entity’s financial statements?
Communication principle.
Performance principle.
Reporting principle.
Responsibilities principle.
EXERCISES AND PROBLEMS
2.52
AICPA and PCAOB Responsibilities. The creation of the PCAOB by the Sarbanes–Oxley Act has affected both the standards-setting process and the periodic review of the quality of an audit firm’s work.
Required:
Identify the responsibilities of the AICPA, PCAOB, and SEC in the auditing standards-setting process.
Which standard(s) provide guidance for the audits of public entities? Which standard(s) provide guidance for the audits of nonpublic entities?
What role do the AICPA and PCAOB play in the periodic review of the quality of audit firms’ work?
2.53
Professional Guidance. A challenge facing auditors is the wide array of professional guidance available to them in the audits of different types of entities.
Required:
Describe Statements on Auditing Standards and Auditing Standards. In your description, identify which professional body(ies) is(are) responsible for issuing the standards and the types of audits in which the standards are applicable.
2.54
Independence. You are meeting with executives of Cooper Cosmetics Corporation to arrange your firm’s engagement to audit the corporation’s financial statements for the year ending December 31. One executive suggests the audit work be divided among three staff members. One person would examine asset accounts, a second would examine liability accounts, and the third would examine income and expense accounts to minimize audit time, avoid duplication of staff effort, and curtail interference with entity operations.
Advertising is the corporation’s largest expense, and the advertising manager suggests that a staff member of your firm whose uncle owns the advertising agency that handles the corporation’s advertising be assigned to examine the Advertising Expense account because the staff member has a thorough knowledge of the complex contact between Cooper Cosmetics and the advertising agency.
Page 67
Required:
To what extent should auditors follow the client’s suggestions for the conduct of an audit? Discuss.
List and discuss the reasons that audit work should not be assigned solely according to asset, liability, and income and expense categories.
Should the staff member of your accounting firm whose uncle owns the advertising agency be assigned to examine advertising costs? Discuss.
2.55
Independence. Generally accepted auditing standards require auditors to be independent. Included within this standard are the concepts of independence in fact and independence in appearance.
Required:
Define independence in fact and independence in appearance.
What two general types of relationships would normally compromise auditors’ independence?
For each of the following separate situations, discuss whether you believe the auditors’ independence has been compromised.
The auditors’ firm provides extensive consulting services to the client; these services provide revenues to the firm that exceed revenues received from the audit engagement.
The spouse of the partner in charge of the audit engagement occupies an executive-level position within the client.
A distant relative of a partner within the firm occupies an entry-level position within a client of the firm. (The audit is conducted by another office of the firm with which the partner has infrequent contact.)
A staff member within the firm owns shares of stock of one of that firm’s clients. (She is not a member of the engagement team serving that client.)
2.56
Professional Skepticism. An important principle for auditors is the need to maintain an appropriate level of professional skepticism.
Required:
Define professional skepticism.
During which stages of the audit are auditors required to exhibit professional skepticism?
How does each of the following independent issues potentially relate to the principle of professional skepticism?
The auditor’s firm has served the client for a long period of time, and strong friendships have developed between the firm personnel and client’s officers.
Auditors are anxious to complete the audit shortly because of other workload demands and deadlines related to other engagements.
The client has mentioned on a number of occasions its desire to reduce (or limit) the audit fee.
2.57
Responsibilities Principle. Martin is considering submitting a proposal to conduct the audit examination of Phillip Inc., a manufacturer and distributor of automotive parts to the large automobile manufacturers. Martin learned of this client opportunity through one of its staff accountants, who is a cousin of Phillip’s chief financial officer. In evaluating this opportunity, Martin first inquired with Phillip as to the reason for a change in auditors and was assured that the former auditors decided not to continue auditing Phillip Inc. because it no longer possessed the necessary expertise to audit clients in the automotive parts industry. A conversation with Phillip’s former auditors confirmed this explanation, so Martin is currently evaluating this opportunity.
