Ch3. US CPA AUD — Auditing Standards & Internal Controls
AUD Overview
AUD (Auditing & Attestation) has a relatively higher pass rate than FAR but requires deep conceptual understanding rather than memorization.
Key areas:
- Audit standards and ethics (GAAS, PCAOB)
- Audit planning and procedures
- Internal controls
- Assurance engagements
- Non-audit services (reviews, compilations)
Independence Threats (AICPA Framework)
| Threat | Example |
|---|---|
| Self-review | Audit firm also prepared the client’s financial statements |
| Self-interest | Auditor holds stock in the audit client |
| Advocacy | Audit firm represents the client in legal proceedings |
| Familiarity | Long-standing relationship erodes critical perspective |
| Intimidation | Client threatens to replace auditor for unfavorable opinion |
The Audit Risk Model
Audit Risk (AR) = Inherent Risk (IR) × Control Risk (CR) × Detection Risk (DR)
The auditor controls ONLY Detection Risk (DR):
- If IR × CR is high → must reduce DR → more extensive audit procedures
- The auditor assesses IR and CR; the auditor does not set them
Audit Procedures
| Procedure | Description |
|---|---|
| Inquiry | Ask management/staff questions |
| Observation | Watch a process being performed |
| Inspection | Examine documents, records, physical assets |
| Confirmation | Third-party verification (e.g., bank confirmations) |
| Recalculation | Re-perform mathematical computations |
| Analytical Procedures | Compare actual amounts to expected amounts |
PCAOB vs. AICPA
| Feature | PCAOB | AICPA |
|---|---|---|
| Applies to | Public (listed) companies | Private (non-public) companies |
| Created by | Sarbanes-Oxley Act (2002) | — |
| Internal control | AS 2201 (SOX 404) | COSO |
| Standards | PCAOB AS | GAAS |
Audit Opinion Types
| Opinion | Condition |
|---|---|
| Unmodified (Clean) | No material misstatements |
| Qualified | Material but not pervasive misstatement OR scope limitation |
| Adverse | Material AND pervasive misstatements |
| Disclaimer of Opinion | Severe scope limitation |
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