1 - 1 ©2006 prentice hall business publishing, auditing 11/e, arens/beasley/elder the demand for...
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1 - 1©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
The Demand for Audit The Demand for Audit and Other Assurance and Other Assurance ServicesServices
Chapter 1Chapter 1
1 - 2©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 1Learning Objective 1
Describe auditing.Describe auditing.
1 - 3©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Nature of AuditingNature of Auditing
AuditingAuditing is the accumulation and evaluation is the accumulation and evaluationof evidence about information to determineof evidence about information to determineand report on the degree of correspondenceand report on the degree of correspondencebetween the information and established criteria.between the information and established criteria.
Auditing should be done by a competent,Auditing should be done by a competent,independent person.independent person.
1 - 4©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Information and Established Information and Established CriteriaCriteria
To do anTo do an audit, there must be information in aaudit, there must be information in averifiable formverifiable form and someand some standardsstandards (criteria)(criteria)by which the auditor can evaluate the information.by which the auditor can evaluate the information.
1 - 5©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Accumulating Evidence and Accumulating Evidence and Evaluating EvidenceEvaluating Evidence
EvidenceEvidence is any information used by the auditor is any information used by the auditorto determine whether the information beingto determine whether the information beingaudited is stated in accordance with theaudited is stated in accordance with theestablished criteria.established criteria.
1 - 6©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Competent, Independent PersonCompetent, Independent Person
The auditor must be qualified to understand theThe auditor must be qualified to understand thecriteria used and must be criteria used and must be competentcompetent to know to knowthe types and amount of evidence to accumulatethe types and amount of evidence to accumulateto reach the proper conclusion after theto reach the proper conclusion after theevidence has been examined.evidence has been examined.
The competence of the individual performingThe competence of the individual performingthe audit is of little value if he or she is biasedthe audit is of little value if he or she is biasedin the accumulation and evaluation of evidence.in the accumulation and evaluation of evidence.
1 - 7©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
ReportingReporting
The final stage in the auditing process is preparingThe final stage in the auditing process is preparingthe the Audit ReportAudit Report,, which is the communication which is the communicationof the auditor’s findings to users.of the auditor’s findings to users.
1 - 8©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Audit of a Tax Return ExampleAudit of a Tax Return Example
InternalInternalrevenuerevenue
agentagent
Competent,Competent,independentindependent
personperson
Examines cancelledExamines cancelledchecks and otherchecks and other
supporting recordssupporting records
Accumulates andAccumulates andevaluates evidenceevaluates evidence
DeterminesDeterminescorrespondencecorrespondence
Federal taxFederal taxreturns filedreturns filedby taxpayerby taxpayer
InformationInformation
Internal RevenueInternal RevenueCode and allCode and all
interpretationsinterpretations
Established criteriaEstablished criteria
Report on taxReport on taxdeficienciesdeficiencies
Report on resultsReport on results
1 - 9©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 2Learning Objective 2
Distinguish betweenDistinguish between
auditing and accounting.auditing and accounting.
1 - 10©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Distinguish BetweenDistinguish BetweenAuditing and AccountingAuditing and Accounting
AccountingAccounting is the recording, classifying, is the recording, classifying,and summarizing of economic eventsand summarizing of economic eventsfor the purpose of providing financialfor the purpose of providing financialinformation used in decision making.information used in decision making.
AuditingAuditing is determining whetheris determining whetherrecorded information properlyrecorded information properlyreflects the economic events thatreflects the economic events thatoccurred during the accounting period.occurred during the accounting period.
1 - 11©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 3Learning Objective 3
Explain the importanceExplain the importance
of auditing in reducingof auditing in reducing
information risk.information risk.
1 - 12©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Economic DemandEconomic Demandfor Auditingfor Auditing
Information risk reflects the possibility thatInformation risk reflects the possibility thatthe information upon which the businessthe information upon which the businessrisk decision was made was inaccurate.risk decision was made was inaccurate.
Auditing can have a significant effectAuditing can have a significant effecton information risk.on information risk.
1 - 13©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 4Learning Objective 4
List the causes of informationList the causes of information
risk, and explain how thisrisk, and explain how this
risk may be reduced.risk may be reduced.
1 - 14©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Causes of Information RiskCauses of Information Risk
Remoteness of informationRemoteness of information
Biases and motives of the providerBiases and motives of the provider
Voluminous dataVoluminous data
Complex exchange transactionsComplex exchange transactions
1 - 15©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Reducing Information RiskReducing Information Risk
User verifies information.User verifies information.
User shares information risk with management.User shares information risk with management.
Audited financial statements are provided.Audited financial statements are provided.