Phillip is a particularly attractive engagement for Martin because it would allow the firm to enter into the manufacturing market. Most of Martin’s clients are in the services industry and are much smaller than Phillip. Martin is concerned about the numerous locations of Phillip’s warehouses and the ability to conduct an appropriate observation of Phillip’s year-end inventory balances; however, Martin’s staff accountant noted that the firm could engage component auditors to assist with this aspect of the audit engagement. As a manufacturing entity, inventory (and the related cost of goods sold) is highly material to Phillip’s financial statements. Alternatively, Phillip indicated that its previous auditors would observe physical Page 68inventory at the different warehouses on different days, reducing the need for them to rely on the work of others. To ensure that inventory was not transferred from one location to another and “double counted,” the auditors obtained a written statement from Phillip indicating that no such transfers occurred.
After considering these factors, Martin has decided to submit a proposal for the audit of Phillip. If accepted, Martin will take appropriate actions to ensure that the appropriate firm personnel are independent in fact and in appearance with respect to Phillip.
Required:
Identify issues related to the responsibilities principle that Martin should consider in its decision to submit a proposal to conduct the audit of Phillip.
2.58
Performance Principle: Planning. Your public accounting practice is located in a city of 15,000 people. The majority of your work, conducted by you and two assistants, consists of compiling clients’ monthly statements and preparing income tax returns for individuals from cash data and partnership returns from books and records. You have a small number of audit clients; given the current size of your practice, you generally consider it a challenge to accept new audit clients.
One of your corporate clients is a retail hardware store. Your work for this client has been limited to preparing the corporate income tax return from a trial balance submitted by the bookkeeper.
On December 26, you receive from the president of the corporation a letter containing the following request:
We have made arrangements with First National Bank to borrow $500,000 to finance the purchase of a complete line of appliances. The bank has asked us to furnish our auditors’ certified statement as of December 31, which is the closing date of our accounting year. The trial balance of the general ledger should be ready by January 10, which should allow ample time to prepare your report for submission to the bank by January 20. In view of the importance of this certified report to our financing program, we trust you will arrange to comply with the preceding schedule.
Required:
From a theoretical viewpoint, discuss the difficulties that are caused by such a short notice audit request.
2.59
Performance Principle: Evidence. Generally accepted auditing standards (the performance principle) require auditors to gather sufficient appropriate evidence on which to base an opinion.
Required:
Briefly define the characteristics “sufficient” and “appropriate” as they relate to audit evidence.
What are relevance and reliability (as they relate to audit evidence)? How do these concepts relate to the auditors’ requirement to gather sufficient appropriate evidence?
How does the source of evidence affect its reliability?
How does the effectiveness of the entity’s internal control affect the sufficiency and appropriateness of evidence gathered by auditors?
2.60
Performance Principle. You have accepted the engagement of auditing the financial statements of the C. Reis Company, a small manufacturing firm that has been your client for several years. Because you were busy writing the report for another engagement, you sent a staff accountant to begin the audit with the suggestion that she start with accounts receivable. Using the prior year’s audit documentation as a guide, she prepared a trial balance of the accounts, aged them, prepared and mailed positive confirmation requests, examined underlying support for charges and credits, and performed other work she considered necessary to obtain evidence about the validity and collectability of the receivables. At the conclusion of her work, you reviewed the audit documentation she prepared and found she had carefully followed the prior year’s audit documentation.
Required:
The opinion rendered by auditors states that the audit was made in accordance with generally accepted auditing standards. Identify the important components of the performance Page 69principle and relate them to the audit of C. Reis Company by indicating how they were fulfilled or, if appropriate, how they were not fulfilled.
2.61
Performance Principle. Identify how each of the following statements relates to the performance principle by considering which element(s) of the principle are related to that statement. (A statement may be related to more than one element.) Use the following elements in providing your response:
Reasonable assurance
Planning and supervision
Materiality
Risk assessment
Audit evidence
Evaluating the effectiveness of the client’s internal control in preventing or detecting misstatements.
