Audit and Assurance Services

INTRODUCTION

Audits reduce

Information risk

Cost of capital

Professional challenges

Rebuild confidence in auditor credibility

Incorporate changes stemming from Sarbanes-Oxley Act

ASSURANCE SERVICES

Three-party contracts

Common attestation services

Agreed-upon procedures engagements

Review engagements

Financial statement audit

ATTESTATION SERVICES

Agreed-upon procedures engagements

Uses procedures agreed by contracting parties

Review engagements

Limited assurance whether financial statements conform to GAAP

PROFESSIONAL SERVICE FIRMS

Attestation & audit offered by public accounting firms

Professional staff are certified public accountants

Organized as limited liability partnerships (LLP)

FINANCIAL STATEMENT AUDIT

Performed by certified public accountants

Auditor offers assurances about management's financial statement assertions

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

DEMAND FOR AUDITS

Minimize information risk

Unbiased monitor reduces information risk

Reports on quality of financial statement information

VALUE OF AUDIT

Reduces information risk to interested parties

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

Reduces cost of capital to company

FINANCIAL STATEMENTS

Representations of management

Responsible for assertions embodied in financial statements

Examined by auditor

WHO IS AUDIT CLIENT?

Board of directors

Auditor is engaged by board of directors

Board of directors

Elected by shareholders

Represents shareholder interests

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.

UNDERSTANDING THE AUDIT PROCESS

Investigation

Gathering, investigating evidence

Using scientific method of inquiry

Report

Issue opinion whether management's financial statement assertions correspond in all material
respects to GAAP

SCIENTIFIC METHOD OF INQUIRY

Scientific Method

Observe problem

Formulate hypothesis

Gather evidence

Evaluate evidence & conclude 15

Auditing

Opinion on fair presentation of financials

Financial statements are fairly presented

Assess risk; design procedures

Evaluate evidence to support or refute 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
service

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

AUDIT STANDARD SETTING: PCAOB

Created 2003 by Congress in Sarbanes- Oxley 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

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.

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

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

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

Agreed-upon procedures

■ Attest service with contractual procedures

CONSULTING & OTHER ASSURANCE SERVICES

Business valuation

Financial planning

Litigation support

Information system design & processing

Forecasts & projections

Sarbanes-Oxley prohibits many services to public companies

AICPA VISION STATEMENT

CPAs are trusted professionals 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.

Audit Responsibilities and Objectives

Objective of Conducting an Audit of Financial Statements
The objective of the ordinary audit of financial
statements is the expression of an opinion of
the fairness with which they present fairly, in
all respects, financial position, result of
operations, and its cash flows in
conformity with GAAP.

Management’s Responsibilities
Management is responsible for the financial
statements and for internal control.
The Sarbanes–Oxley Act increases management’s
responsibility for the financial statements.
It requires the CEO and the CFO of public
companies to certify the quarterly and annual
financial statements submitted to the SEC.

Auditor’s Responsibilities
Material versus immaterial misstatements
Combined uncorrected errors likely to affect
A user’s decision are usually considered material
Errors vs. fraud
Both are a potential source of material misstatement,
However, fraud has further implications.
Reasonable assurance
Not a guarantee
Professional skepticism
The attitude we adopt in all aspects of the engagement

Auditor’s Responsibilities for Discovering Illegal Acts

Direct-effect vs. Indirect-effect illegal acts
* Auditors have the same responsibility for detecting
direct-effect illegal acts, as they do fraud.
* Auditors provide no assurance indirect-effect illegal
acts will be detected
Evidence accumulation when there is no reason
to believe indirect-effect illegal act exists
* Inquiries of management and the B.O.D., reading
the B.O.D. minutes.

Auditor’s Responsibilities for Discovering Illegal Acts

Actions when the auditor knows of an illegal act
* Consider effects on the financial statements and
disclosures. More evidence may be required.
* Who are you gonna tell?
Within the client’s company
Outside the client’s company

Financial Statements Cycles

Audits are performed by dividing the financial
statements into smaller segments or components.

Relationships Among Transaction Cycles

General
cash
Capital acquisition
and repayment cycle
Sales and
collection
cycle
Acquisition
and payment
Payroll and
personnel
Inventory and
warehousing

Management Assertions
1. Existence or occurrence
2. Completeness
3. Valuation or allocation
4. Rights and obligations
5. Presentation and disclosure

Transaction-Related Audit Objectives and Management Assertions

General Transaction-
Related Audit Objectives
Existence or occurrence
Completeness
Valuation or allocation
Existence
Accuracy
Classification
Timing
Posting and summarization
Rights and obligations
Presentation and disclosure
N/A
Transaction-Related Audit Objectives and Management Assertions
Existence
Recorded transactions
exist.
Completeness
Existing transactions are
recorded.
Accuracy
Recorded transactions
are stated at the
correct amounts.

Transaction-Related Audit Objectives and Management Assertions

Classification
Transactions are properly
classified.
Timing
Transactions are recorded
on the correct dates.
Posting and
summarization
Transactions are included
in the master files and
are correctly summarized.

Assertions and Balance-Related Audit Objectives

Management Assertions
General Balance
Related Audit Objectives
Existence or occurrence
Completeness
Valuation or allocation
Existence
Accuracy
Classification
Cut-off, Detail tie-in
Realizable value
Rights and obligations
Presentation and disclosure

General Balance-Related Audit Objectives

Existence
Amounts included exist.
Completeness
Existing amounts are
included.
Accuracy
Amounts included are
stated at the correct
amounts.

General Balance-Related Audit Objectives

Classification
Amounts are properly
classified.
Cutoff
Transactions are recorded
in the proper period.
Detail tie-in
Account balances agree
with master file amounts,
and with the general ledger.

General Balance-Related Audit Objectives

Realizable
value
Assets are included at
estimated realizable value.
Rights and
obligations
Assets must be owned.
Presentation
and
disclosure
Account balances and
disclosures are presented
in financial statements.

Balance and Transactions Affecting Balances Example

Beginning balance
Sales
$ 17,521
$144,328
$137,087
Cash receipts
$ 1,242
Sales returns
and allowances
Charge-off of
uncollectible
accounts
Ending balance
$ 20,197
$ 3,323
Accounts Receivable (in thousands)

How Audit Objectives Are Met

The auditor must obtain sufficient competent
audit evidence to support all management
assertions in the financial statements.
An audit process is a methodology
for organizing an audit.

Four Phases of a Financial Statement Audit

Phase I
Plan and design
an audit approach.
Phase III
Perform analytical
procedures and
tests of details
of balances.
Phase II
Perform tests of
controls and
substantive tests
of transactions.
Phase IV
Complete the
audit and issue
an audit report.

Financial Statement Audit Process

(Wala nako nakitang ppt ani guys) hehehe