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Concepts for Audits
Concepts for Audits

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Published by: blahblah123sd on Jan 23, 2014
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Chapter 01

The Role of the Public Accountant in the American Economy

Note: Certain slides in this presentation were created by McGraw Hill, the publisher of the textbook




From Merriam Websters Dictionary

Definitions Definition of AUDIT 1 a : a formal examination of an organization's or individual's accounts or financial situation b : the final report of an audit 2 : a methodical examination and review
Would you accept a financial statement from management?
Note: Certain slides in this presentation were created by McGraw Hill, the publisher of the textbook.

APPLE, INC. Financial Statements pdf page 44 Auditor’s Report pdf page76

Audit of financial statements—An examination designed to provide an opinion; the highest level of assurance that the financial statements follow generally accepted accounting principles or another acceptable basis of accounting.

Attest engagement (1)

<b>Def</b>: An engagement in which the CPAs issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e.g., management).

Assurance Assurance services (1) <b>Def</b>: Professional services that enhance the quality of information, or its context, for decision makers. Many assurance services involve some form of attestation.

at·test verb \ə-ˈtest\ Definition of ATTEST transitive verb 1 a : to affirm to be true or genuine; specifically : to authenticate by signing as a witness b : to authenticate officially

Independence Independence includes two categories—independence of mind and independence of appearance Term: Independence in appearance (73) Def: The avoidance of circumstances that would cause a reasonable and informed third party. having knowledge of all relevant information. to reasonably conclude that the integrity. . including safeguards applied. or professional skepticism of a firm or a member of the attest engagement team has been compromised. objectivity.

.Term: Independence of mind (73) Def: The state of mind that permits the performance of an attest service without being affected by influences that compromise professional judgment. thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism .

2 defines internal control as [emphasis added]: A process. Effectiveness and efficiency of operations. management. effected by the entity's board of directors.Internal Control The Committee of Sponsoring Organizations (COSO) commissioned a study to: Establish a common definition of internal control to serve the needs of different parties. designed to provide reasonable assurance regarding the achievement of objectives in the following categories: Reliability of financial reporting. . Provide a standard against which businesses and other entities can assess their control systems and determine how to improve them. titled Internal Control—Integrated Framework. The study. Compliance with applicable laws and regulations. and other personnel.

Material Per page 44 of text -“Sufficiently important to influence decisions Made by reasonable users of financial statements.” .

Types of Professional Services • Attestation and Assurance (Includes auditing) • Tax (compliance and tax planning) • Consulting • Accounting (and Review Services) • Personal Financial Planning • Litigation support • Fraud Investigation 1-10 .

Assurance services • The broad range of information enhancement services that are provided by certified public accountants (CPAs). 1-11 . • Two types: – Increase reliability of information – Putting information into a form or context that facilitates decision making.

. Audit committee.Which of the following has primary responsibility for the fairness of the representations made in financial statements? (1) (2) (3) (4) Client's management. Independent auditor. AICPA.

Types of Services • Assurance Services – Attestation Services • Example: Audits of Financial Statements. Examinations of Internal Control – Other Assurance Services • Example: CPA ElderCare Prime Plus Services • NonAssurance Services – Tax Services – Management Consulting Services – Other 1-13 .

Attestation Services • To attest to information means to provide assurance as to its reliability • Attest engagement: A practitioner is engaged to issue or does issue an examination.g. or an agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party (e. a review. management) 1-14 .

The Attest Function Management Subject Matter Suitable Criteria The CPA Gathers Evidence Issues Report Subject Matter* The Attest Report *May be management’s assertion about the subject matter. 1-15 .

Suitable criteria • Standards established or developed by groups of experts.” 1-16 . • Example: Internal control audit – standards established by a committee of experts on internal control • Example: Financial statement audit – standards are GAAP. For a financial statement audit suitable criteria are referred to as the “applicable financial reporting framework.

Forms of Attestation 1-17 .

What are the required statements ? Who might be the users ? .


.Audit of Financial Statements Management Prepares Financial Statements Criteria (e. GAAP) The Auditors Gathers Evidence Issues Report Financial Statements The Auditors’ Report *Applicable financial reporting framework 1-20 .g.

or some other appropriate basis of accounting • Audit involves searching and verifying accounting records and examining other documents • Evidence necessary to issue an audit report that states auditors’ opinion 1-21 .Financial Statement Audit • Auditors gather evidence and provide a high level of assurance that the financial statements follow GAAP.

