AS 1000: Auditor General Principles and Responsibilities

Auditing Standard 1000, General Responsibilities of the Auditor in Conducting an Audit, is a foundational standard issued by the Public Company Accounting Oversight Board (PCAOB). The PCAOB, established by the Sarbanes-Oxley Act of 2002, oversees the audits of public companies to protect investors. AS 1000 applies to audits of “issuers,” which are companies with securities registered with the U.S. Securities and Exchange Commission (SEC). This standard consolidates several previous interim standards into a single framework, establishing the core principles that guide auditors and ensure informative and independent audit reports.

The Objective of an Independent Audit

The objective of an independent audit is the expression of an opinion. The auditor’s opinion addresses whether the company’s financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework. For most U.S. public companies, this framework is U.S. Generally Accepted Accounting Principles (U.S. GAAP). The auditor’s formal opinion is the main deliverable of the audit process and is included in the auditor’s report, which accompanies the company’s annual filing, such as a Form 10-K.

A clear distinction exists between the duties of company management and the responsibilities of the independent auditor. Management is responsible for preparing and presenting the financial statements and for establishing a system of internal control. The auditor is responsible for planning and performing the audit to obtain sufficient appropriate evidence to form an opinion on those financial statements.

The auditor’s work provides an external, objective assessment of the financial information prepared by the company. This independent verification gives the financial statements credibility, allowing investors and other stakeholders to make decisions with greater confidence.

Auditor Qualifications and Independence

To perform an audit, an individual must possess certain qualifications. The principle of “Adequate Technical Training and Proficiency” dictates that auditors must have the necessary education and experience, which involves a formal education in accounting and auditing followed by practical, supervised experience. Auditors are also required to complete Continuing Professional Education (CPE) to maintain their licenses and stay current with evolving standards, regulations, and complex business transactions. Most jurisdictions require certified public accountants to complete around 40 hours of CPE annually.

The principle of “Independence” requires the auditor to maintain an impartial mental attitude. This concept has two components: independence in fact and independence in appearance. Independence in fact refers to the auditor’s actual state of mind—an internal commitment to objectivity and impartiality, free from bias.

Independence in appearance relates to how a third party would perceive the auditor’s relationship with the client. To avoid situations that could cause a reasonable person to question their objectivity, auditors must adhere to strict SEC rules. These rules prohibit certain financial relationships, like owning stock in a client company, or having a close family member, such as a spouse or dependent, in a key accounting or financial oversight role at the client.

Conducting the Audit with Due Professional Care

The performance of an audit is governed by the principle of “Due Professional Care.” This principle requires the auditor to exercise the level of skill and diligence that a reasonably prudent and competent auditor would use in similar circumstances. It is a standard of performance that applies to every aspect of the audit, but it does not imply infallibility.

A component of due professional care is the exercise of “Professional Skepticism.” This is an attitude that includes a questioning mind and a critical assessment of audit evidence. It means the auditor should not be satisfied with less-than-persuasive evidence because of a belief that management is honest. For instance, when examining a significant revenue-generating contract, an auditor exercising professional skepticism would seek corroborating evidence, such as confirming terms directly with the customer.

This approach requires the auditor to remain alert for conditions that may indicate a material misstatement due to error or fraud and to rigorously probe issues that arise.

Another element of due professional care is “Reasonable Assurance.” An audit conducted in accordance with PCAOB standards provides a high, but not absolute, level of assurance that the financial statements are free from material misstatement. This is because of the inherent limitations of an audit, such as testing a sample of transactions rather than examining every single one.

Furthermore, audit evidence is generally persuasive rather than conclusive. A well-concealed fraud scheme, particularly one involving collusion among management, may be difficult for an auditor to detect. These limitations mean that while an audit enhances the reliability of financial statements, it is not a guarantee of their absolute accuracy.