chapter 1 an overview of auditing. what does an auditor do?

CHAPTER 1An Overview

ofAuditing

What does anWhat does anauditor do?do?

evidenceauditoraccumulates and evaluates

What does an auditor do?What does an auditor do?

auditorevidence

What are some typesWhat are some typesof of evidenceevidence auditors auditors

find helpful?find helpful?

What does an auditor do?What does an auditor do?accumulates and evaluates

to determine correspondence between

auditorevidence

management assertions

established criteria

What does an auditor do?What does an auditor do?accumulates and evaluates

then communicates results to

established criteria

auditor

management assertions

interested users

evidence

What does an auditor do?What does an auditor do?accumulates and evaluates

to determine correspondence between

What is What is AUDITINGAUDITING

??

What is What is AUDITINGAUDITING??Auditing is the accumulation and evaluation of evidence

about information to determine and report on the degree of correspondence

between the information and established criteria.

What is the distinction between What is the distinction between auditingauditing and and accountingaccounting??

accountant?

auditor?

One of the auditor’s responsibilities is todetermine whether

accounting rules have been applied correctly.

What is the distinction between What is the distinction between auditingauditing and and accountingaccounting??

Could one be a

Could one be a

proficient

proficient accountant

accountant

without an extensive

without an extensive

knowledge of

knowledge of

auditingauditing??

Could one be a

Could one be a

proficient

proficient auditorauditor

without an extensive

without an extensive

knowledge of

knowledge of

accounting

accounting??

Types of audits and auditorsTypes of audits and auditors1. audit of financial statements - are state- ments fairly presented? Conducted by independent (external) auditors, e.g., a CPA firm.

AceCompany

19x4Financial

Statements

1. audit of financial statements - are state- ments fairly presented? Conducted by independent (external) auditors, e.g., a CPA firm.2. operational audit - is the organization efficient and effective? Usually conducted by internal auditors.

Types of audits and auditorsTypes of audits and auditors

2. operational audit - is the organization efficient and effective? Usually conducted by internal auditors.

Types of audits and auditorsTypes of audits and auditors

3. compliance audit - is the organization complying with a set of rules? May be conducted by government auditors, e.g., IRS, GAO.

What is What is internal auditinginternal auditing??

Many organiza-tions employ in-ternal auditors to help the organ-ization achievegreater efficiency and effectiveness.

What is What is internal auditinginternal auditing??

How do How do internalinternal and and externalexternal auditing differ? auditing differ?

How do How do internalinternal and and externalexternal auditing differ? auditing differ?

Internal auditors usually focus on im-proving the efficiency and effectivenessof their employer.

How do How do internalinternal and and externalexternal auditing differ? auditing differ?

Internal auditors usually focus on im-proving the efficiency and effectivenessof their employer.

External auditors (CPA firms) usually focus on the fairness of the financial statements of their clients.

There may be There may be very littlevery little overlap overlap between the responsibilities of between the responsibilities of internal and external auditors.internal and external auditors.

internalauditors

externalauditors

What is the primary What is the primary economic reason for an economic reason for an

audit?audit?An auditwill cost our

companyhundreds of

dollars!!

What’s the point?

What is the primary What is the primary economic reason for an economic reason for an

audit?audit?An audit

will cost ourcompany

hundreds ofdollars!!

What’s the point?

An auditcan helpreduce

informationrisk - therisk that

informationupon whicha businessdecision is

made isinaccurate.

clientmanagement

externalauditors

Important Characteristics of a Financial Important Characteristics of a Financial AuditAudit

1. auditors are independent of client management

1. auditors are independent of client management2. auditors base their opinions on the results of selective testing

Important Characteristics of a Financial Important Characteristics of a Financial AuditAudit

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$$

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$$

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1. auditors are independent of client management2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause

Important Characteristics of a Financial Important Characteristics of a Financial AuditAudit

1. auditors are independent of client management2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause4. auditors form opinions regarding the fairness of financial statements - auditors are never absolutely certain

Important Characteristics of a Financial Important Characteristics of a Financial AuditAudit

opinion = guarantee

1. auditors are independent of client management2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause4. auditors form opinions regarding the fairness of financial statements - auditors are never absolutely certain5. auditors report on financial statements as a whole - not on individual items

Important Characteristics of a Financial Important Characteristics of a Financial AuditAudit

AceCompany

19x4Financial

Statements

1. auditors are independent of client management2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause4. auditors form opinions regarding the fairness of financial statements - auditors are never absolutely certain5. auditors report on financial statements as a whole - not on individual items6. auditors are concerned with financial presenta- tion - NOT the client’s financial stability or the wisdom of client management

Important Characteristics of a Financial Important Characteristics of a Financial AuditAudit

rule-making politicsrule-making politics::

Who makesWho makesaccountingaccounting

rules?rules?

Who makes Who makes accountingaccounting rules? rules?

the Financial Accounting Standards Board

FASBFASB

What is the natureWhat is the natureof the FASB?of the FASB?

rule-making politicsrule-making politics::

The FASB is an independent board representing the variedinterests of many accounting

and business groups.