1 - 16©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Capital Costs to Shrink: Elliott’s Capital Costs to Shrink: Elliott’s ExampleExample
Assuming a cost of capital of 13%, ElliottAssuming a cost of capital of 13%, Elliottestimates this rate is composed of the following:estimates this rate is composed of the following:
5.5% risk-free interest rate5.5% risk-free interest rate
3.5% economic risk premium (business risk)3.5% economic risk premium (business risk)
4.0% information cost (information risk)4.0% information cost (information risk)
1 - 17©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Capital Costs to Shrink: Elliott’s Capital Costs to Shrink: Elliott’s ExampleExample
Elliott believes the following factors willElliott believes the following factors willdrastically reduce information risk:drastically reduce information risk:
Advanced technologyAdvanced technology
New accounting and auditing standardsNew accounting and auditing standards
Auditors finding more efficient ways to auditAuditors finding more efficient ways to audit
1 - 18©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 5Learning Objective 5
Describe assurance servicesDescribe assurance services
and distinguish audit servicesand distinguish audit services
from other assurance andfrom other assurance and
nonassurance servicesnonassurance services
provided by CPAs.provided by CPAs.
1 - 19©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Assurance ServicesAssurance Services
Assurance services are professionalAssurance services are professionalservices that improve the quality ofservices that improve the quality ofinformation for decision makers.information for decision makers.
Assurance services can beAssurance services can beperformed by CPAs or byperformed by CPAs or bya variety of other professionals.a variety of other professionals.
1 - 20©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Attestation ServicesAttestation Services
An An attestation serviceattestation service is a type of assurance is a type of assuranceservice in which the CPA firm issues aservice in which the CPA firm issues areport about the reliability of an assertionreport about the reliability of an assertionthat is the responsibility of another party.that is the responsibility of another party.
1 - 21©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Attestation ServicesAttestation Services
1. Audit of historical financial statements1. Audit of historical financial statements
2. Effectiveness of internal control over2. Effectiveness of internal control over financial reportingfinancial reporting
3. Review of historical financial statements3. Review of historical financial statements
4. Other attestation services4. Other attestation services
1 - 22©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Relationships Among Auditors, Relationships Among Auditors, Client, and External UsersClient, and External Users
ClientClient
AuditorAuditorClient or auditClient or auditcommittee hirescommittee hiresauditorauditor
ExternalExternalUsersUsers
Auditor issuesAuditor issuesreport reliedreport reliedupon by usersupon by users
1 - 23©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Other Assurance ServicesOther Assurance Services
Most of the other assurance services that CPAsMost of the other assurance services that CPAsprovide do not meet the formal definitionprovide do not meet the formal definitionof attestation services.of attestation services.
The CPA is not required to issue a written report.The CPA is not required to issue a written report.
The assurance does not have to be about theThe assurance does not have to be about thereliability of another party’s assertion aboutreliability of another party’s assertion aboutcompliance with specified criteria.compliance with specified criteria.
1 - 24©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
AICPA Assurance ServicesAICPA Assurance Services
The AICPA formed the Special CommitteeThe AICPA formed the Special Committeeon Assurance Services (SCAS).on Assurance Services (SCAS).
1 - 25©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Assurance Services on Assurance Services on Information TechnologyInformation Technology
The growth of the Internet and new waysThe growth of the Internet and new waysof conducting business electronicallyof conducting business electronically((e-commercee-commerce) is driving the demand) is driving the demandfor other assurance services.for other assurance services.
1 - 26©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Assurance Services on Assurance Services on Information TechnologyInformation Technology
WebTrustWebTrust is an attestation service, and theis an attestation service, and theWebTrustWebTrust seal is a symbolic representationseal is a symbolic representationof the CPA’s report on management’sof the CPA’s report on management’sassertions about its disclosure ofassertions about its disclosure ofelectronic commerce practices.electronic commerce practices.
1 - 27©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Assurance Services on Assurance Services on Information TechnologyInformation Technology
SysTrustSysTrust is an attest-type engagement is an attest-type engagementto evaluate and test system reliability into evaluate and test system reliability inareas such as security and data integrity.areas such as security and data integrity.
1 - 28©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Principles for Principles for WebTrustWebTrust and and SysTrustSysTrust Services Services
1. Online privacy1. Online privacy2. Security2. Security3. Processing integrity3. Processing integrity4. Availability4. Availability5. Confidentiality5. Confidentiality6. Certification authorities (6. Certification authorities (WebTrustWebTrust only) only)
1 - 29©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Other AssuranceOther AssuranceServices ExamplesServices Examples
Controls over and risks related to investments,Controls over and risks related to investments,including policies related to derivatives…including policies related to derivatives…
assessing the processes in a company’sassessing the processes in a company’sinvestment practices to identify risks and toinvestment practices to identify risks and todetermine the effectiveness of those processes.determine the effectiveness of those processes.
