In this lesson, we are going to talk about the structure of Generally Accepted Auditing Standards or GAAS.
I like frameworks. They are always easier to understand and recall than diving straight into the details right off the bat.
GAAS, can be broken into three sections.
First we have the General Standard, and this covers qualifications and conduct of the auditor.
Second, we have the Examination Standards the discuss the performance of the audit.
And third, we have the Reporting Standards that detail how the auditor should communicate their findings.
Let’s look a little more closely at each of these sections.
The General Standard seems kind of obvious, but it’s the underpinning of the profession of auditing.
That is to say that auditors must have the technical background and practical experience to be competent auditors.
You need to know your limits and not take on assignments beyond your capabilities.
You must also use due care during an audit.
And this means working diligently and carefully as you pull together the audit file.
Another element of this [general] standard is that the auditor must be free of bias.
We’ve discussed why an auditor needs to be independent in our first lesson.
There are various rules of professional conduct, all of which hold independence as a core principle of auditing,
no matter which jurisdiction you are practicing in.
We’ll talk about this important topic more in another lesson.
The Performance Standards require an auditor to use a risk-based approach in their audit.
We will spend a lot time on understanding what a risk-based approach means and how you do it.
But suffice it to say, a risk based approach means that the auditor identifies areas contained within the financial statements...
that are at the greatest risk of misstatement, after all, this is what the auditors are expressing their opinion on.
And risk can arise for a number of different reasons such as: business complexity,
imprecise judgements, susceptibility to fraud etc.
This activity of identify risk areas is called audit planning and it requires a strong understanding of the client’s business.
Having identified these higher risk areas, the auditor performs work on these areas to confirm or
refute what management is representing as true in the financial statements.
This is called audit execution and it requires the proper supervision of assistants as audit evidence is gathered.
The types of audit evidence gathered will vary depending on the circumstances as we will learn.
Some clients have strong internal controls upon which the auditors can place certain reliance to reduce the amount of audit evidence they gather.
An internal control is an activity performed by the client to ensure that everything is properly recorded.
Clients with poor internal controls make it necessary to gather more documentary evidence to...
support the information represented by management.
The Reporting Standards describe the specific wording used in the auditor’s report,
which is tailored based on the auditor’s overall evaluation of what management has represented,
the evidence gathered to support it, in the context of the relevant criteria, which in the financial context is most often GAAP.
The standard opinion, or an unqualified opinion, means that...
the auditors concur with the information management has presented.
Variations of this standard opinion can arise when either the auditor doesn’t agree with certain positions taken by management or
when the auditor has been unable to gather sufficient evidence to support making an unqualified opinion.
In the last lesson, we introduced this notion of quality control which the accounting bodies and regulators enforce through practice inspections.