Complying with GAAS
Auditors must comply with and understand AU-C sections. (AU-C 200.20 and .21) AU-C Section 200.25-26 clarifies that the SASs use two categories of professional requirements to describe the degree of responsibility the standards impose on auditors.
1. Unconditional requirements.The auditor is required to comply with an unconditional requirement in all cases in which the circumstances exist to which the unconditional requirement applies. SASs use the word must to indicate an unconditional requirement.
2. Presumptively mandatory requirements. The auditor is also required to comply with a presumptively mandatory requirement in all circumstances where the presumptively mandatory requirement exists and applies. However, in rare circumstances, the auditor may depart from a presumptively mandatory requirement. The departure should only relate to a specific procedure when the auditors determine that the procedure would be ineffective in the specific circumstances. The auditors must document their justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the objectives of the presumptively mandatory requirement. GAAS use the word should to indicate a presumptively mandatory requirement.
(AU-C 200.25-.26)
The term should consider means that the consideration of the procedure or action is presumptively required, whereas carrying out the procedure or action is not.
AU-C Section 200 also clarifies that explanatory material is intended to explain the objective of the professional requirements, rather than imposing a professional requirement for the auditor to perform.
GAAS and the GAAS Hierarchy
The auditor is responsible for planning, conducting, and reporting the results of an audit according to GAAS.3 GAAS provide the standards for the auditors' work in fulfilling their objectives. Each AU-C section contains objectives that provide a link between the requirements and the overall objectives of the auditors. Auditors should have sufficient knowledge of the AU-C sections to determine when they apply and should be prepared to justify departures from them.
Interpretive Publications
Interpretive publications are not auditing standards, but are recommendations, issued under the authority of the ASB, on how to apply the SASs in specific circumstances, including engagements for entities in specialized industries. Interpretive publications are not auditing standards. They consist of the following:
● Auditing Interpretations of SASs, listed in each chapter of this book that has a related Interpretation.
● AICPA Audit and Accounting Guides and Statements of Position, listed in Appendix B of this book.
(AU-C 200.A81)
Auditors should consider interpretive publications that apply to their audits.
Other Auditing Publications
Other auditing publications, listed in Appendix C of this book, are not authoritative but may help auditors to understand and apply SASs. An auditor should evaluate such guidance to determine whether it is both (1) relevant for a particular engagement and (2) appropriate for the particular situation. When evaluating whether the guidance is appropriate, the auditor should consider whether the publication is recognized as helpful in understanding and applying SASs, and whether the author is recognized as an auditing authority. AICPA auditing publications that have been reviewed by the AICPA Audit and Attest Standards staff are presumed to be appropriate. (AU-C 200.A84)
AU-C 210 TERMS OF ENGAGEMENT
AU-C Original Pronouncement
Applicability
This section states the requirements and provides application guidance on the auditor's responsibilities in agreeing upon terms of engagement with management and those charged with governance. It establishes preconditions for an audit, for which management is responsible. AU-C 220, Quality Control for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards, addresses those aspects of engagement acceptance that the auditor can control. AU-C 580, Written Representations, discusses management's responsibilities. (AU-C 210.01)
AU-C 210 Definitions of Terms
Source: AU-C 210.04
Preconditions for an audit. The use by management of an acceptable financial reporting framework in the preparation and fair presentation of the financial statements and the agreement of management and, when appropriate, those charged with governance, to the premise on which an audit is conducted.
Recurring audit. An audit engagement for an existing audit client for whom the auditor performed the preceding audit.
Objectives
AU-C Section 210.03 states that:
…the objective of the auditor is to accept an audit engagement for a new or existing audit client only when the basis upon which it is to be performed has been agreed upon through
a. establishing whether the preconditions for an audit are present and
b. confirming that a common understanding of the terms of the audit engagement exists between the auditor and management and, when appropriate, those charged with governance.
Fundamental Requirements
Engagement Acceptance
Preconditions
Unless required to do so by law or regulation, an auditor should not accept an engagement when the preconditions (see “Definitions of Terms” section above) are not met. (AU-C 210.08) To assess whether those preconditions are met, the auditor should:
a. determine whether the financial reporting framework4 to be applied in the preparation of the financial statements is acceptable and
b. obtain the agreement of management that it acknowledges and understands its responsibility
i. for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework;
ii. for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; and
iii. to provide the auditor with
1. access to all information of which management is aware that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters;
2. additional information that the auditor may request from management for the purpose of the audit; and
3. unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.
(AU-C 210.06)
Limitation of Scope
If management limits the scope of the auditor's work so that the auditor will have to disclaim an opinion, the auditor should not accept the engagement. The exception to this is when management is required by law or regulation to have an audit and the disclaimer of opinion is acceptable under law or regulation, for example with audits of employee benefit plans. Then the auditor can accept the engagement, but is not required to do so. (AU-C 210.07)
Agreement on Terms
The auditor should establish an understanding with management or those charged with governance5 about the services to