I. Introduction

– Brief overview of what auditing is and why auditing standards and best practices are important for ensuring quality financial reporting and preventing fraud

II. Top 10 Auditing Standards to Know

1. GAAS – Generally Accepted Auditing Standards 

– Overview of what GAAS is, who issues it, and key principles like due professional care, planning and supervision, sufficient evidence, etc.

2. PCAOB Standards

– Role of PCAOB in setting standards for audits of public companies  

3. ISAs – International Standards on Auditing

– Overview of ISAs and their role in international auditing standards

4. Government Auditing Standards 

– Standards that apply to audits of government entities and organizations receiving government funding

5. SASs – Statements on Auditing Standards

– Overview of SASs issued by AICPA that interpret GAAS

6. SSAEs – Statements on Standards for Attestation Engagements 

– Overview of SSAEs and how they relate to audits of non-financial information

7. SSARS – Statements on Standards for Accounting and Review Services

– Standards for compilation and review engagements

8. SQCSs – Statements on Quality Control Standards

– AICPA standards on quality control for CPA firms 

9. Code of Professional Conduct

– Ethical standards CPAs must follow like integrity, objectivity, confidentiality

10. Single Audit Act and Compliance Supplement 

– Standards for entities receiving federal funding

III. Auditing Best Practices and Methodologies

1. Planning and risk assessment

– Steps like understanding the entity, performance materiality, risk assessment

2. Internal control testing

– Testing design and operating effectiveness of internal controls

3. Substantive testing

– Testing details of transactions and account balances

4. Sampling

– Methodologies for selecting samples like random, systematic, risk-based

5. Analytical procedures 

– Evaluating data by developing expectations and comparing to recorded amounts

6. Concluding and reporting 

– Steps like final analytical review, discussions with management, report writing

7. Workpaper documentation

– Importance of workpaper form, content, organization, indexing, and maintenance

8. Audit technology 

– Using technology like data analytics and audit software to enhance audit quality and efficiency

9. Quality control

– Processes for ensuring quality like peer review, internal inspection, checklists 

10. Continuing professional education

– Importance of ongoing CPE to ensure knowledge of latest standards and practices

IV. Conclusion

– Summary of key auditing standards that apply and best practices auditors should follow

– Importance of standards and best practices for high quality, effective audits

Introduction

Auditing is a critical process for ensuring the integrity and transparency of financial reporting. Audits provide independent verification that a company’s financial statements are free from material misstatement and presented fairly in accordance with accounting standards. To provide this assurance, auditors must adhere to strict standards and apply best practices for the planning, execution, and documentation of audit engagements. This builds confidence among financial statement users that the statements can be relied upon for making informed decisions.

This article outlines the top 10 auditing standards auditors must follow in the United States, as well as 10 vital best practices and methodologies. Understanding these standards and practices is essential for auditors, as well as beneficial for management, audit committees, investors, and other financial statement users to gain insight into the audit process.

Top 10 U.S. Auditing Standards 

1. Generally Accepted Auditing Standards (GAAS)

GAAS provides the core framework and principles for conducting audits of financial statements in the private sector. These standards are issued by the American Institute of Certified Public Accountants (AICPA) and provide the standards for the auditor’s professional qualifications, quality of work, and reporting requirements. Adherence to GAAS is required for auditors to provide their opinion that the financial statements are presented fairly. 

Some key aspects of GAAS include:

– General Standards such as adequate technical training and proficiency, independence, and due professional care in performing the audit.

– Standards of Field Work including audit planning and supervision, understanding the entity and its controls, obtaining sufficient evidence, and evaluating results. 

– Reporting Standards for expressing the auditor’s opinion on the financial statements.

2. PCAOB Standards

The Public Company Accounting Oversight Board (PCAOB) sets standards for audits of publicly-traded companies. The PCAOB also conducts inspections of public accounting firms auditing public companies. PCAOB standards align with the principles and framework in GAAS but provide additional requirements for areas like auditor independence, documentation, and quality control.

3. International Standards on Auditing 

Outside of the U.S., most countries use International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB). ISAs provide a globally recognized framework for audit conduct, quality control, review, and other assurance engagements. U.S. standards and ISAs have been converging over time.

4. Government Auditing Standards  

Often called the “Yellow Book,” Government Auditing Standards apply to audits of government organizations, entities, programs, and funds. They relate to audits of federal, state, and local governments and entities that receive government funding. These standards incorporate GAAS but include additional standards for auditor independence, due professional care, quality control, and reporting.

5. Statements on Auditing Standards (SASs)

SASs are issued by the AICPA Auditing Standards Board to interpret, expand on, and clarify GAAS. SASs provide guidance on specialized areas and industries as well as new auditing approaches as technology and regulations evolve. For example, SAS No. 99 addresses the auditor’s responsibility for detecting fraud.

6. Statements on Standards for Attestation Engagements (SSAEs) 

SSAEs provide guidance for examinations, reviews, or agreed-upon procedures related to non-financial and compliance audits. For example, SSAEs provide standards for audits of internal control effectiveness and compliance with laws or contracts. SSAE 18 covers SOC 1, 2, and 3 reports on system and organization controls.

