THE DEMAND FOR AUDIT AND

O T H E R A S S U R A N C E S E RV I C E S
C H A P T E R 1

L E C T U R E R : Y E N P H A M ADAPTED FROM 2014 PEARSON EDUCATION

LEARNING
OBJECTIVES
• Nature of auditing
• Distinction between auditing and accounting
• Information risk: Cause and how to reduce
• Assurance services
• Types of audit
• Types of auditors
 1.
BEFORE WE START

WHY WE NEED AUDIT?

 ? External
Company
Stakeholder
?
I N F O R M AT I O N R I S K

The possibility that the information upon which the business

risk decision was made was inaccurate.
C A U S E S O F I N F O R M AT I O N R I S K

• Remoteness of information
• Biases and motives of the provider
• Voluminous data
• Complex exchange transactions
SOLUTION

• User verifies information

• User shares information risk with management
• Audited financial statements are provided
ECONOMIC DEMAND FOR AUDITING

Information risk

Demand for audit

Auditing can have a significant effect on information risk.

AUDITOR – CLIENT- EXTERNAL USER

Auditor

? ?

? External
Company
?
Users

1-9
 ACCOUNTING VS AUDITING

Accounting
is the recording, classifying, and summarizing of economic events for
the purpose of providing financial information used in decision making.

Auditing
is determining whether recorded information properly reflects the
economic events that occurred during the accounting period.
 2.
W H AT I S A U D I T I N G ?
N AT U R E O F A U D I T

• 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.

I N F O R M AT I O N
& E S TA B L IS H E D C R IT E R IA

To do an audit, there must be information in a verifiable form and

some standards (criteria) by which the auditor can evaluate the
information.

Example of information? Example of criteria?

A C C U M U L AT I N G E V I D E N C E
& E VA L U A T I N G E V I D E N C E

Evidence is any information used by the auditor to determine whether

the information being audited is stated in accordance with the
established criteria.

Written and
Client Transaction electronic
Observations
Testimony data Communications
with outsiders
C O M P E T E N T, I N D E P E N D E N T P E R S O N

Judgment and
Competence Independence
Experience

Evaluation
of Evidence

Proper
Conclusion
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 3.
A S S U R A N C E S E RV I C E
&
TYPE OF AUDIT
A S S U R A N C E S E RV I C E

An independent professional service: improve the quality

of information for decision makers.

Can be performed by CPAs or by a variety of other

professionals
A T T E S T A T I O N S E RV I C E S

• A type of assurance service

• CPA reports on the reliability of an assertion
• That is the made by another party.
AT T E S TAT I O N
SERVICE
5 categories
1. Audit (Historical FS)
2. Internal Control over Financial Reporting
3. Review (Historical FS)
4. Information technology
5. Other
TYPE OF AUDITS

• Operational
• Compliance
• Financial statement
 O P E R AT I O N A L A U D I T

Example Evaluate computerized payroll system for efficiency and effectiveness

Number of records processed, costs of the department, and number of

Information errors

Established Company standards for efficiency and effectiveness in payroll department

Criteria
Available
Error reports, payroll records, and payroll processing costs
Evidence
 COMPLIANCE AUDIT

Example Determine whether bank requirements for loan continuation have been met

Information Company records

Established Loan agreement provisions

Criteria
Available
Financial statements and calculations by the auditor
Evidence
 A U D I T O F F I N A N C I A L S TAT E M E N T

Example Annual audit of Boeing’s financial statements

Information Boeing's financial statements

Established Generally accepted accounting principles (GAAP)

Criteria
Available
Documents, records, and outside sources of evidence
Evidence
TYPE OF AUDITORS

• Certified public accounting firms

• Governmental accountability office auditors
• Internal Revenue agents
• Internal auditors