Historical Context of Auditing Standards

The development of generally accepted auditing standards (GAAS) has been shaped significantly by pivotal events in the history of accounting and auditing. One such landmark was the McKesson & Robbins scandal of 1938, which exposed fraudulent practices and underscored the need for more structured auditing procedures. In response, the American Institute of Certified Public Accountants (AICPA) began establishing foundational guidelines for audits to safeguard the integrity of financial reporting. Later, in the early 2000s, corporate scandals involving companies such as Enron and WorldCom further emphasized the necessity for robust auditing oversight. These incidents led to the enactment of the Sarbanes-Oxley Act of 2002, which created the Public Company Accounting Oversight Board (PCAOB) to establish and enforce standards specifically for issuers. Meanwhile, the AICPA's Auditing Standards Board (ASB) retained responsibility for nonissuer audits.

Framework and Regulatory Oversight of Auditing Standards

GAAS, as the cornerstone of audit quality, is maintained through distinct responsibilities assigned to the PCAOB and the ASB. The PCAOB, operating under the oversight of the Securities and Exchange Commission (SEC), sets standards for public companies (issuers). These standards are subject to SEC approval and aim to protect investors and enhance the reliability of financial reporting. For nonpublic entities (nonissuers), the ASB issues Statements on Auditing Standards (SASs) as part of the AICPA's regulatory role. This bifurcated framework ensures tailored approaches to auditing that meet the needs of different entities while maintaining the integrity of the profession.

Structure of Generally Accepted Auditing Standards

The GAAS framework is organized around three fundamental principles that guide the audit process and ensure adherence to ethical and technical requirements:

Responsibilities

The responsibilities principle emphasizes the auditors’ ethical conduct, including independence and professional skepticism. Auditors must possess the necessary competence and capabilities to perform their duties and exercise sound professional judgment throughout the audit process.

Performance

The performance principle centers on the systematic execution of an audit. It requires auditors to plan and supervise their engagements effectively, assess risks of material misstatement, and obtain sufficient and appropriate evidence to support their conclusions. This principle ensures that audits are conducted thoroughly and methodically.

Reporting

Finally, the reporting principle governs how auditors communicate their findings. Auditors must express their opinion on the fairness of financial statements and report on the degree to which they conform to applicable financial reporting frameworks. This principle is critical for providing stakeholders with reliable and transparent information.