Chapter 1 Auditing and

Assurance Services

Presentation Outline
I. The Demand for Reliale Information
II. !nderstanding Assurance Services
III. "anagement Assertions
I#. Saranes$O%le& Act of '(('
#. )ecoming a CPA

I. The Demand for Reliale
Information
A. !nderstanding a Client*s )usiness
). +nvironmental Conditions
C. Information Ris,

A. !nderstanding a Client*s
)usiness

)usiness ris, is the

ris, that an entit& -ill
fail to meet its
o.ectives.

/ailing to reach
o.ectives can
eventuall& result in
temptation to misstate
financial statements
to avoid usiness
failure.

). +nvironmental Conditions
0 Comple%it& Decisions ma,ers
are not trained to collect1 compile1
and summari2e the ,e& operating
information themselves.
0 Remoteness Investors are not
ale to personall& visit locations to
chec, on investments.
0 Time sensitivit& Decisions must
often e made on a moment*s
notice.
0
Conse3uences A drop in
investment value can -ipe out
one*s life savings.
I lost m&
savings in a
ad investment4

C. Information Ris,

Information ris, is the

proailit& that the
information circulated & a
compan& -ill e false or
misleading.

Client management has an

incentive to ma,e the
usiness appear etter than
it actuall& ma& e.

This can create a conflict of

interest et-een client
management and investors.
/inancial
Statements

II. !nderstanding Assurance
Services
A. Definition of Assurance Services
). Definition of Attestation Services
C. Definition of Auditing
D. Overvie- of /inancial Statement Auditing
+. 5raphical Representation of Assurance
Services

A. Assurance Service +lements
Assurance services are 617 independent 6'7
professional services that 687 improve the
quality of information, or its context1 697
for decision makers. Assurance services
include man& areas of information1 including
nonfinancial areas.
6See e%amples on page : of te%t7

). Definition of Attestation Services

Attestation involves an
engagement resulting in
the issuance of a report
on su.ect matter or an
assertion aout the
su.ect matter that is the
responsiilit& of another
part&.

Auditing is a specific t&pe

of attestation.
6See e%amples on p. ; of
te%t7

C. Definition of Auditing
6See Auditing Insight on p. < of te%t7
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 the
assertions and established criteria
and communicating the results to
interested users.
Financial Statements
(including footnotes)
GAAP
Auditors !eport"
#ther !eports
Persons who rely on
the financial reports
$
%reditors
$
&nvestors
Source: American Accounting Association %ommittee on 'asic
Auditing %oncepts. ()*+. A Statement of Basic Auditing
Concepts, American Accounting Association (Sarasota, F-).

D. Overvie- of /inancial Statement
Auditing

+. 5raphical Representation of Assurance Services
The Relationships Among Auditing1 Attestation1
and Assurance +ngagements
Assurance Services
An& Information
Attestation Services
Primarily Financial &nformation
Auditing
Financial Statements

III. "anagement Assertions
A. Presentation and Disclosure
). +%istence or Occurrence
C. Rights and Oligations
D. Completeness
+. #aluation or Allocation

A. Presentation and Disclosure

/ootnote disclosure of important

accounting policies must e relevant and
reliale.

Transactions must e classified in the

correct accounts.

Information must e transparent 6i.e.1

understandale to a reasonal&
sophisticated person7.

). +%istence or Occurrence

Assets1 liailities1 and e3uities on the

alance sheet actuall& e%ist.

+ach of the revenue and e%pense

transactions actuall& occurred.

C. Rights and Oligations

Amounts reported as assets of the

compan& represent its propert& rights.

Amounts reported as liailities represent

its oligations.

D. Completeness

All transactions1 events1 assets1 liailities1 and e3uities

that should have een recorded have een recorded.

All disclosures that should have een discussed in the

footnotes are there.
Cutoff refers to accounting for revenue1 e%pense1 and
other transactions in the proper period 6neither
postponing some recordings to the ne%t period 6i.e.1
completeness7 nor accelerating ne%t period*s
transactions into the current &ear accounts 6i.e.1
e%istence or occurrence77. The cutoff date refers to
the client*s &ear$end alance sheet date.

