You are on page 1of 26

Copyright 2015 McGraw-Hill Education. All rights reserved.

. No reproduction or distribution without the prior written consent of McGraw-Hill Education.



Auditing &
Assurance
Services,
6e
Chapter 01
Auditing and Assurance Services

Our system of capital formation relies upon the confidence of
millions of savers to invest in companies.
The auditors opinion is critical to that trust."
-- James R. Doty, Chairman
Public Company Accounting Oversight Board (PCAOB)
1-2
Learning Objectives
Define information risk and explain how the financial statement auditing process
helps to reduce this risk, thereby reducing the cost of capital for a company.
Define and contrast financial statement auditing, attestation, and assurance
services.
Describe and define the assertions that management makes about the
recognition, measurement, presentation, and disclosure of the financial
statements and explain why auditors use them as the focal point of the audit.
Define professional skepticism and explain its key characteristics.
Describe the organization of public accounting firms and identify the various
services that they offer.
Describe the audits and auditors in governmental, internal, and operational
auditing.
List and explain the requirements for becoming a certified public accountant
(CPA) and other certifications available to an accounting professional.


1-3
User Demand for Reliable Information
Todays information
More complex
Demanded by remote users
Demanded in a more timely manner
Has far reaching consequences
Information risk
The risk that the information disseminated by a
company will be materially false or misleading.
Users demand an independent third party assessment of
the information
Business risk
The risk that an entity will fail to meet its stated
business objectives
1-4
Definition of Auditing
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
Auditor's Report/
Other Reports
Persons who rely on
the financial reports
Creditors
Investors
Source: American Accounting Association Committee on Basic Auditing Concepts.
1973. A Statement of Basic Auditing Concepts, American Accounting Association
(Sarasota, FL).
1-5
Exhibit 1.1: Overview of Financial
Statement Auditing
1-6
Attestation Engagements
An attestation engagement - a practitioner is assesses and
reports on subject matter or an assertion about the subject
matter that is the responsibility of another party.
Some financial attestation engagements (other than audits)
Financial forecasts and projections
Examination of Managements Discussion & Analysis
Pro forma financial information
Some non-financial attestation engagements
Effectiveness of internal control systems
Compliance with environmental regulations
Sustainability reporting engagements
1-7
Exhibit 1.2: Sustainability Report for UPS
1-8
Assurance Services
Assurance services are independent professional services
that improve the quality of information, or its context, for
decision makers.
Examples
XBRL Reporting
Information risk assessment
Customer satisfaction surveys.
Internal audit outsourcing
1-9
Exhibit 1.4: The Relationships Among
Auditing, Attestation, and Assurance
Engagements
Assurance Services

Attestation Services

Auditing

1-10
Sarbanes-Oxley Act of 2002
Managements Responsibility For Financial Reporting

One of its most important provisions clearly indicates that the
management team is responsible for the financial reporting process and
the financial statements.
In fact, Section 302 of the Act states that the key company officials must
certify the financial statements. That is, the company CEO and CFO
must sign a statement indicating:

1. They have read the financial statements.
2. They are not aware of any false or misleading statements (or any key
omitted disclosures).
3. They believe that the financial statements present an accurate picture of
the companys financial condition.

Source: U.S. Congress, Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat/ 745 (2002).

1-11
Managements Financial
Statement Assertions (PCAOB)
Existence or occurrence Assets and liabilities included in
the accounts exist and recorded transactions are valid and have
actually occurred.
Rights and obligations- Entity has a legal claim on all assets
and revenues reported and has a legal responsibility for all
liabilities and expenses
Completeness - All balances and transactions have been
recorded in the financial statements
Valuation or allocation Assets, liabilities and recorded
transactions have been valued in accordance with GAAP
Presentation and disclosure All accounts are presented in
the appropriate place and all information required has been
disclosed in the statements and footnotes.
1-12
Managements Financial
Statement Assertions (ASB)
Assertions about Events and Transactions
Occurrence Events giving rise to transactions are
valid and have taken place
Completeness and Cutoff - All transactions have
been recorded and are recorded in the appropriate period
Accuracy Transactions are recorded at the correct
amount
Classification Transactions have been posted to the
proper account

