Chapter 2

The Financial Statement Auditing Environment

Part 1: The different types of auditors and the various types of audit, attest, and
assurance services.

Part 2: The public accounting firms and the composition of audit teams.

Part 3: A model of business.

Part 4: The major organizations that affect the public accounting profession’s

environment.

Part 5: The auditing standards.

 Reference page :38

Part 1: The different types of auditors and the various types of audit,
attest, and assurance services.

I. Types of Auditors

II. Types of Other Audit, Attest, and Assurance Services provided by

CPAs.
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I. Types of Auditors

1. External Auditors

• Referred to as independent auditors.

• Not employees of the entity.

• Must be a CPA (certified public accountant)

• Audit financial statements for publicly traded and private companies.

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2. Internal Auditors

•Employees of individual companies, government agencies, and

other entities .

•Add value and improve an organization’s operations.

•Conduct financial, internal control, compliance, operational,

and forensic audits within their organizations.

•May assist the external auditors with the annual financial

statement audit.
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3. Government Auditors

• Employed by federal, state, and local agencies.

• examine and audit the books and records of

organizations and individuals to determine tax liability

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4. Forensic Auditors

• Employed by corporations, government agencies, public accounting

firms, and consulting and investigative services firms.

• Trained in detecting, investigating, and deterring fraud and white-collar

crime.

• Often involved in:

∙Reconstructing incomplete or damaged accounting records.

∙Probing money-laundering activities.

∙Investigating and documenting embezzlement allegations.

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II. Types of Other Audit, Attest, and Assurance Services and other
services
A. Other Audit Services
In addition to the financial statement audit, there are four major types of
audits provided by CPA firms:

1. Internal Control Audits

• External auditor to provide an opinion on the effectiveness of internal
control.
• Not required for private entities, thus its optional.
• Auditing standards for public companies require an integrated audit of
internal control and financial statements.
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2. Compliance Audits
• Determine the extent to which rules, policies, laws, covenants, or
government regulations are followed by the entity being audited.

• For example, a university may ask auditors to determine whether

applicable rules and policies are being followed with respect to
the granting of student loans.
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3. Operational Audits
•Evaluate whether resources are being used effectively and
efficiently.
•The purpose of an operational audit is to
1. assess performance
2. identify areas for improvement
3.develop recommendations.
• Also referred to as a performance audit or management audit.
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4. Forensic Audits
•To detect or deter fraudulent activities.
•Include:
• business or employee fraud
•various other types of criminal investigations where money
or other assets are involved
•matrimonial disputes involving division of assets.
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B. Attest Services
• Auditors can provide numerous types of attest services
regarding almost any subject matter.

For example, an auditor might be asked to attest to the nature and

quantity of inventory stored in an entity’s warehouse so that the
entity can obtain a bank loan with the inventory as collateral.
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C. Assurance Services
• Auditing and attestation are specialized forms of the more
general category of assurance services.

• CPAs can offer a variety of services that provide assurance but

that do not qualify as auditing or attestation. These non attest
services can be considered as a form of consulting services.
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D. Other Nonaudit Services

• In addition to audit, attest, and assurance services, many
public accounting firms perform three other broad
categories of Nonaudit services:

1.Tax Preparation and Planning Services

2.Management Advisory Services
3.Compilation and Review Services (bookkeeping and
financial statements preparation)
 Chapter 2
The Financial Statement Auditing Environment

Part 1: The different types of auditors and the various types of audit, attest, and
assurance services.

Part 2: The public accounting firms and the composition of audit teams.

Part 3: A model of business.

Part 4: The major organizations that affect the public accounting profession’s

environment.

Part 5: The auditing standards.

 Reference page :43

Part 2: The public accounting firms and the composition of audit teams.

I. The public accounting firm : big 4

II. The audit team: Table 2-1 page 43

1.Partners

2.Managers

3.Seniors/In-Charge

4.Associates/Stuff
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Selected Duties of Audit Team Members : 1-Partner

•Reach agreement with the auditee(company to be audited) on the

scope of the service to be provided.
•Ensure that the audit is properly planned and that the audit is
conducted in accordance with applicable auditing standards.
•Assemble an audit team that has the required skills and experience.
•Supervise the audit team and review the working papers.
•Conclude on the adequacy of audit evidence and sign the audit
report.
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Selected Duties of Audit Team Members : 2-Manager

•Ensure that the audit is properly planned, including scheduling of

team members.
•Supervise the preparation of and approve the audit program.
•Review the working papers, financial statements, and audit report.
•Deal with invoicing and ensure collection of payment for
services.
•Inform the partner about any auditing or accounting problems
encountered.
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Selected Duties of Audit Team Members : 3-Senior/In-Charge

•Assist in the development of the audit plan.

