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Chapter 1: The Demand for an Auditing and Assurance Profession

Concept Check Answers

C1-1 Page 7 LIST AND EXPLAIN THE 5 KEY ELEMENTS OF THE DEFINITION OF AUDITING. The five key elements of the definition of auditing are: (1) information (in a verifiable form); (2) standards or criteria to evaluate the information (generally GAAP for Canadian financial statements); (3) accumulation and evaluation of evidence (to verify the information); (4) a competent, independent person (who can effectively evaluate the evidence, independent of those who prepared the information); (5) the report(communication of the results).

C1-2 Page 7 EXPLAIN THE DIFFERENCE BETWEEN ACCOUNTING AND AUDITING. Accounting is the recording, classifying, and summarizing of economic events while auditing is concerned with evaluation of the recorded information.

C1-3 Page 7 DESCRIBE THE ECONOMIC REASONS FOR CONDUCTING AN AUDIT. An independent audit can reduce information risk, helping to improve the decision-making process of trading partners, investors, and other stakeholders.

C1-4 Page 14 EXPLAIN THE DIFFERENCE BETWEEN ASSURANCE AND NONASSURANCE ENGAGEMENTS, PROVIDING AN EXAMPLE OF EACH. An assurance service (or engagement) improves the quality of information for decision makers (e.g., financial statement audit). The auditor provides a report about there liability of the information. Non-assurance services (or engagements) do not add value to the information in the same way, but may add value by organizing information (e.g.,bookkeeping and tax) or by providing a service using skills the organization requires (e.g., management advisory services for the acquisition of information technology).

C1-5 Page 14 LIST AND DESCRIBE 3 TYPES OF AUDITS, GIVIG AN EXAMPLE FOR EACH. WHY IS EACH TYPE OF AUDIT IMPORTANT? (1) Financial statement audit (e.g., historical financial statements), assessing evidence with respect to potential material misstatements. (2) Compliance audit (e.g.,compliance with environmental legislation), assessing the organizations ability tocomply with legislation. (3) Operational audit (e.g., effective factory production), to help provide good quality control and manage costs.

C1-6 Page 18 LIST AND DESCRIBE 3 PROFESSIONAL ACCOUNTING ORGAINIZATIONS IN CANADA (1) CICA: umbrella organization for CAs; (2) CGAAC: umbrella organization for CGAs; (3) SMAC: umbrella organization for CMAs.

C1-7 Page 18 WHICH PROFESSIONALS COULD CONDUCT THE AUDIT OF A COMPANY THAT MANUFACTURES AUTOMOBILES? PROVIDE EXAMPLES OF THE TYPES OF ASSURANCE OR NON-ASSURANCE ENGAGEMENTS THEY COULD CONDUCT FOR THIS COMPANY Public accountants could conduct a financial statement audit (assurance engagement); evaluate the quality of information systems security (operational audit; could also be done by internal audit); and examine effectiveness of data privacy (compliance audit or operational audit; could be done by PA, internal auditor, or governmental auditor). Other examples are possible.

1.

Define a

Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be done by a competent, independent person.

Attestation is a special form of assurance engagement, such as a financial statement audit, in which the auditor issues a report about the reliability of any information provided by one party to another. Assurance is the issuance of a written communication expressing a conclusion on a subject matter where an accountable party is responsible as part of an accountability relationship.

2.
1. Financial statement audit. 2. Compliance audit. 3. Operational audit. A financial statement audit is conducted by public accountants to determine whether the overall financial statements (the information being verified) are stated in accordance with specified criteria. Normally, the criteria are generally accepted accounting principles, although it is also possible to conduct audits of financial statements prepared using the cash basis or some other basis of accounting appropriate for the organization. The purpose of a compliance audit is to determine whether the auditee is following specific procedures or rules set down by a higher authority. A compliance audit for a private business could include determining whether accounting personnel are following the procedures prescribed by the company controller, reviewing wage rates for compliance with minimum wage laws, or examining contractual agreements with bankers and other lenders to be sure the company is complying with legal requirements. An operational audit is a review of any part of an organizations operating procedures and methods for the purpose of evaluating economy, efficiency, and effectiveness.

Identify

3.
The Canadian public accounting profession is influenced by a number of groups. There are three Canadian professional accounting bodies: the Canadian Institute of Chartered Accountants (CICA), the Certified General Accountants Association of Canada (CGAAC), and the Certified Management Accountants of Canada (CMAC). Professional accounting bodies outside Canada such as the American Institute of Certified Public Accountants (AICPA) and, increasingly, the International Federation of Accountants (IFAC) also play an influential role.

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Chapter Summaries
What is an audit? An audit is an engagement where evidence collection and evaluation are used to assess client information, such as a financial statement, using specific criteria, such as GAAP (generally accepted accounting principles). The results are reported by independent professionals. Why is there continued demand for audits? Audits provide added value to information since they provide

independent assurance where the user of the report is remote from the provider, where the provider may be biased, or where data audited are voluminous or complex. What is the difference between accounting and auditing? Accounting involves the actual preparation of underlying records, whereas auditing helps determine whether that recorded information reflects actual economic events. What are the different types of engagements completed by auditors? An audit is an attest engagement, a subset of assurance engagements. For an attest engagement, the client prepares the materials (such as the financial statements), and the auditor provides a written report on them, whereas for an assurance engagement, the auditor may actually prepare the report (such as comments on lottery processes). What type of work do accountants complete? Audits and assurance engagements are conducted by accountants and other professionals. Public accountants (PAs), who audit financial statements as well as conducting these other engagements, can be either CGAs, CMAs, or CAs in Canada. Although some CMAs provide assurance services, most CMAs are financial management professionals. CIAs and internal auditors often do operational audits and help management assess risks. There are also many specialist designations, such as the CISA.