1-13
Managements Financial
Statement Assertions (ASB)
Assertions about Account Balances
Existence Balances include only assets and liabilities that
exist
Rights and obligations Entity has legal claim on all
assets and revenues reported and has a legal responsibility for
all liabilities and expenses
Completeness Balances include all items that should be
included in accordance with GAAP
Accuracy and valuation Balances are reported at the
proper amount in accordance with GAAP

1-14
Managements Financial
Statement Assertions (ASB)
Assertions about Presentation and Disclosures
Occurrence and rights and obligations items presented
have occurred and are either owned by or represent the responsibility
of the entity
Completeness the proper disclosures have all been made by the
entity
Classification and understandability accounts in the
disclosures have been appropriately grouped and users can
comprehend the disclosures
Accuracy and valuation the amounts in the disclosures have
been properly measured and are valued in accordance with GAAP

1-15
Exhibit 1.6: Assertions and their
Relationships to the Financial Statements
1-16
Professional Skepticism
Refers to an auditors questioning mindset towards
representations made by management and evidential matter
gathered
Inquiry alone is never enough. The auditor must obtain sufficient
corroborative evidence.
Unusual financial trends need investigation
Documents are always checked for authenticity or possible alteration
Ask questions, get answers, then verify the answers.
Must be skeptical because a potential conflict of interest
always exists between the auditor and the client.
Management wants to portray the company and its operations in the
best possible light.
Auditors want to make sure that this portrayal is fair and accurate.

1-17
A Professional Judgment Process
Clarify the issues and objectives
Consider the possible alternatives
Gather and evaluate the relevant evidence
Reach an audit conclusion
Carefully document rationale for the
professional judgment reached

Source: Elevating Professional Judgment in Accounting and Auditing: The
KPMG Professional Judgment Framework (Montvale, NJ: KMPG, 2011).



1-18
The Public Accounting Profession
Assurance services
Financial Statement Audit engagements
Assurance engagements
Attestation engagements
Compilations
Reviews
Tax services
Consulting and Advisory services
1-19
Exhibit 1.7: Public Accounting Firm
Organization
1-20
Organization of the Profession
Big Four Accounting Firms
Deloitte, EY, KPMG, PwC
National
Grant Thornton, BDO, McGladrey
Local/Regional
Melton & Melton (Houston)
Plante Moran (Michigan/Illinois/Wisconsin)
Goodman & Company (Virginia)
Sole Proprietor
1-21
Exhibit 1.8: Revenues for the Big Four
CPA Firms
1-22
Prohibited Professional Services
In summary, Sarbanes-Oxley prohibits professional service firms
from performing any client services for audit clients in which the
auditors may find themselves making management decisions or
auditing their own firms work.
Specifically, Sarbanes-Oxley prohibits professional service firms
from providing any of the following services to an audit client:
1) bookkeeping and related services
2) design or implementation of financial information systems
3) appraisal or valuation services
4) actuarial services
5) internal audit outsourcing
6) management or human resources services
7) investment or broker/dealer services
8) legal and expert services (unrelated to the audit)
Professional service firms may provide client tax services (with some
restrictions) and other non-prohibited services to audit clients if the
companys audit committee has approved them in advance.
1-23
Types of Audits and Auditors
Financial (External Auditors/CPAs)
Ensure that financial statements are reliable
Operational (Internal and Governmental
Auditors/CIAs)
Improve operational economy
Improve operational efficiency
Compliance (Internal and Governmental Auditors)
Ensure compliance with company and/or governmental rules
and regulations
Forensic (Fraud Auditors/CFEs)
Designed to investigate a crime and will often involve
gathering evidence designed to convict a fraudster
1-24
Become Certified!
Education
Examination
Experience
State Certificate and License
Skills sets and your education
1-25
The CPA Exam
Significantly Revised in 2011
Computerized
14 Hours - Four parts
Auditing and Attestation (AUD)
Financial Accounting and Reporting (FAR)
Regulation (REG)
Business Environment and Concepts (BEC)
Multiple Choice Questions and Task-Based
Simulations
1-26

You might also like