Chapter 2

Professional Standards
All my growth and development led me to believe that if you
really do the right thing, and if you play by the rules, and if youve
got good enough, solid judgment and common sense, that youre
going to be able to do whatever you want to do with your life.
Barbara Jordan, first African-American woman from the South
ever elected to the U.S. House of Representatives

McGraw-

Copyright 2008 by The McGraw-Hill Companies, Inc. All

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Practice Standards
Client

Public
Entities

Private
Entities

Governmental
Entities

Foreign
Entities

Rulemaking
body

Public Company
Accounting
Oversight Board
(PCAOB)

AICPA Auditing
Standards
Board (ASB)

U.S.
Government
Accountabilit
y Office
(GAO)

IFAC
International
Auditing and
Assurance
Standards Board
(IAASB)

Standards

Auditing
Standards (ASs)

Statements on
Auditing
Standards
(SASs)

Government
Auditing
Standards
(The Yellow
Book)

International
Standards on
Auditing (ISAs)

www.aicpa.org

www.gao.gov

www.ifac.org

Web site
www.pcaobus.or
g

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Generally Accepted Auditing

Standards
Measures of the quality of auditors
performance
Same from audit to audit
Auditing standards versus auditing
procedures

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Exhibit 2.1

Generally Accepted Auditing Standards

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Engagement Overview and GAAS

OBTAIN
(OR RETAIN)
CLIENT

ENGAGEMENT
PLANNING

RISK
ASSESSMENT

SUBSTANTIVE
PROCEDURES

ISSUE
REPORT

General Standards (Due Professional Care)

Standards of Field Work
Standards of
Reporting

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General Standards
Affect all phases of audit
1. Training and proficiency

Experience and expertise

2. Independence

Independence in fact vs. independence in appearance

Financial and managerial relationships

3. Due professional care

Observe standards of field work and standards of

reporting.

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Standards of Field Work

Affect conduct of the audit
1. Planning and supervision

2.

Use of audit program

Interim and year-end work

Understanding of entity and environment (including I/C)

3.

Assess risk of material misstatement

Determine effectiveness of substantive procedures

Sufficient appropriate evidence

Sufficient = quantity
Appropriate = quality (relevance, reliability)

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Sufficient evidence
Related to quantity (number of transactions
or components examined)
Influenced by effectiveness of entitys
internal control
Effectiveinternal
control

Lowerlevelof
controlrisk

Reducedeffectivenessof
substantiveprocedures

Ineffectiveinternal
control

Higherlevelof
controlrisk

Increasedeffectivenessof
substantiveprocedures

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Appropriate Evidence
Relates to the quality of evidence
Reliability (from highest to lowest)

Auditors direct personal knowledge

External documentary evidence
External-internal evidence
Internal documentary evidence
Verbal and written representations

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Examples of Evidence
Auditors direct personal knowledge
Observe PPE, inventories

External documentary evidence

A/R confirmations, bank confirmations

External-internal evidence
Vendor invoices for purchases

Internal documentary evidence

Client sales invoices

Verbal and written representations

Management representations (SAS 85)

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Standards of Reporting
Identify contents of auditors reports
1. Are F/S in conformity with GAAP?
2. Have GAAP been consistently applied
(implicit reporting)?
3. Are disclosures adequate (implicit reporting)?
4. Report must express or disclaim an opinion

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Independent Auditors Report (AS 5)

Report Title

Report of Independent Registered Public Accounting Firm

Report Address

To the Board of Directors and Shareholders

APOLLO SHOES, INC.

Introductory
Paragraph

We have audited the accompanying balance sheets of APOLLO SHOES, INC. as of December 31, 2008 and 2007,
and the related statements of income, comprehensive income, shareholders equity, and cash flows for each of the
years in the three-year period ended December 31, 2008. These financial statements are the responsibility of the
APOLLO SHOES, INC.s management. Our responsibility is to express an opinion on these financial statements
based on our audits.

Scope
Paragraph
Opinion
Paragraph
Internal Control
Paragraph (AS 5)
Signature
Report Date

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of APOLLO SHOES, INC. as of December 31, 2008 and 2007, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), APOLLO SHOES INC.S' internal control over financial reporting as of December 31, 2008, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated January 29, 2009 expressed an
unqualified opinion on the effective operation of internal control over financial reporting.

Smith & Smith, CPAs

January 29, 2009

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Types of Audit Opinions

Unqualified
F/S are in conformity with GAAP

Qualified
Except for one (limited) item, F/S are in conformity with GAAP
Can issue for GAAP departure and scope limitation

Adverse
F/S are not in conformity with GAAP
Can issue for GAAP departure (more serious)

Disclaimer
Auditors do not express an opinion
Can issue for scope limitation (more serious)

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Attestation Standards
Cover a broader range of engagements than
GAAS
Differences from GAAS
Subject matter must be evaluated against
reasonable criteria
No requirement to assess risk of material
misstatement (unless attestation engagement
involves risk of material misstatement)
May have limited distribution of report

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Quality Control Standards for Accounting

Firms
Guide the performance of firm-wide services
Categories
Independence, integrity, objectivity
Personnel management
Acceptance and continuance of clients
Engagement performance
Monitoring

2-16

The Public Company Accounting

Oversight Board (PCAOB)
Establishes standards (Auditing Standards)

Auditors reports (AS 1)

Audit documentation (AS 3)
Material weaknesses in internal control (AS 4)
Audits of internal control over financial reporting (AS
5)

Standards must be approved by SEC

ASB and AICPA standards prior to April 16, 2003
are Interim Auditing Standards
May be modified or amended by Auditing Standards

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The Public Company Accounting

Oversight Board (PCAOB)
Monitors accounting firms through inspections
Firms auditing > 100 public entities: annual
Firms auditing < 100 public entities: every 3 years

Inspection reports list deficiencies in audits

conducted by registered firms