+. #aluation or Allocation

Determine -hether proper values have

een assigned to assets1 liailities1 and
e3uities.

+%amples include collectiilit& of

receivales1 recalculating depreciation1
otaining lo-er of cost or mar,et data1 etc.

I#. Saranes$O%le& Act of '(('
6SO=7
A. "a.or Provisions of Saranes$O%le&
). "anagement Responsiilit& !nder SO=
C. Prohiited Services to Audit Clients

A. "a.or Provisions of Saranes$O%le&
Congress passed the Saranes$O%le& Act in an attempt
to address a numer of -ea,nesses found in
corporate financial reporting in the -a,e of the recent
accounting scandals. The Act*s ma.or provisions
include>
Re3uirement of C+O?C/O certification of financial
statements 6Section 8('7
Re3uirement of auditor e%amination of compan& internal
controls
Creation of the Pulic Compan& Accounting Oversight )oard
6PCAO)7 to serve as an auditing profession @-atchdog.A
Prohiition of certain client services & firms conducting a
client*s audit.

). "anagement*s Responsiilit& !nder SO=
One of its most important provisions 6Section 8('7 states that
the ,e& compan& officials must certify the financial
statements. Certification means that the compan& C+O and
C/O must sign a statement indicating>
1. The& have read the financial statements.
'. The& are not a-are of an& false or misleading statements
6or an& ,e& omitted disclosures7.
8. The& elieve that the financial statements present an
accurate picture of the compan&*s financial condition.
Source> !.S. Congress1 Sarbanes-Oxley Act of 20021 Pu. B.
1(:$'(91 11; Stat? :9< 6'(('7.

C. Prohiited Services to Audit Clients

SO= and the PCAO) prohiit professional service firms from

providing an& of the follo-ing services to an audit client>

oo,,eeping and related services

design or implementation of financial information

s&stems

appraisal or valuation services

actuarial services

internal audit outsourcing

management or human resources services

investment or ro,er?dealer services

legal and e%pert services 6unrelated to the audit7

Professional service firms ma& provide client ta% services

6-ith some restrictions7 and other non$prohiited services to
audit clients if the compan&*s audit committee has approved
them in advance.

SO= prohiits professional service firms from performing an&

client services -here auditors ma& find themselves ma,ing
management decisions or auditing their o-n firm*s -or,.

#. )ecoming a
A. +ducation
). +%amination
C. +%perience
Cote that successful candidates actuall& receive a CPA certificate
from their State )oard of Accountanc&. Reciprocal
CPA certificates for other states are also possile.

A. +ducation

"ost states re3uire 1<(

semester hours of college
education to sit for the
e%am.

Continuing professional
education of 1'( contact
hours 6not college semester
or 3uarter hours7 over three
&ear reporting periods -ith
no less than '( hours in an&
one &ear is a common
re3uirement in most states.

). +%amination

The AICPA )oard of +%aminers administers the

!niform CPA +%am as a computer$ased
e%amination in four parts
1. Auditing and attestationD9.< hrs
'. /inancial accounting and reportingD9 hrs
8. RegulationD8 hrs.
9. )usiness environmentD'.< hrs

Consists of multiple$choice testlets 6'9$8( 3uestions

each7 and simulation prolems -here students
electronicall& research a solution to a prolem.

Revealing e%am material can result in certifications

eing revo,ed.

Testing is on demand -ith :<E considered a

passing score.

C. +%perience

Although not a re3uirement

to sit for the CPA e%am1
accounting e%perience
supervised & a competent
accountant is re3uired to
ecome certified.

5enerall& ' &ears for

persons -ith a achelors
degree and 1 &ear for
those -ith a masters.

Some states re3uire the

e%perience to e in pulic
accounting.

Summar&

Audit process considers usiness ris,1

information ris,.

+nvironmental factors result in need for audits.

!nderstanding assurance1 attestation1 and

auditing

The effect of Saranes$O%le& on the audit

process.

CPA re3uirements include education1

e%amination1 and e%perience.