. 37
( 82 .)


of auditing. However, auditing procedures are flexible since the auditors use vari-
ous methods based upon their professional judgment to perform the audit. Fur-
thermore, the Auditing Standards Board of the AICPA periodically issues
pronouncements on auditing matters that represent the board™s interpretations of
generally accepted auditing standards. These pronouncements provide the auditors
with guidance and direction regarding various auditing procedures in a particular
auditing situation. (See Appendix A.)

American Institute of Certified Public Accountants, Professional Standards, U.S. Auditing Stan-
dards/Attestation Standards, Vol. 1 (Copyright © 2003 by the AICPA, Inc.), AU Sec. 150.03.
180 Rules of the Road”Auditing and Related Accounting Standards

General Auditing Standards
With respect to the general standards, adequate technical training and proficiency
as an auditor implies that the individuals who are performing the audit are profes-
sional accountants (certified public accountants). Certified public accountants are
requisite to the audit function since their major objective is to express an inde-
pendent opinion on the financial statements. Their professional opinion is criti-
cally important to the users of the financial statements because such users need
assurance on corporate management™s financial accounting representations. More-
over, independent auditors have a duty of professional care whereby they must ex-
ercise their professional judgment with reasonable care and diligence. (Visit
www.aicpa.org, Code of Professional Conduct.)

The first standard of fieldwork centers
Auditing Standards of Fieldwork
around the auditors™ objectives, plans, and procedures concerning the particular
audit engagement. For example, the Auditing Standards Executive Committee
points out:

Audit planning involves developing an overall strategy for the expected conduct and
scope of the examination. The nature, extent, and timing of planning vary with the
size and complexity of the entity, experience with the entity, and knowledge of the
entity™s business.2
Supervision involves directing the efforts of assistants who are involved in accom-
plishing the objectives of the examination and determining whether those objectives
were accomplished.3

Thus the first standard of fieldwork requires that the auditors plan their neces-
sary auditing procedures subsequent to their review of such matters as the corpo-
ration™s accounting policies and procedures and the industry practices of the
particular entity. Also, they are required to develop and administer the necessary
levels of proper supervision regarding the audit examination.4
The second standard of fieldwork requires that the auditors obtain a sufficient
understanding of the internal control structure. (See Chapter 8.) Their evaluation of
the system of internal control is necessary in order to determine how much reliance
can be placed on the entity™s financial accounting system. Since the financial state-
ments are the product of the accounting system, the auditors must examine the in-
ternal controls and the related recordings of various business transactions.
Furthermore, the auditors evaluate the system of internal control to determine the
extent of their tests of the accounting records as well as their auditing procedures.
As the third standard of fieldwork, sufficient competent evidential matter means
that the auditors must obtain and examine internal and external documentation that

Statement on Auditing Standards No. 22, “Planning and Supervision” (New York: AICPA, 1978), par. 3.
Ibid., par. 9.
For a complete description of the organizational and operational aspects of a public accounting firm,
see any standard auditing textbook.
Integration of Auditing and Related Accounting Standards 181

supports the financial accounting representations in the financial statements. For
example, the auditors will examine not only sales invoices and other documenta-
tions but also correspondence from various parties outside the entity, such as banks
and customers. The amount of evidential matter to be examined is based on the au-
ditors™ professional judgment. Obviously, the auditors™ major objective is to exam-
ine sufficient evidence to enable them to express their opinion on the fairness of the
presentations in the financial statements.
The standards of fieldwork are directly related to the scope of the auditors™ ex-
amination. The scope of the audit is critically important because the auditors may
not express an unqualified opinion on the financial statements if their scope is lim-
ited. As the Auditing Standards Executive Committee states:

Restrictions on the scope of his examination, whether imposed by the client or by
circumstances such as the timing of his work, the inability to obtain sufficient com-
petent evidential matter, or an inadequacy in the accounting records, may require him
to qualify his opinion or to disclaim an opinion.5

