AUDIT AND

ASSURANCE SERVICES

THE STUDY OF AUDITING

The study of auditing is different from other accounting courses that
you have taken in college because

Technical,
analytical and
logical skills

More
conceptual in
nature

Gather and
assess the
evidence
against
assertions

Improving the
reliability of
information
for decision
makers

THE DEMAND FOR

AUDITING

THE DEMAND FOR AUDITING AND

ASSURANCE

The development of the corporate

form of business and the expanding
world economy over the last 200 years
have given rise to an explosion in the
demand for assurance provided by
auditors.

PRINCIPALS AND AGENTS

A public company is a company that sells its
stocks or bonds to the public, giving the public a
valid interest in the proper use, or stewardship,
over the companys resources.
Managers

Stockholders

Agents

Principals
5

OTHER THEORIES ON THE DEMAND

FOR AUDIT SERVICES

Policeman theorywatchdog,
used to discover fraud
Lending credibility theoryaudit
reports enhance users faith in
management
Theory of inspired confidence
Theodore Limperg auditors should
meet the public expectations
6

THE ROLE OF AUDITING

HOUSE INSPECTOR

Imagine you are buying an

older home.
How does this example
illustrate the concepts we just
discussed?

NOW, WHAT ABOUT THE SERVICE?

What are desirable

characteristics of House
Inspectors?
What are desirable
characteristics of a house
inspection service?

HOUSE INSPECTORS
Desirable Characteristics of House Inspectors
Competent they possess the required training,
expertise, and experience to evaluate the property for
sale
Objective they have no reason to side with the seller;
they are independent of the sellers influence
Honest they will conduct themselves with integrity,
and they will share all of their findings with the buyer
Skeptical they will not simply take the sellers
assertions at face value; they will conduct their own
analysis and testing
Responsible and/or liable they should stand by their
assessment with a guarantee and/or be subject to
litigation if they fail to act with care

INSPECTION SERVICE
Desir ab le Characteristics of a H ouse Ins p ec tion S erv ic e
Timely- the results of the service are reported in time to benefi t the
decision maker
Reasonably priced the costs of the services must not exceed the
benefi ts. For this to occur the service provider will likely need to focus
attention on the most important and risky assertions and likely cant
provide absolute assurance
Complete the service addresses all of the most important assertions
made by the seller
Eff ective the service provides some degree of certainty that it will
uncover signifi cant risks or problems
Systematic and reliable the service is based on a systematic process,
and the conclusions are based on reliable evidence. In other words,
another comparable inspector would likely fi nd similar things and come
to similar conclusions
Informative the service provides a sense for how likely mechanical
failure is in the near future and provides an estimate of the cost to
repair know defects or failures.

TYPES OF
ASSURANCE
SERVICES

12

AUDITING, ATTEST, AND

ASSURANCE SERVICES DEFINED
Auditing

Attest

Assurance
Services

Are independent professional

services that improve the quality
of information, or its context, for
decision makers.

13

TYPES OF AUDIT, ATTEST, AND

ASSURANCE SERVICES

Assurance Services
Risk Assessment

Performance
Measurement

Information
System
Reliability &
E-Commerce

14

AUDITING, ATTEST, AND

ASSURANCE SERVICES DEFINED
Auditing

Attest

Assurance
Services

Services occur when a practitioner

is engaged to issue or does issue
a report on subject matter, or an
assertion about subject matter,
that is the responsibility of
another party.
15

TYPES OF AUDIT, ATTEST, AND

ASSURANCE SERVICES

Attest Services
Reporting on Internal
Control

Financial Forecasts
and Projections

16

AUDITING, ATTEST, AND

ASSURANCE SERVICES DEFINED
Auditing

Attest

Assurance
Services

A systematic process of
objectively obtaining and
evaluating evidence
regarding
17
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.

TYPES OF AUDIT, ATTEST, AND

ASSURANCE SERVICES

Audit Services
Internal Control Audits

Compliance Audits

Operational Audits

Forensic Audits

18

TYPES OF AUDITORS

External Auditors

Government Auditors

Internal Auditors

Forensic Auditors

19

RELATIONSHIPS AMONG AUDITING,

ATTEST, AND ASSURANCE SERVICES

20

AUDIT DEFINITION

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.

MANAGEMENTS FINANCIAL
STATEMENT ASSERTIONS
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 fi nancial 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 .
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MANAGEMENT ASSERTIONS
Financial statements issued by
management contain explicit and implicit
assertions.
Transactio
ns

Account
Balances

Management
asserts that
transactions
related to
inventory actually
occurred.

Management
asserts that the
entity owns the
inventory
represented in the
inventory account.

Presentati
on &
Disclosure

Management
asserts that the
financial
statements
properly classify
and present the
inventory.23

MANAGEMENT ASSERTIONS

24

EXHIBIT 1.5: ASSERTIONS AND THEIR

REL ATIONSHIPS TO THE FINANCIAL
STATEMENTS

1-25

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 fi nancial
reporting process and the fi nancial statements.
In fact, Section 302 of the Act states that the key company
offi cials must certify the fi nancial statements. That is, the
company CEO and CFO must sign a statement indicating:
1.
2.
3.

They have read the fi nancial statements.

They are not aware of any false or misleading statements (or
any key omitted disclosures).
They believe that the fi nancial statements present an
accurate picture of the companys fi nancial condition.

S o u rc e : U . S . C o n g re s s , S a r b a n e s - O x l e y A c t o f 2 0 0 2 , Pu b . L . 1 0 7 - 2 0 4 , 1 1 6
Stat/ 745 (2002).

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PROHIBITED PROFESSIONAL
SERVICES

In su mmary, Sar banes - O xle y prohibits p rofes sional

s ervice fi rms from p e rforming an y clie n t se rvice s for aud it
clie n ts in which the au ditors may fi nd the mse lves makin g
manage me nt de cisions or au diting the ir ow n fi rms work.
Sp e cifi cally, S arbane s- O xle y p rohibits profe ss ional
s ervice fi rms from p roviding any of the follow ing s ervice s
to an au dit clie nt:
1) bookkeeping and related services
2) design or implementation of fi nancial 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)
Profe ssion al se rvice fi rms may provide clie nt tax se rvice s
(with some re s trictions) and othe r non-proh ibite d se rvice s
to audit clie nts if th e companys aud it committe e has
approve d the m in advance .
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EXHIBIT 1.7: REVENUES FOR

THE BIG FOUR CPA FIRMS

1-28