Adhering to Generally Accepted Accounting Principles and Standards

By Maire Loughran from Auditing For Dummies

Generally accepted accounting principles (GAAP) define acceptable practices in the preparation of financial statements in the United States. Keep in mind that when you’re wearing your auditor hat, you can’t prepare the financial statements you audit; the financial statements are the responsibility of the client’s management. However, as an auditor, part of your job is to make sure the financial statements are prepared in conformity with GAAP.

The Financial Accounting Standards Board (FASB) has five full-time members. All are required to have knowledge of accounting, finance, and business. The nonprofit Financial Accounting Foundation (FAF) selects these members. For more info about the FASB, accounting standards, and FAF, check out the FASB website.

Occasionally, a company may not be required to use GAAP. Instead, it can use an Other Comprehensive Basis of Accounting (OCBOA), such as cash or tax, to prepare its financial statements. How to handle this type of client and how to decide whether you should use an OCBOA or GAAP for the audit is a topic to discuss with your audit team leader.

The generally accepted auditing standards (GAAS) are the product of the Auditing Standards Board (ASB). GAAS have three categories of standards: general standards, standards of fieldwork, and standards of reporting.

Keep in mind that the ten GAAS are your minimum standards of performance. Each audit engagement you work on may require you to perform audit work beyond that specified in GAAS and the SAS in order to appropriately issue an opinion that a set of financial statements is fairly presented. As a result, you need to use professional judgment in following all standards. Your audit team leader will be there every step of the way to help you go beyond the guidance of the GAAS.

General standards

The first three GAAS are general standards that address your qualifications to be an auditor and the minimum standards for your work product:

The audit must be conducted by an auditor having both adequate training and proficiency. You achieve these through your education and experience and by attending continuing education classes to stay current with the field of auditing.
You’re independent in fact and appearance.
You exercise due professional care in performing your auditing tasks. That is, you exhibit the same level of skill as others working in the auditing profession.

Standards of fieldwork

The next three GAAS govern how you actually do your job:

Your work is adequately planned, and all assistants (which means you in the beginning stage of your audit career) are properly supervised.
You get an understanding of the client and its internal control procedures so you can plan your audit, including the nature, timing, and extent of your testing and procedures.
The evidence you gather during the audit is sufficient and competent enough to support the figures on the financial statements prepared by management.

Standards of reporting

The last four GAAS concern information you must consider prior to issuing your audit report:

You have to consider whether the financial statements are prepared using GAAP.
Just as important is to report if GAAP are consistently applied for all financial accounting.
You also have to make sure that any additional information needed to explain the numbers on the financial statements is provided. Auditors refer to this additional information as disclosures.
You have to include your opinion as to whether the financial statements present fairly in all material respects the financial position of the company under audit.