AUDITING CHAPTER 1

Introduction to Audit & Other Assurance Services By David N. Ricchiute

TOPICS
Nature audit & attestation services Demand for financial statement audits Audit standard-setting process Influences on accounting & auditing Other audits & nonattest services Other attestation services Consulting & other assurance services

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INTRODUCTION
Audits reduce

Information risk Cost of capital Rebuild confidence in auditor credibility Incorporate changes stemming from

Professional challenges

Sarbanes-Oxley Act
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ASSURANCE SERVICES
Three-party contracts Common attestation services

Agreed-upon procedures engagements Review engagements

Financial statement audit

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ATTESTATION SERVICES
Agreed-upon procedures engagements

Uses procedures agreed by contracting parties Limited assurance whether financial statements conform to GAAP

Review engagements

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PROFESSIONAL SERVICE FIRMS

Attestation & audit offered by public accounting firms Professional staff are certified public accountants Organized as limited liability partnerships (LLP)

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FINANCIAL STATEMENT AUDIT

Performed by certified public accountants Auditor offers assurances about managements financial statement assertions

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INFORMATION RISK MODEL

Definition: risk that information is materially misstated Interested parties rely on information in decision making Audit provides assurance about quality of financial statement information Assurance offsets information risk
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DEMAND FOR AUDITS

Minimize information risk Unbiased monitor reduces information risk

Reports on quality of financial statement information

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VALUE OF AUDIT
Reduces information risk to interested parties

Investors, creditors, employees, suppliers, regulatory agencies, tax agencies, etc.

Reduces cost of capital to company

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FINANCIAL STATEMENTS
Representations of management

Responsible for assertions embodied in financial statements

Examined by auditor

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WHO IS AUDIT CLIENT?

Board of directors

Auditor is engaged by board of directors

Board of directors

Elected by shareholders Represents shareholder interests

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DEFINING THE AUDIT PROCESS

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 those assertions and established criteria and communicating the results to interested users.
Committee on Basic Auditing Concepts, A Statement of Basic Auditing concepts, The Accounting Review, supplement to v. 47, 1972, p. 18

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UNDERSTANDING THE AUDIT PROCESS

Investigation

Gathering, investigating evidence Using scientific method of inquiry Issue opinion whether managements financial statement assertions correspond in all material respects to GAAP

Report

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SCIENTIFIC METHOD OF INQUIRY

Scientific Method
Observe problem

Auditing

Opinion on fair presentation of financials Formulate hypothesis Financial statements are fairly presented Gather evidence Assess risk; design procedures Evaluate evidence & Evaluate evidence to conclude support or refute 15 GBW 8th ed., Ch. 1 hypothesis

AUDIT STANDARD SETTING:

AICPA

Trade association for CPAs

Audit Standards Board (ASB)

Senior technical body that issues authoritative pronouncements

for non-public company audits and attestation services

Accounting & Review Services Committee:

Senior technical body that issues pronouncements for non-

public company accounting & review services

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AUDIT STANDARD SETTING

Securities & Exchange Commission

Created 1934 to protect investors Oversight authority for accounting and auditing

Regulates registration & exchange of securities Issues Staff Accounting Bulletins (SAB)
Unofficial interpretations to guide practitioners

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AUDIT STANDARD SETTING:

PCAOB
Created 2003 by Congress in SarbanesOxley Act

Private sector non-profit organization Issues audit, attestation standards for

public companies

Oversees auditors of public companies to

Protect investors May adopt AICPA auditing standards or

establish new standards

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AUDITING DESCRIBED
Auditing is analytic, not constructive; it is critical, investigative, concerned with the basis for accounting measurements and assertions. Auditing emphasizes proof, the support for financial statements and data. Thus auditing has its principal roots, not in accounting which it reviews, but in logic on which it leans heavily for ideas and methods.
R.K. Mautz & H.A. Sharaf. The Philosophy of Auditing. Sarasota: AAA, 1961, p. 14

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ACCOUNTING STANDARD SETTERS

Financial Accounting Standards Board (FASB) & Governmental Accounting Standards Board (GASB)

Independent standard-setting bodies issuing authoritative standards (GAAP) for non-governmental and governmental entities Auditor must express opinion on financial statements in conformity with GAAP
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RELATIONSHIP OF ACCOUNTING & AUDITING

Hypothesis: financial statements are fairly presented in accordance with GAAP

FASB writes accounting standards that become part of GAAP GASB writes accounting standards for governmental accounting GAAP standards are criteria for fair presentation
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OTHER AUDIT & ATTEST SERVICES

Operational audits

Assess effectiveness & efficiency of operations

Compliance audits

Assess whether entity has complied with applicable laws & regulations Mostly for Not-for-Profit organizations
Attest service with contractual procedures

Agreed-upon procedures

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CONSULTING & OTHER ASSURANCE SERVICES

Business valuation Financial planning Litigation support Information system design & processing Forecasts & projections Sarbanes-Oxley prohibits many services to public companies
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AICPA VISION STATEMENT

CPAs are trusted professional who enable people and organizations to shape their future. Combining insight with integrity, CPAs deliver value by communicating the total picture with clarity and objectivity, translating complex information into critical knowledge, anticipating and creating opportunities and designing pathways that transform vision into reality
Source: AICPA Vision Project (http://www.aicpa.org)
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