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Lesson 3: Generally Accepted Auditing Standards - YouTube
Channel: Executive Finance
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in this lesson we're going to talk about
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the structure of generally accepted
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auditing standards or gasps and I like
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frameworks they are always easier to
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understand and recall than diving
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straight into the details right off the
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bat gas can be broken down into three
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sections first we have the general
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standard and this covers the
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qualifications in the conduct of the
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auditor second we have the examination
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standards which discussed the
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performance of the audit and third we
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have the reporting standards that detail
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how the auditor should communicate their
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findings let's look at each of these
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sections a little more closely the
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general standards seem kind of obvious
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but it's the underpinning of the
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profession of auditing that is to say
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auditors must have a technical
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background and practical experience to
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be competent auditors you need to know
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your limits and not take on assignments
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beyond your capabilities you also must
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use due care during it on it and this
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means working diligently and carefully
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as you pull together the audit file
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another element of the standard is that
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the auditors must be free of bias and
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we've discussed why daughter needs to be
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independent in our very first lesson
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there are various Rules of Professional
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Conduct all of which hold independence
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as a core principle of auditing no
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matter which jurisdiction you're
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practicing in and we're going to talk
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about this important topic in another
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lesson the performance standards require
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an artery to use a risk-based approach
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with their audit we'll spend time
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understanding what a risk-based approach
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means and how you do it but suffice it
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to say a risk-based approach means the
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auditor identifies areas contained
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within the financial statements that are
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of the greatest risk of a misstatement
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after all that is what the auditors are
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expressing their opinion on a risk arise
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for a number of different reasons such
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as business complexity imprecise
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judgments susceptibility to fraud etc
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the activity of identifying risk is
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called audit planning and it requires a
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strong understanding of the clients
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business having identified these higher
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risk areas the auditor performs work on
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these areas to confirm or refute what
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management is representing is true in
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the financial statements this is called
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the audit execution as it requires the
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proper supervision of assistants as
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audit evidence is gathered the types of
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evidence gathered will vary depending on
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the circumstances we will learn and some
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clients have strong internal controls
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upon which we as the auditors can place
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certain reliance to reduce the amount of
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audit evidence we would otherwise have
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to gather an internal control is an
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activity performed by the client to
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ensure that everything is properly
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recorded clients with poor internal
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controls make it necessary to gather
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more documentary evidence to support the
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information that's been represented by
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management the reporting standards
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describe the specific wording unist
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in the audit report and this is tailored
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based on the auditors overall evaluation
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of what management is represented the
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evidence gathered to support and then in
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the context of the relevant criteria
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which in the financial context is most
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often GAAP a standard opinion or an
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unqualified opinion means that the
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auditors concur with the information
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that management has presented variations
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of the standard opinion can arise when
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either the auditor doesn't agree with
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certain positions taken by management or
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when the auditors have been unable to
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gather sufficient evidence to support
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making their unqualified opinion in the
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last lesson we introduced this notion of
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quality control which was largely driven
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by the accounting bodies and the
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regulator's which are enforced through
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practice inspections but how does it
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audit firm ensure that it meets the
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standards that we've just discussed
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well there's nine elements of quality
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control to consider and
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you were to set up your own public
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accounting firm these would be the sorts
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of things that you would have to
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consider prior to accepting your first
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client first you'd need to establish a
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culture of audit quality this broadly
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covers everything from leadership of the
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firm to the development and
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implementation of strong policies and
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procedures secondly you would need to
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establish mechanisms to ensure ethical
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behaviors ever present consider the
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principles of integrity objectivity
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professional competence due care
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confidentiality the failure on any of
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these will jeopardize the firm's ability
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to continue operating third independence
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is so important that it deserves its own
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special consideration for each and every
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engagement consider such things as when
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and whether you can offer not insurance
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services to audit clients in their
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relationships with clients and fee
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considerations fourth your firm needs to
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be choosy and who it accepts as clients
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your firm needs to evaluate management's
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integrity as well as the firm's
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confidence to meet the needs of the
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client before accepting or continuing
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and assurance relationship fifth your
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firm needs to establish human resource
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policies because at the end of the day
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auditing relies heavily on its people
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and their judgment and if you don't have
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good people you're going to expose
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yourself to litigation sixth accounting
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and auditing standards never sit still
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the nature of the profession dictates
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that you and your staff will need to
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continuously undertake professional
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development to stay current seventh you
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need to establish an audit program that
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can be tailored as necessary to achieve
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gasps these policies and procedures will
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be extensive and incorporate such things
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as the use of audit software supervision
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review of work and the use of
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specialists Hey you'll need an internal
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process to ensure the quality control
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during and after an engagement your firm
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will need policies on when to use second
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partner reviews technical reviews are
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compliance type activities and last but
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not least you will need a documentation
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policy around the extent and retention
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of documentation now you get a sense of
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why it is the first charge out staff and
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partners for hundreds of dollars per
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hour
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you just don't suddenly wake up one day
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and decide that you're going to become a
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public accountant and start your own
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public accounting firm for those who
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persevere it's a wonderful and highly
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profitable business model but you need
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to do it right you need to look no
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further than the demise of Arthur
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Andersen after Enron to see what happens
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if any of these elements are compromised
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Arthur Andersen was one of the world's
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largest public accounting firms prior to
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the Enron scandal but because the firm's
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undisciplined execution of gas was
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brought down in the week following the
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scandal that's the nature of public
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accounting one bad on it one bad partner
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can jeopardize the entire organization
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think about this for a moment and let
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your mind weigh in the gravity of the
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importance of these principles and until
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next time don't stop to get to the top
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and get to the top don't stop
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