Obtaining an understanding of the client’s business and industry.
Acknowledging that the risk of failing to detect a material misstatement cannot be reduced to zero.
Obtaining confirmations from the client’s customers as to the ending balances in accounts receivable.
Preparing a written audit plan.
Designing audit procedures to identify misstatements that would have a significant effect on financial statement users’ decisions.
Considering the likelihood that the account balance contains a material misstatement.
Failing to detect material misstatements because of audit team mistakes and misinterpretations in evaluating evidence.
2.62
Responsibilities and Performance Principles. Respond to each of the following comments that you heard related to the audit of Swan Company, a public entity.
“We don’t need to consider the risk of material misstatement in our work because we really can’t do anything to reduce that risk.”
“Because the client has not implemented effective internal controls, we need to gather more reliable evidence. This means we need to test a greater number of transactions and obtain more reliable forms of evidence.”
“We will really need to spend a lot of time and effort on this audit. Because this client has just filed for a bond offering, we can't allow for any misstatements in the financial statements. We need to guarantee the accuracy of the client’s financial statements.”
“Because this company has $140 million in revenues, we really shouldn’t be concerned about smaller accounts because they are not likely to have a major impact on the financial statements.”
“I know it will be more time consuming and expensive, but we are required to physically inspect the stock certificates held by the client rather than obtain confirmation from the custodian. After all, our own direct observation is more reliable than receiving a confirmation.”
2.63
Reporting Principle. The reporting principle requires auditors to express their opinion through the issuance of a written report.
Required:
What is the purpose of the auditors’ opinion and report?
What are the major paragraph(s) in the auditors’ report on the examination of a public entity? What are the major contents of each of these paragraphs?
What are the four types of opinions that auditors can issue?
How does the concept of materiality influence the auditors’ report?
2.64
Comprehensive Principles Case Study. Ray, the owner of a small entity, asked Holmes, CPA, to conduct an audit of the entity’s records. Ray told Holmes that the audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to provide an auditors’ Page 70report within three weeks. Ray agreed to pay Holmes a fixed fee plus a bonus if the loan was granted.
Holmes hired two accounting students to conduct the audit and spent several hours telling them exactly what to do. Holmes told the students not to spend time reviewing the controls but instead to concentrate on proving the mathematical accuracy of the ledger accounts and on summarizing the data in the accounting records that support Ray’s financial statements. The students followed Holmes’ instructions and, after two weeks, gave Holmes the financial statements, which did not include footnotes. Holmes studied the statements and prepared an unmodified auditors’ report. The report, however, did not refer to generally accepted accounting principles or to the fact that Ray had changed to the accounting standard for capitalizing interest.
Required:
Briefly describe each of the principles and indicate how the action(s) of Holmes resulted in a failure to comply with these principles.
2.65
Fundamental Principles (Comprehensive). In each of the following, identify which of the elements of the fundamental principles is most applicable. In addition, discuss what action(s) (if any) you believe auditors should take with respect to these issues.
An entity has contacted you about performing its audit engagement. You have not previously served a client in the entity’s industry, which has many industry-specific accounting issues that are both technical and complex.
An entity has entered into a number of lease agreements. Based on the requirements of GAAP, you believe that these obligations meet the criteria for being classified as capital leases; however, the entity has elected to treat these leases as operating leases, providing full and complete disclosure of this treatment in the footnotes to the financial statements.
Because of a disagreement with its current auditors, an entity has contacted you about conducting its current-year audit. However, because the previous auditors have just recently resigned from the engagement, you have some questions as to whether an audit can be completed in time to meet the entity’s deadlines for providing audited financial statements to a lender.
Based on the effectiveness of the entity’s internal control, you have assessed control risk at low levels and decided that a smaller number of customer accounts need to be confirmed.
An entity has contacted you about performing its audit engagement. This entity became aware of your firm because the husband of one of your partners is currently serving as the entity’s chief financial officer.
