jzanzig_auditing ch 1 lecture
Post on 12-Nov-2014
16 Views
Preview:
DESCRIPTION
TRANSCRIPT
Auditors Have a Great Responsibility
• Internal auditor Gene Morse found an unsupported entry
for $500 million in computer acquisitions.
• Billions of dollars in fees paid to telephone companies were
recorded as capital assets turning a $662 million loss into a $2.4 billion profit in
2001.• Total amount of fraud discovered at WorldCom amounted to $11 billion.Page 3
Chapter 1The Demand for Audit and Other
Assurance Services
Company Owners
and Lenders
Company Managers
Presentation Outline
I. The Nature of Auditing
II. Auditing and Investor Risk
III. Assurance Services
IV. Requirements for CPA Certification
I. The Nature of Auditing
A. Auditing DefinedB. The Distinction Between Accounting and Auditing
C. Types of AuditsD. Types of Auditors
A. Auditing DefinedAuditor
accumulates and evaluates evidence
to ascertain correspondence between
the informationestablished
criteriaand
and communicates results
to interestedusers
B. The Distinction Between Accounting and Auditing
Accounting is the recording, classifying, and summarizing of economic events for the
purpose of providing financial information used in decision making.
Auditing is determining whether recorded information properly reflects the economic events that occurred during the accounting
period.
C. Types of AuditsOperational Audit
Involves evaluation of any part of an organization’s operating efficiency and effectiveness. Not limited to accounting areas.
Compliance AuditDetermine whether the auditee has complied with specific
procedures, rules, or regulations set by some higher authority.
Financial Statement Audit Determine whether overall financial statements are stated in
accordance with specified criteria. Generally accepted accounting principles are normally the
criteria, although other basis of accounting are at times used.
D. Types of Auditors
External or Independent Auditors – CPAs are the only group permitted to provide financial statement audits. Such audits
are required of all publicly traded companies.General Accounting Office Auditor – works for the
Comptroller General who reports to and is solely responsible to Congress. They audit various governmental bodies.
Internal Revenue Agents – evaluate taxpayer compliance with tax laws.
Internal auditors – Auditors who are employees of the companies they audit.
II. Auditing and Investor Risk
A. The Cost of DebtB. Causes of Information Risk
C. Ways of Reducing Information Risk
A. The Cost of Debt
When a bank makes a loan, it will charge a rate of interest determined by primarily three factors:
Risk-free rate – return on U.S. Treasury notes for the term of the business loan.
Business risk for the customer – risk associated with a particular business that may result in it being unable to
repay a loan.Information risk – Improper business risk decisions
resulting from inaccurate information.
Auditing has no effect on either the risk-free rate or
business risk, but it can have a significant effect on information risk!
B. Causes of Information Risk Remoteness of information
– information provided by others must be relied upon.
Biases and motives of the provider – can result from
honest optimism of intentional misstatement.
Voluminous data – the amount of data grows with the organization. Important
details can be lost. Complex exchange transactions – business
transactions are becoming increasingly complex.
WarningThin Ice!
C. Ways of Reducing Information Risk
User verifies information – normally impractical for user to go to business and examine information.
User shares information risk with management – although users may bring suit against management for supplying inaccurate information, it is often difficult to collect on
losses. Provide audited financial statements – most feasible
approach is to have an independent party check for completeness, accuracy, and removal of bias.
III. Assurance Services
A. Assurance Services
B. Attestation Services
C. Other Assurance Services
D. Non-Assurance Services
A. Assurance ServicesDecision makers seek assurance
regarding the reliability information they use to make
decisions.Assurance services are valued
because the assurance provider is perceived as an independent
and unbiased evaluator of information.
Assurance services can be provided by CPAs and a variety
of other professionals.
B. Attestation ServicesMany other assurance services do not meet the criteria of attestation
services: a CPA who issues a report about the reliability of an assertion that is the responsibility of another party. There are
four categories of attestation services.
ASSURANCE SERVICES
ATTESTATION SERVICES
1. Audits of historical financial statements2. Effectiveness of internal control over financial reporting
3. Review of historical financial statements4. Other attestation services
B1. Audits of Historical Financial Statements An audit of historical financial statements is a
form of attestation in which the auditor issues a written
report expressing an opinion about whether the financial statements are in material conformity with generally
accepted accounting principles.
Publicly traded companies in the United States are required to have audits
under the federal securities acts.
Ben JohnsonCertified Public Accountant
B2. Attestation on Internal Control over Financial Reporting
Section 404 of the Sarbanes-Oxley Act requires public
companies to report management’s assessment
of the effectiveness of internal controls over financial reporting.
The Act further requires auditors to attest to the effectiveness of internal control over financial
reporting.
B3. Review of Historical Financial Statements
Many nonpublic companies want to
provide assurance on their financial statements
without incurring the cost of an audit.
In comparison to an audit, less evidence is necessary
to support the level of assurance provided by a
review.
B4. Other Attestation Services
Other attestation services are natural extensions of
financial statement engagements:
Debtor compliance with loan agreement
provisions.Forecasted financial
statements.WebTrust and SysTrust
for Internet sites (see p. 11)
C. Other Assurance Services
Other assurance services differ from those involving attestation in that:
The CPA is not required to issue a written report.The assurance does not have to be about the reliability
of another party’s assertion about compliance with specified criteria. (see examples in Table 1-2 on p. 12)
ASSURANCE SERVICES
ATTESTATION SERVICES
AuditsInternal Controls
ReviewsOther
OTHERASSURANCE
SERVICES
D. Non-Assurance Services
CPAs also provide non-assurance services
including:Accounting and
bookkeepingTaxes
Management consulting
IV. Requirements for CPA Certification
A. Educational Requirement
B. Uniform CPA Examination Requirement
C. Experience Requirement
A. Educational Requirement
Normally, an undergraduate degree
with a major in accounting.
Some states require 150 semester hours before the exam can
be taken. Others require the hours
before certification.
B. Uniform CPA Examination Requirement
A computer-based examination offered at various testing centers.
The examination consists of the following four sections:
Auditing and Attestation – 4.5 hoursFinancial Accounting and Reporting – 4 hours
Regulation – 3 hoursBusiness Environments and Concepts – 2.5 hours
C. Experience Requirement
Varies among states from no experience to
2 years experience.Some states include
experience for working for
governmental units or in internal auditing.
Summary
The Audit Process
Types of Audits and Auditors
Risk and the Need for Auditing
Assurance and Attestation
Becoming a CPA
top related