AUDITING

CHAPTER 1
Introduction to Audit & Other
Assurance Services
By
David N. Ricchiute
TOPICS
Nature audit & attestation services
Demand for financial statement audits
Audit standard-setting process
Influences on accounting & auditing
Other audits & nonattest services
Other attestation services
Consulting & other assurance services

2 GBW 8th ed., Ch. 1

INTRODUCTION
Audits reduce
 Information risk
 Cost of capital
Professional challenges
 Rebuild confidence in auditor credibility
 Incorporate changes stemming from
Sarbanes-Oxley Act

3 GBW 8th ed., Ch. 1

ASSURANCE SERVICES
Three-party contracts
Common attestation
services
 Agreed-upon procedures
engagements
 Review engagements
Financial statement audit

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ATTESTATION SERVICES
Agreed-upon procedures engagements
 Uses procedures agreed by contracting
parties
Review engagements
 Limited assurance whether financial
statements conform to GAAP

5 GBW 8th ed., Ch. 1

PROFESSIONAL SERVICE
FIRMS
Attestation & audit offered by public
accounting firms
Professional staff are certified public
accountants
Organized as limited liability
partnerships (LLP)

6 GBW 8th ed., Ch. 1

FINANCIAL STATEMENT
AUDIT
Performed by certified public
accountants
Auditor offers assurances about
management’s financial statement
assertions

7 GBW 8th ed., Ch. 1

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

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DEMAND FOR AUDITS

Minimize information risk

Unbiased monitor reduces
information risk
 Reports on quality of financial
statement information

9 GBW 8th ed., Ch. 1

VALUE OF AUDIT
Reduces information risk to interested
parties
 Investors, creditors, employees, suppliers,
regulatory agencies, tax agencies, etc.
Reduces cost of capital to company

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FINANCIAL STATEMENTS

Representations of management
 Responsible for assertions embodied
in financial statements
Examined by auditor

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WHO IS AUDIT CLIENT?
Board of directors
 Auditor is engaged by board of directors
Board of directors
 Elected by shareholders
 Represents shareholder interests

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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.

Committee on Basic Auditing Concepts, “A Statement of Basic Auditing

concepts,” The Accounting Review, supplement to v. 47, 1972, p. 18

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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

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SCIENTIFIC METHOD OF
INQUIRY
Scientific Method Auditing
Observe problem Opinion on fair
presentation of financials

Formulate hypothesis Financial statements are

fairly presented
Gather evidence Assess risk; design
procedures
Evaluate evidence & Evaluate evidence to
conclude support or refute
15
hypothesis
GBW 8th ed., Ch. 1
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 services

16 GBW 8th ed., Ch. 1

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

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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

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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.

R.K. Mautz & H.A. Sharaf. The Philosophy of Auditing. Sarasota: AAA,
1961, p. 14

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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

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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

21 GBW 8th ed., Ch. 1

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

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CONSULTING & OTHER
ASSURANCE SERVICES
Business valuation
Financial planning
Litigation support
Information system design & processing
Forecasts & projections
Sarbanes-Oxley prohibits many services
to public companies
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AICPA VISION STATEMENT

CPAs are trusted professional 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

Source: AICPA Vision Project (http://www.aicpa.org)

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