One of your clients is currently a potential defendant in several cases because of the damage caused by one of its products. Because this entity does not believe that it is likely to receive an unfavorable outcome from this litigation, it did not disclose the potential litigation in the footnotes accompanying their financial statements.
You are performing tests of the client’s controls over the processing of revenue transactions to determine whether these controls are operating effectively and can be relied upon to prevent or detect misstatements.
One of your supervisors has requested a number of clarifications based on her review of your work on an audit engagement. A subsequent meeting with her has resolved these clarifications, and you both have concluded that your work supports the opinion on the client’s financial statements.
2.67
Fundamental Principles (Comprehensive). Comment upon each of the following statements you heard in a conversation between two newly hired staff auditors.
“Of course, I’m qualified to be assigned to this engagement. I have an accounting degree from a top university and was an honors graduate. I know some of the accounting rules have changed since I graduated, but I’ll be able to figure that out as we go through the audit.”
“It doesn’t really matter what others think. . . . I’m completely independent of Acme Industries and should be a member of the audit team. While I own some stock, it’s a small amount and I’m holding it for the long term, anyway.”
“You really have to question everything the client tells you. That’s what professional skepticism is all about. It’s a shame you can’t believe a word they say.”
“The evidence is lower in quality, but we typically use internal evidence when we audit property, plant, and equipment. It just takes too much time and costs too much to get more reliable evidence.”
“On that last job, we really planned the audit well. We were able to finish everything by November 1 and didn’t need to do any work after year-end.”
“We’re not too worried about internal control. We always do the same substantive procedures anyway, so why take the time to look at the client’s controls?”
“Because the client isn’t accounting for its leases properly, we need to issue either a qualified opinion or a disclaimer of opinion. Just how large a dollar impact does this have on the financial statements?”
“When we evaluate items for materiality, the only thing we need to worry about is the absolute dollar amount. There really isn’t anything else we need to consider.”
2.68
System of Quality Control. Each of the following quality control policies and procedures is typical of ones that can be found in public accounting firms’ systems of quality control. Identify each of them with one of the six elements of quality control identified by SQCS 8.
Assign management responsibilities in such a manner that commercial considerations do not override the quality of work performed.
Establish policies and procedures for resolving differences of opinion among firm personnel that arise during professional engagements.
Develop policies and procedures to ensure that professionals are provided appropriate professional development opportunities.
Review engagement documentation, reports, and the client’s financial statements.
Develop effective performance evaluation, compensation, and advancement procedures.
Identify circumstances and relationships that create threats to independence and take appropriate action to eliminate those threats or reduce them to an acceptable level.
Identify whether the firm possesses the competency, capability, and resources to appropriately serve a specific client.
Devote sufficient resources to develop, communicate, and support the firm’s quality control procedures.
Retain engagement documentation for a sufficient period of time to satisfy the needs of the firm, professional standards, laws, and regulations.
2.69
Evaluating Quality Control. Firms auditing public entities are required to have periodic inspections conducted by the PCAOB.
Required:
What are the major characteristics of PCAOB inspections?
What types of firms typically have PCAOB inspections? How frequently are these evaluations conducted?
2.70
Internet Exercise: Public Company Accounting Oversight Board Inspection Reports. Refer to the website of the Public Company Accounting Oversight Board (PCAOB) (www.pcaobus.org), review the information under “Inspections,” and select the most current inspection report for one of the Big Four firms (Deloitte, EY, KPMG, and PwC).
Required:
What information is contained in the “public” version of the PCAOB’s inspection reports? Is there any additional information that you would like to see?
What categories of practices, policies, and procedures are evaluated in the PCAOB’s inspection of the firm’s quality control system?
For the firm you selected, how many practice offices had audits inspected by the PCAOB?
For the firm you selected, for how many audits (issuers) did the PCAOB find deficiencies?
Identify five deficiencies that were cited in the PCAOB’s inspection report. For each deficiency, to which of the elements of the principles does it most closely relate? (If the firm had fewer than five deficiencies, evaluate all of the deficiencies identified in the report.)
