Generally Accepted Auditing Standards (GAAS)

Definition

Generally Accepted Auditing Standards (GAAS) are a set of systematic guidelines used by auditors when conducting audits on companies’ financial statements. These standards are established by the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA). They ensure the accuracy, consistency, and verifiability of auditors’ actions and reporting.

GAAS sets forth ten overarching guidelines, comprising three categories:

1. General Standards: Focused on the personal qualifications of auditors.
2. Standards of Field Work: Focused on the actual performance of the audit process.
3. Standards of Reporting: Focused on how the audit results are communicated.

General Standards

1. Training and Proficiency: The audit must be performed by a person or persons having adequate technical training and proficiency.
2. Independence: Auditors must maintain independence in mental attitude in all matters relating to the audit.
3. Due Professional Care: Auditors must exercise due professional care in performing the audit and preparing the report.

Standards of Field Work

1. Adequate Planning: The work is to be adequately planned, and assistants, if any, are to be properly supervised.
2. Understanding of Entity and its Environment: Auditors must obtain a sufficient understanding of the entity and its environment, including its internal control.
3. Sufficient Appropriate Evidence: Auditors must obtain sufficient appropriate evidence to afford a reasonable basis for an opinion.

Standards of Reporting

1. GAAP Compliance: The report must state whether the financial statements are presented in accordance with Generally Accepted Accounting Principles (GAAP).
2. Consistency: The report must indicate any instances where accounting principles have not been consistently observed in the current period in relation to the preceding period.
3. Disclosure: Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.
4. Opinion Expression: The report must contain an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed.

Examples

Example 1: Training and Proficiency

A junior auditor without sufficient training in a complex financial instrument might raise concerns about conformity to GAAS, specifically the general standard regarding technical proficiency.

Example 2: Independence

An auditor who owns shares in a client’s company fails to meet the independence requirement, which compromises the objectivity of the audit.

Frequently Asked Questions

1. What are GAAS?

GAAS are the general guidelines auditors must follow when conducting audits of a company’s financial statements, ensuring the work is accurate, consistent, and reliable.

2. Who sets the GAAS?

The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) is responsible for setting GAAS.

3. Why is independence important in GAAS?

Independence ensures that auditors do not have a personal interest in the company they are auditing, which could compromise their objectivity and the integrity of the audit.

4. What constitutes “sufficient appropriate evidence” in audit field work?

This includes any evidence that is relevant and reliable, obtained through inspection, observation, inquiries, and confirmations.

5. How does GAAS ensure consistency in financial reporting?

By requiring that the report indicates any changes in accounting principles between periods, GAAS ensures the comparability of financial information over time.

Related Terms

• Auditing Standards: Set guidelines used by auditors to perform their audit tasks effectively and ensure the reliability of audit reports.
• International Standard on Auditing (ISA): These are international standards that provide guidelines on how audits should be conducted globally.
• Statement of Auditing Standards (SAS): Issued by the Auditing Standards Board (ASB) to provide guidance on audit practice in the USA.
• Statement on Auditing Standards: Specific guidelines and principles published periodically by the ASB.
• Generally Accepted Accounting Principles (GAAP): The standard framework of guidelines for financial accounting used in any given jurisdiction, typically known US standards are issued by the FASB.

References

• AICPA Auditing Standards Board: AICPA ASB
• Public Company Accounting Oversight Board: PCAOB

Suggested Books

1. “Principles of Auditing & Other Assurance Services” by Ray Whittington and Kurt Pany
   • This comprehensive book covers various auditing standards and includes practical applications related to GAAS.
2. “Auditing: A Risk-Based Approach to Conducting a Quality Audit” by Karla Johnstone, Audrey Gramling, and Larry E. Rittenberg
   • Offers a thorough approach to audit standards and procedures with a risk-based perspective.
3. “Wiley CPAexcel Exam Review 2023 Study Guide + Question Pack: Auditing and Attestation” by Wiley
   • Specifically focused on auditing standards for those preparing for the CPA exam, aligning closely with GAAS.

Accounting Basics: “Generally Accepted Auditing Standards (GAAS)” Fundamentals Quiz

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