Professional Documents
Culture Documents
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CHAPTER 1 LEARNING OBJECTIVES
1-1 Describe auditing.
1-2 Distinguish between auditing and accounting.
1-3 Explain the importance of auditing in reducing information risk.
1-4 List the causes of information risk, and explain how this risk can
be reduced.
1-5 Describe assurance services and distinguish audit services from
other non-assurance services provided by CPAs.
1-6 Differentiate the three main types of audits.
1-7 Identify the primary types of auditors.
1-8 Describe the requirements for becoming a CPA.
1-2
OBJECTIVE 1-1
Describe auditing.
1-3
NATURE OF AUDITING
1-4
THIS DEFINITION INCLUDES SEVERAL
KEY WORDS AND PHRASES AS
FOLLOWS:
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INFORMATION AND ESTABLISHED CRITERIA
Criteria
FASB IASB
1-5
Information can and does take many forms which
are:
1. Quantifiable information, including companies’ financial
statements and individuals’ federal income tax returns.
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NOTICE
For more subjective information, it is more
difficult to establish criteria. Typically,
auditors and the entities being audited
agree on the criteria well before the audit
starts.
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The criteria for evaluating information also vary depending on
the type information being audited as follows:
In the audit of historical financial statements by CPA firms, the criteria may
be U.S. Generally Accepted Accounting Principles (GAAP) or International
Financial Reporting Standards (IFRS).
For the audit of tax returns by the Internal Revenue Service (IRS), the
criteria are found in the Internal Revenue Code.
For an audit of Internal Control over Financial Reporting, the criteria will
be a framework such as COSO internal control integrated framework
(Committee of Sponsoring Organizations of the Treadway Commission).
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ACCUMULATING AND EVALUATING EVIDENCE
Communications Client
with Outsiders Testimony
Transaction Observations
Data
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To satisfy the purpose of the audit, auditors must
obtain a sufficient quality and volume of evidence.
Auditors must determine the types and amount of
evidence necessary and evaluate whether the
information corresponds to the established
criteria.
This is a critical part of every audit.
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COMPETENT, INDEPENDENT PERSON
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The auditor must also have an independent mental
attitude. The competence of those performing the
audit is of little value if they are biased in the
accumulation and evaluation of evidence.
Auditors strive to maintain a high level of
independence to keep the confidence of users
relying on their reports. Auditors reporting on
company financial statements are often called
independent auditors.
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Even, Internal auditors—those employed by the
companies they audit— usually report directly to
top management and the board of directors,
keeping the auditors independent of the operating
units they audit.
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Competence Independence
Evaluation of
Evidence
Proper Conclusion
1-15
REPORTING
1-16
The key parts in the description of
auditing are illustrated in the following
figure using an IRS agent’s audit of an
individual’s tax return as an example.
17
Figure 1-1 Audit of a Tax
Return on this slide.
1-18
OBJECTIVE 1-2
Distinguish between
auditing and accounting.
1-19
DISTINCTION BETWEEN AUDITING AND
ACCOUNTING
• Accounting is the recording, classifying, and summarizing of economic
events to provide financial information for decision making.
• Auditors focus on determining whether recorded information properly
reflects the economic events that occurred during the accounting
period.
• Accountants must have a thorough understanding of the principles and
rules that provide the basis for preparing the accounting information.
• Auditors must understand accounting standards to determine the
correspondence between recorded information and established criteria
(standards).
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DISTINCTION BETWEEN AUDITING AND
ACCOUNTING
1-21
OBJECTIVE 1-3
Explain the importance of
auditing in reducing
information risk.
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ECONOMIC DEMAND FOR AUDITING
1-23
OBJECTIVE 1-4
List the causes of information
risk, and explain how this risk
can be reduced.
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CAUSES OF INFORMATION RISK
• Remoteness of information: Decision makers do not have
firsthand knowledge and must rely on information provided by
others.
• Biases and motives of the provider: Information is provided by
someone whose goals are inconsistent with those of the decision
maker and may be biased.
• Voluminous data: Higher volumes of transactions increase the
likelihood of undetected errors.
