Chapter 1 – The Demand for Audit and other assurance services

Auditing is both an art and science. The auditors professional judgement and skepticism is the art and
knowledge of the rules and procedures is the science.

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. Auditing should be
performed by a competent and independent person.

Lets evaluation each part:

Information and established criteria

Information has to be available in some verifiable form and criteria to which it can be evaluation.
Information can be quantative or qualitative. The criteria against which information is evaluated depends
on the information being audited. For example when auditing financial statements the criteria is IFRS. CRA
uses the income tax act. For subjective information criteria is agreed upon aghead of time.

Accumulation and evaluation of evidence

Evidence is any information used by the auditor to assess whether the information being audited is stated
in accordance with the established criteria. An audit strategy is created to plan the evidence gathering
process. Determining how much evidence is necessary and evaluating if the information corresponds to
the criteria is a critical part of the process.

Competent, independent person

The auditor must be qualified, understand engagement risks and the criteria to be used. In order to reach
the proper conclusion professional judgement needs to be excercised. Along with integrity and
professional skepticism. It underlies an auditors professional judgement. Professional judgement requires
indepence in mind or objectivity. Auditors reporting on a company financial statements are independent
auditors. Internal auditors work for the company but are kept separate to maintain independence.

Report

Is the final stage and is the communication of the findings to the users.

Audit vs Accounting

Accounting is about providing financial information for decision making both quant and qualitative.
Auditing is about evaluated wheter the information reflects the economic events within specified dollar
ranges aka materialisty. Mistatements are materially if they for influence economic decision of the users.

Economic Demand

Audits value is seen in information risk aka the possibility that information that the was used to make the
decision was inaccurate.

Causes of information risk

1. complex exchange transactions – exchange transactions have become more complex and harder to
record

2. Biases and motives of the provider

3. Remoteness of information

4. voluminous data

It is practical for large business to incur costs to reduce information risl.

 User can verify information, the user may go to the bssiness to confirm reliability of the
statements
 User shares information risk with management
 Audited information is submitted

External audit of financial statements is a form of assurance engagement. Assurance engagement is when
assurance professional obtains evidence to express a conclusion to users about the outcome of the
measurement or evaluation against some criteria.

Types of audits and auditors

 Financial statement audit- conducted by PA, attest engagements, makes primary assertion that
statements are fairly presented.
 Compliance audit – in accordance with laws, regulation, rules.
 Operational audit – evaluates the efficiency and effectiveness of an orgs proccedures. Upon
conclusion a recommendation is made on how to improve ops.

 Internal auditors – perform a wide varity of assurance sevices. Likely not to depend on internal
auditors because they are not truly independent. Internal auditors report to the audit committee.

 Government audits – Auditor generals audits thos that report to the government. They perform
audit for government. They perform internal audits, external audits of f/s, examination of
efficiency.

 CRA auditorers – enforce federal tax laws, audit returns of taxpayers to ensure that they have
complied with tax laws.

 Forensic acountants and fraud auditors

 Public Accountants – Only public accounting firms can audit financial statements and only those
with a cpa can sign an assurance report.

Assurance and non assurance

In addition to financial statement audits, other assurance engagements like forceasts, due diligence,
budgets etc. Non assurance is basically tax services, accounting and book keeping.

Assurance engagements related to financial information

 Audit of historical financial statements, a major service provided by public accounting firms. These
firms are required to have their financial statements audited. Annual financial statements are not
requiremed
 Review of historical financial statements – with small non public companies a review engagement
is often enough. Has a lower cost than audit and a lower level of assurance.
 Audit of financial information other than statements – this is an audit of specific accounts.

Assurance engagements for Nonfinancial information

Audit of internal control over financial reporting – auditors have to evaluate managements assessment of
internal controls.

Audit of controls of service organizations – Audit of the service organizations who the service has been
outsourced to.

Compliance with an agreement or regulations – For example compliance of a company with a specific
term in the bank loan agreemnts

Attestation service on IT – assurance of their information technology.

Non assurance services

 Compilations – preparation of financial statements, no assurance is provided

 Tax services, perepartion of operate and individual rax returns
 Advisory – retirement planning and personal financial planning.

Attestation engagement is where you provide the documents and we attest. Direct engagement is where
the auditor deriectly measures.