AUDITINGCHAPTER 1

Introduction to Audit & Other Assurance ServicesByDavid N. Ricchiute

GBW 8th ed., Ch. 1 2

TOPICS

Nature audit & attestation servicesDemand for financial statement auditsAudit standard-setting processInfluences on accounting & auditingOther audits & nonattest servicesOther attestation servicesConsulting & other assurance services

GBW 8th ed., Ch. 1 3

INTRODUCTION

Audits reduce Information risk Cost of capital

Professional challenges Rebuild confidence in auditor

credibility Incorporate changes stemming from

Sarbanes-Oxley Act

GBW 8th ed., Ch. 1 4

ASSURANCE SERVICES

Three-party contractsCommon attestation services Agreed-upon procedures

engagements Review engagements

Financial statement audit

GBW 8th ed., Ch. 1 5

ATTESTATION SERVICES

Agreed-upon procedures engagements Uses procedures agreed by

contracting parties

Review engagements Limited assurance whether financial

statements conform to GAAP

GBW 8th ed., Ch. 1 6

PROFESSIONAL SERVICE FIRMS

Attestation & audit offered by public accounting firmsProfessional staff are certified public accountantsOrganized as limited liability partnerships (LLP)

GBW 8th ed., Ch. 1 7

FINANCIAL STATEMENT AUDIT

Performed by certified public accountantsAuditor offers assurances about management’s financial statement assertions

GBW 8th ed., Ch. 1 8

INFORMATION RISK MODEL

Definition: risk that information is materially misstatedInterested parties rely on information in decision makingAudit provides assurance about quality of financial statement informationAssurance offsets information risk

GBW 8th ed., Ch. 1 9

DEMAND FOR AUDITS

Minimize information riskUnbiased monitor reduces information risk Reports on quality of financial

statement information

GBW 8th ed., Ch. 1 10

VALUE OF AUDIT

Reduces information risk to interested parties Investors, creditors, employees,

suppliers, regulatory agencies, tax agencies, etc.

Reduces cost of capital to company

GBW 8th ed., Ch. 1 11

FINANCIAL STATEMENTS

Representations of management Responsible for assertions

embodied in financial statements

Examined by auditor

GBW 8th ed., Ch. 1 12

WHO IS AUDIT CLIENT?

Board of directors Auditor is engaged by board of

directors

Board of directors Elected by shareholders Represents shareholder interests

GBW 8th ed., Ch. 1 13

DEFINING THE AUDIT PROCESS

Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

Committee on Basic Auditing Concepts, “A Statement of Basic Auditing concepts,” The Accounting Review, supplement to v. 47, 1972, p. 18

GBW 8th ed., Ch. 1 14

UNDERSTANDING THE AUDIT PROCESS

Investigation Gathering, investigating evidence Using scientific method of inquiry

Report Issue opinion whether management’s

financial statement assertions correspond in all material respects to GAAP

GBW 8th ed., Ch. 1 15

SCIENTIFIC METHOD OF INQUIRYScientific Method

AuditingObserve problem Opinion on fair presentation of financials

Formulate hypothesis Financial statements are fairly presented

Gather evidence Assess risk; design procedures

Evaluate evidence & conclude

Evaluate evidence to support or refute hypothesis

GBW 8th ed., Ch. 1 16

AUDIT STANDARD SETTING: AICPA

Trade association for CPAs Audit Standards Board (ASB)

Senior technical body that issues authoritative pronouncements for non-public company audits and attestation services

Accounting & Review Services Committee: Senior technical body that issues pronouncements for

non-public company accounting & review services

GBW 8th ed., Ch. 1 17

AUDIT STANDARD SETTINGSecurities & Exchange Commission

Created 1934 to protect investorsOversight authority for accounting and auditing Regulates registration & exchange of

securities Issues Staff Accounting Bulletins (SAB)

Unofficial interpretations to guide practitioners

GBW 8th ed., Ch. 1 18

AUDIT STANDARD SETTING: PCAOB

Created 2003 by Congress in Sarbanes-Oxley Act Private sector non-profit organization Issues audit, attestation standards for

public companies Oversees auditors of public companies

to Protect investors May adopt AICPA auditing standards or

establish new standards

GBW 8th ed., Ch. 1 19

AUDITING DESCRIBED

Auditing is analytic, not constructive; it is critical, investigative, concerned with the basis for accounting measurements and assertions. Auditing emphasizes proof, the support for financial statements and data. Thus auditing has its principal roots, not in accounting which it reviews, but in logic on which it leans heavily for ideas and methods.

R.K. Mautz & H.A. Sharaf. The Philosophy of Auditing. Sarasota: AAA, 1961, p. 14

GBW 8th ed., Ch. 1 20

ACCOUNTING STANDARD SETTERS

Financial Accounting Standards Board (FASB) & Governmental Accounting Standards Board (GASB) Independent standard-setting bodies

issuing authoritative standards (GAAP) for non-governmental and governmental entities

Auditor must express opinion on financial statements in conformity with GAAP

GBW 8th ed., Ch. 1 21

RELATIONSHIP OF ACCOUNTING & AUDITING

Hypothesis: financial statements are fairly presented in accordance with GAAP FASB writes accounting standards

that become part of GAAP GASB writes accounting standards for

governmental accounting GAAP standards are criteria for fair

presentation

GBW 8th ed., Ch. 1 22

OTHER AUDIT & ATTEST SERVICES

Operational audits Assess effectiveness & efficiency of

operations

Compliance audits Assess whether entity has complied with

applicable laws & regulations Mostly for Not-for-Profit organizations

Agreed-upon procedures Attest service with contractual procedures

GBW 8th ed., Ch. 1 23

CONSULTING & OTHER ASSURANCE SERVICES

Business valuationFinancial planning Litigation supportInformation system design & processingForecasts & projectionsSarbanes-Oxley prohibits many services to public companies

GBW 8th ed., Ch. 1 24

AICPA VISION STATEMENT

CPAs are trusted professional who enable people and organizations to shape their future. Combining insight with integrity, CPAs deliver value by communicating the total picture with clarity and objectivity, translating complex information into critical knowledge, anticipating and creating opportunities and designing pathways that transform vision into reality

Source: AICPA Vision Project (http://www.aicpa.org)