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Chapter 1
Auditing and Assurance Services
"If you want to be successful, it's just this simple:
Know what you're doing. Love what you're doing.
And believe in what you're doing."
-- Will Rogers
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Chapter 1 Objectives
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Define auditing and explain its link to
information risk
Understand the difference between
accounting, auditing, attestation, and
assurance
Describe five management assertions
Explain professional skepticism
Describe public accounting firms
List requirements for becoming a CPA
Describe different types of audits
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User Demand for Reliable Information
• User demand for reliable, relevant information is a
consequence of
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Complexity
Remoteness
Time sensitivity
Consequences
• Information risk is the risk (probability) that the
information (mainly financial) disseminated by a
company will be materially false or misleading.
• Demand for Auditing and Assurance Services
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Exhibit 1-1
Overview of Financial Statement Auditing
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Definition of Auditing
Financial Statements
(including footnotes)
Persons who rely on
the financial reports
•Creditors
•Investors
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
GAAP
and communicating the results to
Auditor's Report/
interested users.
Other Reports
Source: American Accounting Association Committee on Basic Auditing Concepts.
1973. A Statement of Basic Auditing Concepts, American Accounting Association
(Sarasota, FL).
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Exhibit 1-2
The Relationships Among Auditing,
Attestation, and Assurance Services
Assurance Services
Any Information
Attestation Services
Primarily Financial Information
Auditing
Financial Statements
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Assurance Services
• Assurance services are independent professional services
that improve the quality of information, or its context, for
decision makers.
• Examples
• CPA WebTrust (http://www.cpawebtrust.org)
• Systrust
• Performance View
• PrimePlus Services (formerly known as ElderCare)
• Can you think of others?
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Attestation Engagements
• An attestation engagement is one “in which a practitioner
is engaged to issue or does issue a report on subject matter
or an assertion about the subject matter that is the
responsibility of another party.”
• Some financial attestation engagements (other than audits)
• Supplementary financial statistics
• Pro forma financial information
• Financial forecasts and projections
• Some non-financial attestation engagements
• Compliance with contractual requirements
• Effectiveness of internal control systems (Now required by SOX)
• Inventory quantities and locations
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Sarbanes-Oxley Act of 2002
• Congress passed the Sarbanes-Oxley Act in an
attempt to address a number of weaknesses found in
corporate financial reporting in the wake of the recent
accounting scandals. The Act’s major provisions
include:
– Requirement of CEO/CFO certification of financial statements
– Requirement of auditor examination of company internal controls
(an attestation engagement)
– Creation of the Public Company Accounting Oversight Board
(PCAOB) to serve as an auditing profession “watchdog.”
– Prohibition of certain client services by firms conducting a client’s
audit.
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Sarbanes-Oxley:
Management’s Responsibility For Financial
Reporting
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One of its most important provisions (Section 302) states that
the key company officials must certify the financial statements.
Certification means that 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 company’s financial condition.
Source: U.S. Congress, Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116
Stat/ 745 (2002).
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Management Assertions (SAS 31)
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Presentation and disclosure
Existence (assets) or occurrence (transactions)
Rights and obligations – ownership/
Completeness - all accounts included
Valuation or allocation
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Exhibit 1-4
Example Assertions and their Relationships
to the Financial Statements
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Professional Skepticism
• Professional skepticism is an auditor’s tendency
not to believe management’s assertions without
sufficient corroboration.
• 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 posssible light.
• Auditors want to portray the company and its operations fairly.
• Ask questions, get answers, then verify the answers.
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Exhibit 1-5
Professional Service Firm Organization
Executive Committee
Managing Partner
Practice Offices
Partners-in-Charge
Tax Consulting
Services
Audit, Assurance and
Business Advisory
Services
Partner
Manager
Manager
Partner
Manager
Senior (In-charge) Accountants
Staff Accountants (or Associates)
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Consulting
Services
Manager
Manager
Manager
Senior (In-charge) Accountants
Staff Accountants (or Associates)
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The Public Accounting Profession
• Assurance services
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Audit engagements
Assurance engagements
Attestation engagements
Compilations
Reviews
• Tax consulting services
• Consulting services
• Litigation support
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Sarbanes-Oxley Prohibited Services
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; and
8) legal and expert services (unrelated to the audit).
In summary, Sarbanes-Oxley prohibits professional service firms
from performing any client services in which the auditors may
find themselves auditing their own firm’s work.
Professional service firms may provide client tax services or other
non-prohibited services to audit clients if the company’s audit
committee has approved them in advance.
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Types of Audits and Auditors
• Financial (External Auditors/CPAs)
• Ensure that financial statements are accurate.
• Operational (Internal Auditors/CIAs)
• Improve economy
• Improve efficiency
• Compliance (Governmental Auditors)
• Ensure compliance with company and/or governmental
rules and regulations
• Forensic (Fraud Auditors/CFEs)
• Most audits are a combination of financial,
operational, and compliance audits.
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Organization of the Profession
• “Big Four” Accounting Firms
– D&T, E&Y, KPMG, PwC
• National
– Grant Thornton, BDO Seidman
• Local/Regional
– Melton & Melton (Houston)
– Postlethwaite & Netterville (Louisiana)
• Sole Proprietor
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Become Certified!
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Education
Examination
Experience
State Certificate and License for CPA
Skills sets and your education
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The New CPA Exam
• Computerized
• Four parts (beginning April 2004)
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Auditing and attestation—4.5 hrs
Financial accounting and reporting—4 hrs
Regulation—3 hrs.
Business environment—2.5 hrs
• Skill sets—research, communication,
analysis, judgment and understanding
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Engagement Overview
OBTAIN
(OR RETAIN)
CLIENT
ENGAGEMENT
PLANNING
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INTERNAL
CONTROL
EVALUATION
SUBSTANTIVE
PROCEDURES
ISSUE
REPORT
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