Chapter 1

An Introduction to Auditing
Auditing and Assurance Services: Understanding the Integrated Audit
First Edition Karen L. Hooks

Prepared by Richard J. Campbell Copyright 2011, Wiley and Sons

Chapter 1
2

An Introduction to Auditing

Prepared by Richard J. Campbell

Learning Objectives
3

1. Recognize an integrated audit and a financial statement audit report. 2. Describe the overall purpose and value of an audit, and identify the differences among an integrated audit, and audit of internal control, an audit of internal control over financial reporting, and a financial statement audit. 3. Define and contrast the responsibilities and expectations of different parties affected by the audit. 4. Learn the roles and interaction of the governing and standard-setting bodies and other entities that affect auditing. 5. Understand the link between independent auditors and accountants who provide other professional services.

Important Basics of Auditing

4

Financial statement audit Audit of ICFR Integrated audit What it means when an auditor issues an unqualified or clean audit report on ICFR and the financial statements

An Integrated Audit
5 Exhibit 1-1

A Definition of Auditing
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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 these assertions and established criteria and communicating the results to interested users.
American Accounting Association, Committee on Basic Auditing Concepts, A Statement of Basic Auditing Concepts

(Sarasota, FL: American Accounting Association, 1973)

Difference in Accountants and Auditors

7

To be an accountant, it is necessary to have accounting knowledge. Understand business transactions Know what information to capture Know controls needed for activity and information Be able to report it for various purposes Be able to record it according to accounting standards To be an auditor, it is also it is necessary to know audit processes and audit reporting

Roles of Auditors and Management

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By giving an opinion on financial statement fairness and ICFR effectiveness the auditor is indirectly reporting on managements assertions.

The Auditing Process

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Management produces financial statements and ICFR report Auditor gathers and evaluates evidence Many forms of evidence; anything the auditor uses Auditor uses established standards to compare evidence to the financial statements and ICFR report Looks for correspondence between what is presented and the underlying evidence Uses processes described/required in auditing standards.

Beneficiaries of Audits
10 Exhibit 1-3

Value of an Audit
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To society: capital markets benefit To owners and prospective owners: remote ownership, complex transactions, investment decisions To corporate governance, the Board of Directors and audit committee: representing shareholders interests To management running the company with good information cost of and access to capital operating efficiency and effectiveness credibility of performance indicators properly accounting for complex transactions

Value of an Audit
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Constituents: society, owners and prospective owners, corporate governance, management All of these constituents need good information. Even nonpublic companies elect to have audits, although they are not required to do so by any law or regulation.

Standard Setters, Governing Authorities

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Standard setters and governing authorities involved with U.S. audits Congress States Securities and Exchange Commissions (SEC) Public Companies Accounting Oversight Board (PCAOB) American Institute of CPAs (AICPA) FASB/GASB International Accounting Standards Board (IASB) International Auditing and Assurance Board (IAASB)

Sarbanes Oxley Act of 2002

14

SOX required: The SEC to set up an auditing governance organization (PCAOB) Management of public companies to provide an audited ICFR report An ICFR audit of public companies
Dodd-Frank (2010) permanently exempts non-

accelerated filers from an ICFR audit

Financial statement and ICFR audits to be one engagement

PCAOB Responsibility and Authority

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Registration of firms The SEC will not accept a companys filings unless they have been audited by a registered firm Lots of information required in registration process Firm must agree to assist in any investigations Inspections Required by SOX SOX required the SEC to have the PCAOB perform inspections

PCAOB Auditing Standards

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AS 1: References in Auditors Reports to the Standards of the Public Company Accounting Oversight Board AS 2: An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements (superseded) AS 3: Audit Documentation AS 4: Reporting on Whether a Previously Reported Material Weakness Continues to Exist

PCAOB Auditing Standards

continued
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AS 5: An Audit of Internal Control Over Financial Reporting That is Integrated with an Audit of Financial Statements AS 6: Evaluating Consistency of Financial Statements AS 7: Engagement Quality Review

Newest, PCAOB Risk Assessment

Standards
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AS No. 8, Audit Risk AS No. 9, Audit Planning AS No. 10, Supervision of the Audit Engagement AS No. 11, Consideration of Materiality in Planning and Performing an Audit AS No. 12, Identifying and Assessing Risks of Material Misstatement AS No. 13, The Auditors Responses to the Risks of Material Misstatements AS No. 14, Evaluating Audit Results AS No. 15, Audit Evidence

AICPA
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Voluntary membership Non-public company audit standards Standards for many other types of engagements Code of conduct, applies to members Writes CPA and grades exam

State Governments
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License to practice Requirements to sit for CPA exam Requirements to be licensed Continuing education requirements Conduct requirements Regulations on doing business

Other AICPA Standards

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Code of Professional Conduct Statements on Standards for Attestation Engagements (SSAE) Statements on Standards for Accounting and Review Services (SSAR) Statements on Quality Control Standards Statements on Standards for Tax Services (SSTS) Statements on Standards for Valuation Services (SSV) Statements on Standards for Consulting

IAASB
22

International code of conduct is covered on the CPA Exam AICPA audit standards (SAS) and IAASB audit standards (ISA) are being aligned through the AICPAs Clarification Project

Other Audit Related Services

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Internal Auditing Operational Auditing Forensic Accounting General Accountability Office

24

Value of Audit Knowledge for NonAuditors In other words, why is this course required at most universities for all accounting majors?
Understand purpose of auditors activities Increase efficiency of interface with auditor Enhanced communication Implementation of ICFR

Appendix A- Working in a CPA

Firm
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Types of Audit Services: Integrated audits for larger public companies Financial statement audits for nonaccelerated filer public and non-public companies Reviews of interim financial statements for public companies Reviews and compilations for non-public companies

Other Types of CPA-Provided Services

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Attest engagements Assurance engagements Tax engagements Accounting and bookkeeping Business advising/management

consulting

CPA Services, Assurance and

Nonassurance
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Exhibit A-1 CPA Services

Common Firm Structures

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Sole proprietorship

Professional corporation General partnership

Limited liability company Limited liability partnership

Firm Sizes
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Big Four International networks; national Regional; large local Small local

Common Auditor Position Titles

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Partner/Owner Manager In Charge Accountant Staff Accountant

Copyright
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Copyright 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.