1 - 30©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Other AssuranceOther AssuranceServices ExamplesServices Examples
Assess risks of accumulation, distribution,Assess risks of accumulation, distribution,and storage of digital information…and storage of digital information…
assessing security risks and relatedassessing security risks and relatedcontrols over data and other informationcontrols over data and other informationstored electronically, including thestored electronically, including theadequacy of backup and off-site storage.adequacy of backup and off-site storage.
1 - 31©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Other AssuranceOther AssuranceServices ExamplesServices Examples
Fraud and illegal acts risk assessment…Fraud and illegal acts risk assessment…
developing fraud risk profiles and assessing thedeveloping fraud risk profiles and assessing theadequacy of company systems and policies inadequacy of company systems and policies inpreventing and detecting fraud and illegal acts.preventing and detecting fraud and illegal acts.
1 - 32©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Other AssuranceOther AssuranceServices ExamplesServices Examples
Compliance with trading policies and proceduresCompliance with trading policies and procedures
Compliance with entertainment royalty agreementsCompliance with entertainment royalty agreements
ISO 900 certificationISO 900 certification
Environmental auditEnvironmental audit
1 - 33©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Assurance, Attestation, and Assurance, Attestation, and Nonassurance ServicesNonassurance Services
Other Assurance ServicesOther Assurance Services
CertainCertainManagementManagementConsultingConsulting
Other Attestation ServicesOther Attestation Services(e.g., (e.g., WebTrust, SysTrustWebTrust, SysTrust))
ATTESTATION SERVICESATTESTATION SERVICES
AuditsAudits ReviewsReviews
Internal ControlInternal Controlover Financial Reportingover Financial Reporting
ASSURANCE SERVICESASSURANCE SERVICES
1 - 34©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Assurance, Attestation, and Assurance, Attestation, and Nonassurance ServicesNonassurance Services
CertainCertainManagementManagementConsultingConsulting
NONASSURANCE SERVICESNONASSURANCE SERVICES
Other ManagementOther ManagementConsultingConsulting
TaxTaxServicesServices
Accounting andAccounting andBookkeepingBookkeeping
1 - 35©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 6Learning Objective 6
Differentiate the threeDifferentiate the three
main types of audits.main types of audits.
1 - 36©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Types of AuditsTypes of Audits
1 - 37©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Operational AuditOperational Audit
ExampleExample Evaluate computerized payroll systemEvaluate computerized payroll systemfor efficiency and effectivenessfor efficiency and effectiveness
InformationInformation Number of records processed, costs ofNumber of records processed, costs ofthe department, and number of errorsthe department, and number of errors
EstablishedEstablishedCriteriaCriteria
Company standards for efficiency andCompany standards for efficiency andeffectiveness in payroll departmenteffectiveness in payroll department
AvailableAvailableEvidenceEvidence
Error reports, payroll records, andError reports, payroll records, andpayroll processing costspayroll processing costs
1 - 38©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Compliance AuditCompliance Audit
ExampleExample Determine whether bank requirementsDetermine whether bank requirementsfor loan continuation have been metfor loan continuation have been met
InformationInformation Company recordsCompany records
EstablishedEstablishedCriteriaCriteria Loan agreement provisionsLoan agreement provisions
AvailableAvailableEvidenceEvidence
Financial statements andFinancial statements andcalculations by the auditorcalculations by the auditor
1 - 39©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Financial Statement AuditFinancial Statement Audit
ExampleExample Annual audit of Boeing’sAnnual audit of Boeing’sfinancial statementsfinancial statements
InformationInformation Boeing's financial statementsBoeing's financial statements
EstablishedEstablishedCriteriaCriteria
Generally accepted accountingGenerally accepted accountingprinciplesprinciples
AvailableAvailableEvidenceEvidence
Documents, records, and outsideDocuments, records, and outsidesources of evidencesources of evidence
1 - 40©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 7Learning Objective 7
Identify the primaryIdentify the primary
types of auditors.types of auditors.
1 - 41©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Types of AuditorsTypes of Auditors
Internal auditorsInternal auditors
Certified public accounting firmsCertified public accounting firms
Internal revenue agentsInternal revenue agents
General accounting office auditorsGeneral accounting office auditors
1 - 42©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Learning Objective 8Learning Objective 8
Describe the requirementsDescribe the requirements
for becoming a CPA.for becoming a CPA.
1 - 43©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
Three Requirements forThree Requirements forBecoming a CPABecoming a CPA
Educational requirementEducational requirement
Uniform CPA examination requirementUniform CPA examination requirement
Experience requirementExperience requirement
1 - 44©2006 Prentice Hall Business Publishing, ©2006 Prentice Hall Business Publishing, Auditing 11/e,Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder
CPA Examination SectionsCPA Examination Sections
Auditing and AttestationAuditing and Attestation
Financial Accounting and ReportingFinancial Accounting and Reporting
RegulationRegulation
Business Environments and ConceptsBusiness Environments and Concepts