Audit Evidence Evidence focuses on whether financial statements are presented in accordance with GAAP. examples: • Balance sheet • • • • • • Do assets really exist Are the assets valued correctly Are the liabilities complete? Are assets and liabilities properly classified • Income statement – – – – Sales really occurred Sales have been recorded at appropriate amounts Recorded costs and expenses are applicable to period All expenses have been recognized • Financial statement amounts – Accurate. properly classified and summarized – Notes are informative and complete 1-22 .

What Creates the Demand for Audits? • Audits lend credibility to information by reducing information risk.g. the risk that information is materially misstated – assists users—e. the risk that a company will not be able to meet its financial obligations due to economic conditions or poor management decisions 1-23 . investors • Financial statement misstatements arise due to-– – – – Accidental errors Lack of knowledge of accounting principles Unintentional bias Deliberate falsification • Audits do not directly address business risk. lenders.

Enable officers and directors to avoid personal responsibility for any misstatements in the financial statements. will be brought to light . if any exist.The most important benefit of having an annual audit by a public accounting firm is to: Provide assurance to investors and other outsiders that the financial statements are reliable. Meet the requirements of government agencies. Provide assurance that illegal acts.

From Chapter 6 .

Corporate governance Board of directors oversee corporations activities Public companies must establish audit committees of their boards of directors Audit committees are charges with areas such as oversight of financial reporting. regulatory compliance. Note: instructor serves on audit committee of a not for profit entity. and risk management. .

Slight reliance on controls Substantial reliance on controls Internal control determines scope of audit Risk assessment determines audit scope. Increased self-regulation Increased demands for reporting on compliance & internal control Panel on Audit Effectiveness. No reliance on controls Increased emphasis on testing. individuals & ventures Industrial revolution resulted in the need for corporate audits Development of stock markets .Do not have to know Period Ancient .1850 1850-1905 History of the Attest Function Developments Audits of city states. SarbanesOxley Act of 2002 Audit Objective Detection of fraud Detection of fraud & clerical errors Determination of fairness.increased emphasis on earnings Development of auditing standards Criticism by Congress. detection of fraud & errors Determination of fairness Determination of fairness Determination of fairness Determination of fairness Nature of Audit Detailed. No reliance on controls Some testing. must assess risk of fraud Business risk approach to audits 2002---audit procedures must address risk of fraud 1-27 1905-1940 1940-1975 1975-1985 1985-1995 1995-Present .

penalties for fraudulent financial activity became more severe. and increased the oversight role of boards of directors. In addition.) 1-28 . and the linkage of audit procedures to audit risks) the accuracy of financial information. SOX increased the independence of the outside auditors who review the accuracy of corporate financial statements. Also. risk assessments.Do not have to know The Accounting Profession’s Credibility Crisis • 2000—The Panel on Audit Effectiveness made a variety of suggestions to improve audits (including documentation of audit • 2001—Enron Bankruptcy • 2002—WorldCom Fraud • 2002—Sarbanes-Oxley Act (top management must individually certify • 2003—Public Company Accounting Oversight Board began operations • 2008—Dodd Frank act– more regulations for broker dealers evidence and judgments.

Financial Audits • Audit of the financial statements of an entity – Covers the balance sheet and related statements of income. retained earnings and cash flows – Goal is to determine if prepared in conformity with GAAP – Performed by CPAs – Users include management. bankers. financial analysts. creditors. government agencies 1-29 . investors.

Other Types of Audits • Compliance Audits • Operational Audits – Examples: IRS audit of income tax return – Not for Profit entities which receive federal funds—OMB Circular A-133 – Example: Effectiveness of operations of receiving department of a manufacturing company – Example: Assurance on both the financial statements and effectiveness of internal control over financial reporting 1-30 • Integrated Audits .

Other Types of Auditors • Internal Auditors—large part of work consists of operational audits • Government Accountability Office Auditors— includes audits of government agencies • Tax Auditors 1-31 .

Internal Auditors • Employed by a company as an employee • They often – perform operational and compliance audits – address internal control – report to the audit committee of the board of directors and to the president • The Institute of Internal Auditors is the international organization of internal auditors. 1-32 .

DNB Government Accountability Office Auditors (GAO Auditors) • Headed by the comptroller general • Responsibility of supporting Congress • Perform – Compliance. operational and financial audits of government agencies – Examinations of corporations holding government contracts to verify contract payments have been proper 1-33 .