Thus it is imperative that the audit committee examine those situations that
may preclude the issuance of an unqualified opinion as a result of a limitation on
the auditors™ scope. For example, a limitation on the auditors™ observation of phys-
ical inventories or the confirmation of accounts receivable would be considered a
restriction on the scope.6
In March 2002, the Auditing Standards Board issued a hierarchy of generally
accepted auditing standards in order to realign and clarify the authority and guid-
ance in the myriad of auditing literature. Exhibit 5.1 contains the three levels in the
hierarchy of generally accepted auditing standards. Given this hierarchy of audit-
ing standards, it is reasonable to expect that audit committees should have a
systematic process in place to ensure that they are informed about current author-
itative auditing literature.
Since the standards of reporting are closely associated with an understanding
of generally accepted accounting principles, such standards are discussed in the
next section of this chapter.

As discussed in Chapter 2, the auditors state in the third paragraph of their report
that they are expressing an opinion on the fair presentation of the financial state-
ments. Also, their opinion gives assurance to the users of the statements that man-
agement has presented the financial statements in conformity with generally
accepted accounting principles.

AICPA, Professional Standards, U.S. Auditing Standards/Attestation Standards, Vol. 1, AU Sec.
508.22. See Chapter 13 for a discussion on the various types of auditing reports.
AICPA, Professional Standards, U.S. Auditing Standards/Attestation Standards, Vol. 1, AU Sec.
182 Rules of the Road”Auditing and Related Accounting Standards

Exhibit 5.1 GAAS Hierarchy Summary

Level of Authority
Level 1: Auditing Standardsa (included the 10 generally accepted auditing standards and
the Statements on Auditing Standards).
Level 2: Interpretive Publicationsb (includes Interpretations of the SASs, auditing guidance
in AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position).
Level 3: Other Auditing Publicationsc (includes other AICPA publications not mentioned
above; auditing articles in professional journals, including the AICPA™s CPA Letter; con-
tinuing professional education programs and other instructional materials, textbooks,
guide books, audit programs, and checklists; and other auditing publications from state
CPA societies, other organizations, and individuals).

Source: Statement on Auditing Standards No. 95, “Generally Accepted Auditing Standards” (New
York: AICPA, 2002) pars. 1“7.
The auditor should be prepared to justify departures from the SASs.
The auditor should be aware of and consider interpretive publications applicable to his or her audit,
and if not applied the auditor should be prepared to explain how he or she complied with the SAS
The third-level publications have no authoritative status; however, they may help the auditor
understand and apply the SASs.

If there are no exceptions noted by the auditors with respect to the consistent
application of generally accepted accounting principles and adequate informative
disclosure in the financial statements, then the users can assume that such state-
ments are fairly presented. The following discussion provides an analysis of the
four auditing standards of reporting and the opinion paragraph of the auditors™

Nature of Generally Accepted Accounting Principles
The first auditing standard of reporting requires the auditors to make a statement
in their report on whether the financial statements are presented in accordance
with generally accepted accounting principles. In contrast with the 10 generally
accepted auditing standards, an authoritative list of generally accepted accounting
principles or standards has not been established by any one authoritative source.
However, the official pronouncements of several authoritative bodies have been
recognized as generally accepted accounting principles. (See Appendix A.) Ex-
hibit 5.2 contains a hierarchy of generally accepted accounting principles.
In addition, several other organizations have influenced modern accounting
thought (see Appendix B), such as:

• American Accounting Association
• Institute of Management Accountants
• Financial Executives International
• Institute of Internal Auditors
Integration of Auditing and Related Accounting Standards 183

