200.15)
To be independent, the auditor must be intellectually honest; to be recognized as independent, he or she must be free from any obligation to or interest in the client, its management, or its owners. For specific guidance, the auditor should look to the AICPA and the state society codes of conduct and, if relevant, the requirements of the Securities and Exchange Commission (SEC).2
Policies and procedures should provide reasonable assurance that personnel maintain independence when required and perform all responsibilities with integrity, objectivity, and due care.
1. Independence is an impartiality that recognizes an obligation for fairness.
2. Integrity pertains to being honest and candid, and requires that service and public trust not be subordinated to personal gain.
3. Objectivity is a state of mind that imposes an obligation to be impartial, intellectually honest, and free of conflicts of interest.
4. Due care requires the auditor to discharge professional responsibilities with the competence and diligence necessary to perform the audit and issue an appropriate report and to render services promptly, thoroughly, and carefully, while observing applicable standards.
(See the AICPA's Code of Professional Conduct, Section 300.)
Professional Skepticism and Judgment
The auditor must perform the audit with professional skepticism and exercise professional judgment in planning and performing an audit of financial statements. (AU-C 200.17-18) The auditor should:
● Observe GAAS,
● Possess the degree of skill commonly possessed by other auditors, and
● Exercise that skill with reasonable care and diligence.
The auditor should also exercise professional skepticism, that is, an attitude that includes a questioning mind and a critical assessment of audit evidence.
In practice, this means that auditors should be alert for:
● Contradictory evidence,
● Indications of fraud,
● Unusual circumstances,
● Evidence that calls into question the reliability of documents and responses to inquiries,
● The possibility of collusion when performing the audit, and
● How management may override controls in a way that would make the fraud particularly difficult to detect.
(AU-C 200.A22-A23)
However, the auditor is not an insurer, and the audit report does not constitute a guarantee. It is based on reasonable assurance. Thus, it is possible that an audit conducted in accordance with GAAS may not detect a material misstatement.
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)