•Prepare budgets.
•Assign tasks to associates and direct the day-to-day performance
of the audit.
•Supervise and review the work of associates.
•Inform the manager about any auditing or accounting problems
encountered.
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Selected Duties of Audit Team Members : 4-Associate/Staff

•Perform the audit procedures assigned to them.

•Prepare adequate and appropriate documentation of
completed work.
•Inform the senior about any auditing or accounting
problems encountered.
 Chapter 2
The Financial Statement Auditing Environment

Part 1: The different types of auditors and the various types of audit, attest, and
assurance services.

Part 2: The public accounting firms and the composition of audit teams.

Part 3: A model of business.

Part 4: The major organizations that affect the public accounting profession’s

environment.

Part 5: The auditing standards.

 Reference page :38

Part 3: A model of business.

I. The general model

II. Corporate governance

III. A model of five components

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I. The general model

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II. Corporate Governance

Due to the way resources are invested and managed in the modern

business world, a system of corporate governance is necessary,

1)managers are overseen and supervised
2) consists of all the people, processes, and activities in place to help
ensure proper stewardship over an entity’s assets.
3)Strong corporate governance ensures an entity properly utilize their time,
talents, and resources
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II. Objectives and Strategies

The management with guidance and direction from the board of

directors set the objectives, along with strategies designed to achieve

those objectives. objectives>Strategies>Processes>Transactions

• The organization must also assess and manage risks that may threaten

the achievement of its objectives.

• It designs and implements a system of internal control to ensure that the

transactions are handled and recorded appropriately and that its

 Reference page :48-49

II. A model of five components

1. The Financing Process

• Obtaining capital through borrowing or soliciting investments from
owners.
• Investment in assets such as land, buildings, and equipment.
• Repaying lenders and provide a return on owners’ investments.

2. The Purchasing Process

• Acquiring goods and services to support their operations.
 Reference page :48-49
3. The Human Resource Management Process
• Hiring personnel to perform various functions in accordance with the
enterprise’s mission and strategy:
• Hiring, training, evaluating, compensating(Payroll)(salaries-related to
financial statements), terminating(Pension), and promoting employees.
4. The Inventory Management Process
• Accumulating and allocating costs to inventory and making adjustments
to record inventory at the lower of cost or market.
• Service providers (such as auditors, lawyers, or advertising agencies)
rarely have significant inventories to manage.

5. The Revenue Process

• Sales of goods or providing services to customers.
 Chapter 2
The Financial Statement Auditing Environment

Part 1: The different types of auditors and the various types of audit, attest, and
assurance services.

Part 2: The public accounting firms and the composition of audit teams.

Part 3: A model of business.

Part 4: The major organizations that affect the public accounting profession’s

environment.

Part 5: The auditing standards.

Reference page :50
 Chapter 2
The Financial Statement Auditing Environment

Part 1: The different types of auditors and the various types of audit, attest, and
assurance services.

Part 2: The public accounting firms and the composition of audit teams.

Part 3: A model of business.

Part 4: The major organizations that affect the public accounting profession’s

environment.

Part 5: The auditing standards.

 Reference page :38

Part 5: The auditing standards.

I. General Standards

II. Standards of fieldwork

III. Standards of reporting

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Part 5: The 10 Generally Accepted Auditing Standards (GAAS)

I. Three General Standards II. Three Standards of Field Work

• Auditors have adequate training • Audit adequately planned
• Auditors should be independent • Understanding of the internal control
• Due professional care is exercised • Sufficient appropriate audit evidence
is gathered

III.Four Standards of Reporting

• FS are presented in accordance to GAAP
• FS are consistent
• Information disclosures to FS
• Expression of an opinion
MULTIPLE-CHOICE QUESTIONS :
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