Exhibit 5.2 GAAP Hierarchy Summary

Nongovernmental Entities State and Local Governments

Established Accounting Principles
10a. FASB Statements and 12a. GASB Statements and Interpreta-
Interpretations, APB Opinions, tions, plus AICPA and FASB
and AICPA Accounting Research pronouncements if made applica-
Bulletins ble to state and local governments
10b. FASB Technical Bulletins, AICPA by a GASB Statement or
Industry Audit and Accounting Interpretation
Guides, and AICPA Statements 12b. GASB Technical Bulletins, and the
of Position following pronouncements if
10c. Consensus positions of the FASB specifically made applicable to
Emerging Issues Task Force and state and local governments by the
AICPA Practice Bulletins AICPA: AICPA Industry Audit and
10d. AICPA accounting interpretations, Accounting Guides and AICPA
“Qs and As” published by the Statements of Position
FASB staff, as well as industry 12c. Consensus positions of the GASB
practices widely recognized and Emerging Issues Task Force and
prevalent AICPA Practice Bulletins if specif-
ically made applicable to state and
local governments by the AICPA
12d. “Qs and As” published by the
GASB staff, as well as industry
practices widely recognized and

Other Accounting Literature
11. Other accounting literature, including 13. Other accounting literature, including
FASB Concepts Statements; APB GASB Concepts Statements; pro-
Statements; AICPA Issues Papers; nouncements in categories (a) through
International Accounting Standards (d) of the hierarchy for nongovern-
Committee Statements; GASB mental entities when not specifically
Statements, Interpretations, and made applicable to state and local
Technical Bulletins; pronouncements governments; APB Statements;
of other professional associations or FASB Concepts Statements; AICPA
regulatory agencies; AICPA Techni- Issues Papers; International Ac-
cal Practice Aids; and accounting counting Standards Committee
textbooks, handbooks, and articles Statements; pronouncements of other
professional associations or regula-
tory agencies: AICPA Technical
Practice Aids; and accounting text-
books, handbooks, and articles

Source: Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles in the Independent Auditor™s Report” (New York:
AICPA, 1992), par. 15.
184 Rules of the Road”Auditing and Related Accounting Standards

• Cost Accounting Standard Board
• Other regulatory agencies (e.g., Securities and Exchange Commission)

According to the Accounting Principles Board, accounting principles are de-
scribed in this way:

Generally accepted accounting principles incorporate the consensus at a particular
time as to which economic resources and obligations should be recorded as assets
and liabilities by financial accounting. . . .
Generally accepted accounting principles encompass the conventions, rules, and pro-
cedures necessary to define accepted accounting practice at a particular time. The
standard of generally accepted accounting principles includes not only broad guide-
lines of general application, but also detailed practices and procedures.7

Since the publication of APB No. 4, the Financial Accounting Standards Board
has issued six Statements of Financial Accounting Concepts relative to business
organizations and one statement with respect to financial reporting by nonbusiness
organizations. In Chapter 3, these statements were identified and their implemen-
tation discussed.
Management™s selection of accounting principles, methods, or procedures
should be based on those principles of accounting that have general acceptance
among the public accounting profession. Adoption of such principles is particu-
larly important because it affects the auditors™ opinion on the financial statements.
If management applies significant accounting principles that lack general accep-
tance, then the auditors cannot express an unqualified opinion on the statements.8
Moreover, Rule 203 of the AICPA Rules of Conduct of the Code of Professional
Ethics states:

A member shall not (1) express an opinion or state affirmatively that the financial
statements or other financial data of any entity are presented in conformity with gen-
erally accepted accounting principles or (2) state that he or she is not aware of any
material modifications that should be made to such statements or data in order for
them to be in conformity with generally accepted accounting principles, if such
statements or data contain any departure from an accounting principle promulgated
by bodies designated by Council9 to establish such principles that have a material ef-
fect on the statements or data taken as a whole. If, however, the statements or data
contain such a departure and the member can demonstrate that due to unusual cir-
cumstances the financial statements or data would otherwise have been misleading,
the member can comply with the rule by describing the departure, its approximate ef-
fects, if practicable, and the reasons why compliance with the principle would result


. 37
( 82 .)