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Auditing Theory

Notes companies in order to protect the interests of investors and further the public interest in
the preparation of informative, fair, and independent audit reports) issued a policy statement
on its Auditing Standard No. 2. The PCAOB’s Policy Statement sought to give ensure some
level of reasonableness and flexibility in the conduct of audits.

As it noted, In particular, the staff questions and answers seek to correct the misimpression
that certain provisions of Auditing Standard No. 2 need to be applied in a rigid manner
that discourages auditors from exercising the judgment necessary to conduct an internal
control audit in a manner that is both effective and cost-efficient. The Policy Statement
expresses the Board’s view that, to properly plan and perform an effective audit under
Auditing Standard No. 2, auditors should-integrate their audits of internal control with
their audits of the client’s financial statements, so that evidence gathered and tests conducted
in the context of either audit contribute to completion of both audits; exercise judgment to
tailor their audit plans to the risks facing individual audit clients, instead of using
standardized “checklists” that may not reflect an allocation of audit work weighted toward
high-risk areas (and weighted against unnecessary audit focus in low-risk areas); use a
top-down approach that begins with company-level controls, to identify for further testing
only those accounts and processes that are, in fact, relevant to internal control over financial
reporting, and use the risk assessment required by the standard to eliminate from further
consideration those accounts that have only a remote likelihood of containing a material
misstatement; take advantage of the significant flexibility that the standard allows to use
the work of others; and engage in direct and timely communication with audit clients
when those clients seek auditors’ views on accounting or internal control issues before
those clients make their own decisions on such issues, implement internal control processes
under consideration, or finalize financial reports.

Private Companies
Where the audit client is a privately owned business (such as a private enterprise customer
or a private service provider), auditor independence rules still apply. The auditors could
probably have avoided the claims of breached fiduciary duty if they had made suitable
disclosures and had remedied, or caused their consulting affiliate, to remedy a failed
software installation. In that case, the auditors should:
1. disclose their conflict of interest to the client and obtain waivers (similar to the
waivers obtained from medical patients undergoing surgery);
2. remedy the flaws in the selection of off-the-shelf software, the systems integrator,
and the systems integrator’s lack of skills to cure the defects impeding software
performance; and
3. learn from similar client-relationship mistakes that had been subject to prior,
unrelated litigation.

The court’s ruling is based under existing rules governing independence of auditors.

4.4 Summary

Sub-sections (1) and (2) of Section 226 enumerate the qualifications required to be an
auditor.

A person who is a Chartered Accountant within the meaning of the Chartered Accountants
Act, 1949 and holds a certificate of practice, or a partnership firm whereof all the partners
are Chartered Accountants holding certificates of practice may be appointed as auditor, of
a company.

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