What is the natureWhat is the natureof the FASB?of the FASB?

rule-making politicsrule-making politics::

Who makesWho makesauditingauditingrules?rules?

Who makesWho makesauditingauditing rules? rules?

the Auditing Standards BoardASBASB

What is the natureWhat is the natureof the ASB?of the ASB?

rule-making politicsrule-making politics::

The ASB is part of the AmericanInstitute of Certified Public Account-ants (AICPA), a national profession-

al organization which CPAs may choose to join.

What is the natureWhat is the natureof the ASB?of the ASB?

What is theWhat is thepurposepurposeof theof the

audit report?audit report?

Ace Corp.Audit Report

How do audit clients How do audit clients know that they are know that they are

receiving receiving competentcompetent audits?audits?

They may notThey may not!!!!!!Because of concerns regarding audit

quality, the AICPA issued a

Statement of Quality Control StandardsStatement of Quality Control Standards

How do audit clients How do audit clients know that they are know that they are

receiving receiving competentcompetent audits?audits?

Statement of Quality Control StandardsStatement of Quality Control StandardsCPA firms are required to establishquality control policies and proceduresthat address five elements of qualitycontrol:- independence, integrity, and objectivity- personnel management- acceptance/continuation of clients and engagements- engagement performance- monitoring

What is a Peer ReviewWhat is a Peer Review??

- a review of a CPA firm’s compliance with its quality control system

What is a Peer ReviewWhat is a Peer Review??

- a review of a CPA firm’s compliance with its quality control system- required every three years

What is a Peer ReviewWhat is a Peer Review??

- a review of a CPA firm’s compliance with its quality control system- required every three years- firms choose the firm to review them or request a review team from the AICPA or state CPA society

What is a Peer ReviewWhat is a Peer Review??

- a review of a CPA firm’s compliance with its quality control system- required every three years- firms choose the firm to review them or request a review team- the firm being reviewed pays the reviewer

What is a Peer ReviewWhat is a Peer Review??

- a review of a CPA firm’s compliance with its quality control system- required every three years- firms choose the firm to review them or request a review team- the firm being reviewed pays the reviewer- upon review completion, the reviewer prepares a report stating conclusions and recommendations

What is a Peer ReviewWhat is a Peer Review??

The AICPA Division for CPA The AICPA Division for CPA FirmsFirms

has has twotwo sections: sections:- SEC Practice Section - for firms with audit clients whose stock is publicly traded AA

CCEE

CCOORRPP..

- SEC Practice Section - for firms with audit clients whose stock is publicly traded- Private Companies Practice Section - for firms with audit clients whose stock is not publicly traded

The AICPA Division for CPA FirmsThe AICPA Division for CPA Firms has has twotwo sections: sections:

Joe’s Gas StationJoe’s Gas Station

Membership in either section is optionalexcept firms with SEC clients must jointhe SEC Practice Section.

The AICPA Division for CPA The AICPA Division for CPA FirmsFirms has has twotwo sections: sections:

- SEC Practice Section - for firms with audit clients whose stock is publicly traded- Private Companies Practice Section - for firms with audit clients whose stock is not publicly traded

- members of either practice section must undergo peer reviews

The AICPA Division for CPA The AICPA Division for CPA FirmsFirms

- members of either practice section must undergo peer reviews- members of neither practice sections also must undergo peer reviews which are less extensive than those required of practice section members

The AICPA Division for CPA The AICPA Division for CPA FirmsFirms

Report title:Independent Auditor’s Report

The Standard Unqualified The Standard Unqualified Audit ReportAudit Report

Report title:Independent Auditor’s Report

Address:To the Stockholders of Ace Corporation:

report mayalso be addressed

to company orboard of directors,not management

Report title:Independent Auditor’s Report

Address:To the Stockholders of Ace Company:

Introductory paragraph:

What statements

were audited?

What time period?

What are clientand auditor

responsibilities?

Report title:Independent Auditor’s Report

Address:To the Stockholders of Ace Company:

Introductory paragraph:We have audited the accompanying balance sheets of AceCompany as of December 31, 19x5 and 19x4, and the relatedstatements of income, retained earnings, and cash flows forthe years then ended. These financial statements are theresponsibility of the Company’s management. Ourresponsibility is to express an opinion on these financialstatements based on our audits.

Scope paragraph:

Whatisan

audit?

Scope paragraph:We conducted our audits in accordance with generally accepted auditing standards. Those standards require thatwe plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financialstatement presentation. We believe that our audits providea reasonable basis for our opinion.

Opinion paragraph:

Whatopiniondid theauditorform?

Opinion paragraph:In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial positionof Ace Company as of December 31, 19x5 and 19x4 and theresults of its operations and its cash flows for the yearsthen ended in conformity with generally accepted accountingprinciples.

Opinion paragraph:In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the financial positionof Ace Company as of December 31, 19x5 and 19x4 and theresults of its operations and its cash flows for the yearsthen ended in conformity with generally accepted accountingprinciples.

Name of firm:Taylor & Tower, CPAs

Audit report date:February 27, 19x6

field work completion

date