7. Statements on Standards for Accounting and Review Services (SSARSs)

For engagements to prepare financial statements, SSARSs set standards and procedures for compilation and review engagements. Compilation involves putting a company’s financial information into the required financial statement format without making any assurances. Reviews provide limited assurance through analytical procedures and inquiries with management.

8. Statements on Quality Control Standards (SQCSs)  

SQCSs define responsibilities for CPA firms’ systems of quality control over their accounting and auditing practices. This includes requirements for independence and ethics policies, personnel management, client acceptance, engagement supervision, and monitoring. SQCSs complement individual audit and attest standards.

9. AICPA Code of Professional Conduct 

Members of the AICPA, the U.S. accounting profession’s largest professional organization, must adhere to strict ethical standards. The Code of Professional Conduct outlines the core ethical principles of integrity, objectivity, due care, and confidentiality. Rules cover areas like auditor independence, contingent fees, commissions and referral fees, conflicts of interest, and false advertising.

10. Single Audit Act and Compliance Supplement

The Single Audit Act applies to state and local government entities and nonprofit organizations that expend over $750,000 in federal funds annually. It requires these entities undergo an audit of compliance with requirements for each major federal program. The Compliance Supplement provides guidance on controls and compliance requirements for federal programs.

Top 10 Auditing Best Practices

While standards provide the required framework for an audit, application of sound audit methodologies and best practices is crucial for conducting high quality audits. Here are 10 vital best practices and procedures for auditors:

1. Planning and Risk Assessment 

Careful planning and risk assessment provides the foundation for an effective audit. Auditors obtain an understanding of the entity and its environment, including internal controls. This allows auditors to identify risks that may lead to a material misstatement in the financial statements and plan an appropriate audit strategy and testing approach. Audit planning continues throughout the engagement as auditors tailor procedures based on emerging risks.

2. Internal Control Testing

Auditors perform tests of the design and operating effectiveness of key internal controls relevant to the audit. This includes testing controls like those over cash receipts and disbursements, inventory management, IT systems, and financial reporting. Control testing impacts the extent of substantive procedures required.

3. Substantive Testing 

Auditors design substantive procedures to obtain adequate assurance related to the accuracy, completeness, and validity of account balances and transactions. Substantive tests include analytical review, inquiries, observations, and substantive detail tests like examining invoices, contracts, and reconciliation back-up. The nature and extent of testing is determined based on risk assessments.

4. Audit Sampling

For testing, auditors often select samples rather than examining entire populations. Auditors use sampling methods such as random selection, systematic selection, or haphazard selection based on auditor judgment. Attributes like tolerable misstatement levels, the risk of misstatement, and population characteristics are considered in determining sample size and selection.

5. Analytical Procedures

Analytical procedures involve the analysis and comparison of data to help identify potential misstatements and unusual fluctuations or relationships. Auditors develop expectations based on their understanding of the entity and compare them to the recorded amounts. Significant differences are investigated and accounted for. Analytical procedures are used throughout the audit process from planning to the final review.

6. Concluding and Reporting

At the end of audit fieldwork, auditors conclude whether sufficient evidence exists to support the financial statements and issue an opinion. This includes overall analytical review procedures to identify inconsistencies or unusual balances warranting further investigation. Auditors then communicate results to management, evaluate the effect of uncorrected misstatements, and obtain written management representations. The final audit report expresses the auditor’s opinion.

7. Workpaper Documentation

Workpapers document the evidence supporting the auditor’s opinion and conclusions. They demonstrate adherence to standards and provide support in the event of regulatory review or litigation. Complete and proper workpaper form, content, organization, and indexing ensures documentation is adequate. Workpapers are retained for specified periods.

8. Audit Technology

Using technology is crucial for effective auditing. Audit management software organizes workpapers and improves efficiency. Data analytics enhances risk assessment and identifies anomalies and relationships not visible manually. Automation handles routine tasks allowing auditors to focus on higher judgement areas. Technology overall enhances audit quality.

9. Quality Control and Assurance 

Firms implement comprehensive quality control systems governing audit performance, supervision, hiring, advancement, and ethics. This includes internal inspections of engagements, checklists, mandatory consultations for technical issues, and required concurring partner reviews. Firms also undergo peer reviews by other firms and oversight by the PCAOB.

10. Continuing Professional Education (CPE)

Auditors participate in ongoing CPE to maintain current knowledge on accounting, auditing, and regulatory standards as well as industry-specific issues. CPE develops auditors’ skills and improves practice quality. Various methods like self-study, instructor-led courses, webcasts, and on-the-job training can fulfill CPE requirements.

Conclusion

Conforming with established standards provides the foundation for audit engagements. Applying prudent audit methodologies and best practices is also essential for high quality audits that withstand regulatory scrutiny. Standards and practices ensure auditors obtain reasonable assurance that the financial statements are free from material misstatement based on sufficient, appropriate evidence. From risk assessment and testing controls to reporting, standards improve practice consistency and quality. Following standards and staying current through best practices helps auditors conduct rigorous, value-added audits.