Tax Auditors • Responsible for enforcement of tax laws of various sorts (e. property taxes..g. state and federal income taxes. sales taxes) • Internal revenue agents generally perform compliance audits of income tax returns 1-34 .

1-35 .AICPA’s Traditional Role • • • • Establish Standards Research and Publication Continuing Professional Education Self-Regulation Note: Much of the standards setting and regulation roles relating to public companies (referred to as “issuers”) has been taken over by the SEC and the PCAOB.

Establishes Standards--Examples • AICPA Auditing Standards Board – Issues official pronouncements on auditing matters for nonpublic companies (“nonissuers”) – Statements on Auditing Standards (SASs) – Statements on Standards for Attestation Engagements (SSAEs) • Guidance for attesting to information other than financial statements such as financial forecasts • Accounting and Review Services Committee – Statements on Standards for Accounting and Review Services (SSARS) – Standards for compilations or reviews not audits of financial statements 1-36 .

Research and Publication • Publications – Journal of Accountancy (monthly) – The Tax Advisor • Audit publications – Industry Audit and Accounting Guides – Audit Risk Alerts – Auditing Practice Releases • Other publications – Accounting Research Studies – Statements of Position – Accounting Trends & Techniques 1-37 .

Continuing Professional Education • Development of continuing professional education programs • Necessary for continuing education requirement for CPA certificate • Offered by – AICPA – State societies – Other professional organizations 1-38 .

Professional Regulation • Regulations of Individual CPAs – Code of Professional Conduct – ethical rules for CPAs – Requirements for regular membership in AICPA • Regulation of Public Accounting Firms – Division for Public Accounting Firms • Center for Public Company Audit Firms • Private Companies Practice Section (PCPS) 1-39 .

The CPA Examination • Uniform national examination prepared and graded by the AICPA • Computerized exam includes multiple choice and simulations in four parts • • • • Auditing and Attestation Financial Accounting & Reporting Regulation Business Environment & Concepts 1-40 .

State Boards of Accountancy • Issue CPA certificates • All boards require successful completion of CPA examination • Education and experience requirements vary • National Association of State Boards of Accounting (NASBA) 1-41 .

state and local governments • GASB – Standards of financial accounting for state and local government entities • FASAB – Accounting standards for the US government 1-42 .Other Parties • FASB – Sets GAAP for entities other than federal.

ethics and independence standards relating to the preparation of audit reports for SEC registrants • Oversee and discipline CPAs and CPA firms that audit public companies. quality control. including – – – – Register firms Perform inspections of firms Conduct investigations and disciplinary proceedings of firms Sanction registered firms 1-43 .PCAOB Role • Adopt auditing. attestation.

deceit.Securities and Exchange Commission (SEC) • Agency of the US government • Oversight responsibility for the PCAOB • Objectives – Protect investors and public by requiring full disclosure of financial information by companies offering securities for sale to the public – Prevent misrepresentation. or other fraud in the sale of securities 1-44 .

Securities and Exchange Commission (SEC ) • Registration statements – Qualify securities for sales – Contains audited financial statements – Makes SEC major user of financial statements • Protects investors • Regulation S-X – Basic accounting regulation » Comment letters 1-45 .

Do not have to know Organization of the Public Accounting Profession Sole proprietorship Partnerships Professional Corporation Limited Liability Partnership (LLP) Limited Liability Company (LLC) • • • • • 1-46 .

Categories of Public Accounting Firms • • • • • Local Regional National Big 4 Alternative Practice Structures 1-47 .

Industry Specialization • Firms with detailed knowledge and understanding of a client’s industry • Helps firms – Be more effective at collecting and evaluating audit evidence – Make valuable suggestions to improve client’s operations – Provide the client consulting services 1-48 .

Typical Structure of a National CPA Firm Partners Managers Seniors Staff Assistant 1-49 .

• Manager—Supervise overall engagement. • Seniors—”In charge” auditor on a daily basis. 1-50 .Responsibilities on an Engagement • Partner—Overall responsibility is to assure that that audit is performed in accordance with professional standards. • Staff assistants—Work under the immediate supervision of the senior.

Elements of Public Accounting Work • Professional Developments – Stay current on developments within the profession • Seasonal fluctuations – Busy season from December through April • Relationships with clients – Need to maintain independence 1-51 .

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