Acc 491 - Generally Accepted Auditing Standards

Generally Accepted Auditing Standards

Rick Underwood

ACC/491

October 8, 2012

Auditing, a branch of financial management, is performed to manage and confirm the correctness of a company's accounting procedures. It originally existed as a method to maintain governmental accountancy. Auditing began to evolve into a form of fraud detection and financial accountability during the Industrial Revolution (1750 - 1850). During the Industrial Revolution companies began to expand, creating more jobs thus owners started hiring managers to oversee the companies during their absences. Because of this, owners needed assurance and protection from fraudulent activities. In the early 20th century, the reporting practices of auditors were standardized as the "Independent Auditor's Report" (Manal, 2012). Eventually, new a new testing process was introduced as the demand for auditors increased. This process strategically selected key cases as a representative of a company's overall performance. This was not only an affordable alternative, but it also saved time.

The nature of auditing standards requires an auditor to exercise professional judgment in applying the auditing standards. There are 10 standards of the Generally Accepted Auditing Standards (GAAS) divided into three categories. These categories are General Standards, Standards of Field Work, and Standards of Reports. In the General Standards category there are three standards, they are:

1. The auditor must have adequate technical training and proficiency to perform the audit.

2. The auditor must maintain independence in mental attitude in all matters relating to the audit.

3. The auditor must exercise due professional care in the performance of the audit and the preparation of the report.

In the Standards of Field Work category, there are three standards:

1. The auditor must adequately plan the work and must properly supervise any assistants.

2. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures.

3. The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

And in the Standards of Reporting category, there are four standards:

1. The auditor must state in the auditor's report whether the financial statements are presented in accordance with generally accepted accounting principles.

2. The auditor must identify in the auditor's report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.

3. When the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor's report.

4. The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor's report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefor in the auditor's report. In all cases where an auditor's name is associated with financial statements, the auditor should clearly indicate the character of the auditor's work, if any, and the degree of responsibility the auditor is taking, in the auditor's report (AU Section 150, Generally Accepted Auditing Standards, 2012).

In July of 2002, Congress approved the Sarbanes-Oxley Act (SOX) created by Senator Paul Sarbanes and Representative Michael Oxley. The reason for the creation of the SOX Act was due to numerous financial scandals and collapses, most notably, the Arthur Andersen scandal and the collapses of WorldCom and Enron. The Sarbanes-Oxley Act of 2002 was created to outline accounting standards and guarantee the accuracy of financial reporting, while restoring investor confidence and preventing future fraudulent activities. The SOX Act, which is mandatory for all publicly traded companies, holds executives responsible for accounting statements.

The Public Company Accounting Oversight Board (PCAOB), established in the first part of the Sarbanes-Oxley Act of 2002, works to oversee the auditors of public