Generally Accepted Auditing Standards

Definition

Generally Accepted Auditing Standards (GAAS) are a set of systematic guidelines used by auditors when auditing a company's financial records. GAAS helps ensure the accuracy, consistency, and verifiability of auditors' actions and reports.

Origin

GAAS was developed by the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA). Established in 1972, the ASB aims to provide standardized guidance for auditing practices. The evolution of GAAS reflects a continuous pursuit of audit quality and transparency.

Categories and Features

GAAS is divided into three main categories: general standards, standards of fieldwork, and standards of reporting. General standards involve the qualifications and independence of the auditor; standards of fieldwork pertain to the planning and execution of the audit; and standards of reporting focus on the content and form of the audit report. Each category is designed to ensure the comprehensiveness and reliability of audits.

Case Studies

Following the Enron scandal, Enron's auditor, Arthur Andersen, was criticized for failing to adhere to GAAS. This incident led to a strengthened emphasis on GAAS compliance in the auditing industry. Another example is the Lehman Brothers bankruptcy case, where auditors were accused of not adequately applying GAAS to identify risks in the financial statements.

Common Issues

Investors often misunderstand GAAS as rigid rules, whereas they are flexible guidelines allowing auditors to exercise judgment based on specific circumstances. Additionally, failure to adhere to GAAS can result in audit failures and legal liabilities.