Briefly summarize the firm’s response (if any) to the PCAOB’s inspection report.
Page 73
Appendix 2A
Referencing Professional Standards
Shown here is a comparison of the categories of standards issued by the PCAOB and Auditing Standards Board (ASB). (Section numbers are shown in parentheses for each category.) These general categories parallel the majors stages of an audit engagement and serve as an appropriate starting point when researching the professional auditing literature with respect to an issue that may be encountered during the audit examination.
ASB PCAOB
General Principles and Responsibilities (200–299) General Auditing Standards (1000–1300)
Risk Assessment and Response to Assessed Risks (300–499) Audit Procedures (2100–2900)
Audit Evidence (500–599) Audit Procedures (2100–2900)
Using the Work of Others (600–699) Incorporated in General Auditing Standards and Audit Procedures
Audit Conclusions and Reporting (700–799) Auditor Reporting (3100–3300)
Special Considerations (800–899) Other Matters Associated with Audits (6101–6115)
Special Considerations in the United States (900–999) Other Matters Associated with Audits (6101–6115)
Matters Related to Filings Under Federal Securities Laws (4101–4105)
EXAMPLE: AUDITING REPORTING
Assume that you were seeking guidance on the appropriate wording for the auditors’ report. For public entities, “Auditor Reporting” is covered under AS sections 3100–3300. Reviewing AS 3101 (“Reports on Audited Financial Statements”), paragraph 8 contains the wording for the auditors’ report. In documenting your reference to the professional standards, you would cite AS 3101.08 as the appropriate source of professional guidance.
For nonpublic entities, “Audit Conclusions and Reporting” are covered under AU-C sections 700–799. AU-C section 700 (“Forming an Opinion and Reporting on Financial Statements”) specifically relates to the content of the auditors’ report. When you access AU-C section 700, you will see the source identified as SAS No. 122 and SAS No. 131. If future pronouncements issued by the ASB affect audit reporting, AU-C section 700 will be updated to include those pronouncements. In this way, auditors can find all of the appropriate professional guidance for an area under one AU-C section rather than needing to reference several individual pronouncements.
Each AU-C section includes a number of paragraphs that address various matters related to that topic. AU-C section 700 has 59 paragraphs outlining the professional guidance for reporting and 63 other paragraphs (referred to as Application and Other Explanatory Material) to provide more specific guidance for applications of the standard. Paragraph A63 (the “A” refers to the application paragraph) provides sample auditors’ reports. In documenting your reference to the professional standards, you could refer to either SAS No. 122/SAS No. 131 or AU-C 700.A63.
EXAMPLE: AUDIT CONFIRMATIONS
You are seeking guidance for the use of confirmations in the audit of a public entity; specifically, you want to know what alternative procedures should be performed for Page 74nonresponses to confirmations. Reviewing the categories of standards, “Audit Procedures” (AS sections 2100–2900) appears to be most applicable; a review of standards within this category allows you to identify AS 2310, “The Confirmation Process.” Reviewing this standard, paragraphs 31 and 32 describe the auditors’ responsibility for performing alternative procedures if replies to confirmations are not received. In documenting your reference to the professional standards, you would cite AS 2310.31-32.
For the audits of nonpublic entities, audit evidence is covered under AU-C sections 500–599. AU-C section 505 (“External Confirmations”) specifically relates to the use of external confirmations. When you access section 505, you will see the source identified as SAS No. 122. Paragraphs A24–A26 provide guidance for auditors’ responsibility for nonresponses to confirmations. In documenting your response, you could cite either SAS No. 122 or AU-C 505.A24–A26.
The preceding examples illustrate that individual pronouncements of the ASB (Statements on Auditing Standards) may contain guidance on a variety of topics. For example, SAS No. 122 addresses both auditor reporting and confirmations (along with other topics). As a result, when referring to professional guidance in the audit of nonpublic entities, it is more appropriate to use the AU-C referencing to allow the specific source of guidance to be easily identified.