• Complex exchange transactions: Transactions are increasingly
complex and more difficult to record properly. Complex
accounting standards are difficult to interpret and apply.
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REDUCING INFORMATION RISK
• User verifies information: The user may go to the business to
verify the information. This is often costly and impractical.
• User shares information risk with management:
Management is responsible for providing reliable information,
and may be held responsible in a lawsuit if inaccurate
information is provided.
• Audited financial statements are provided: External
auditors are engaged to provide assurance that the financial
statements are reliable.
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1-18
OBJECTIVE 1-5
Describe assurance services and
distinguish audit services from other
assurance and nonassurance services
provided by CPAs.
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ASSURANCE SERVICES
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CPAs have provided many assurance services for years,
particularly assurances about historical financial
statement information.
Recently, CPAs have expanded the types of assurance services
they perform to include other information of interest to investors,
customers and other interested parties such as reports on
corporate social responsibility and sustainability reports.
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• The demand for assurance services continues to grow as
shareholders and other stakeholders seek assurance about
financial and nonfinancial information.
• In general, assurance services are valued because the assurance
provider is INDEPENDENT and perceived as being unbiased
with respect to the information examined.
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ATTESTATION SERVICES
An attestation service is a type of assurance service in which
the CPA issues a report about the reliability of a subject matter
or assertion that is made by another party.
Primary categories of attestation services include:
• Audits of historical financial statements
• Audits of internal control over financial reporting
• Reviews of historical financial statements
• Other attestation that may be applied to a broad range of
subjects
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In an audit of historical financial statements, management
asserts that the statements are fairly stated in accordance with
applicable U.S. Or international accounting standards.
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In an audit of internal control over financial reporting, management
asserts that internal controls have been developed and implemented
following well established criteria.
35
What are the differences between audit and review
of financial statements?
Audit F.S Review F.S
• The CPA provides a lower level of
• The CPA provides a assurance
higher level of assurance. • Less evidence is needed.
• More evidence is needed. • It can be provided by the CPA firm at a
much lower fee than an audit .
• It can be provided by the
•
CPA firm at a much Nonpublic companies use this
attestation option to provide limited
higher fee than a assurance on their financial
review. . statements without incurring the cost
of an audit.
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Other Attestation Services. CPAs provide numerous other
attestation services. Many of these services are natural
extensions of the audit of historical financial statements, as
users seek independent assurances about other types of
information.
It could include CPA assurance about company`s compliance
with the financial provisions of a bank loan.
Another type of attestation involves internal control at service
organizations. The service provider often engages an auditor to
provide an attestation report on the design and effectiveness of
controls at the service organization.
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OTHER ASSURANCE SERVICES
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NOTICE: Audits and some types of attestation services
are limited by regulation to licensed CPAs, but the
market for other forms of attestation and assurance is
open to non-CPA competitors.
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NON-ASSURANCE SERVICES
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PRIMARY TYPES OF AUDITS PERFORMED BY CPA FIRMS
1. Operational audit
2. Compliance audit
3. Financial statement audit
1-43
1. Operational audit—Evaluates the efficiency and
effectiveness of any part of an organization’s operating
procedures and methods.
At the completion of an operational audit, management
normally expects recommendations for improving
operations.
In operational auditing, the reviews are not limited to
accounting. They can include the evaluation of organizational
structure, computer operations, production methods,
marketing, and any other area in which the auditor is
qualified.
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2. Compliance audit—Determines whether the auditee is
following specific procedures, rules, or regulations set by some
higher authority. The following are examples of compliance
audits for a private business:
Determine whether accounting personnel are following the
procedures prescribed by the company controller.
Review wage rates for compliance with minimum wage laws.
Examine contractual agreements with bankers and other lenders to
be sure the company is complying with legal requirements.
Governmental units, such as school districts, are subject to
considerable compliance auditing because of extensive government
regulation.
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Results of compliance audits are typically reported to
management, rather than outside users, because management is
the primary group concerned with the extent of compliance with
prescribed procedures and regulations.
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3. Financial statement audit—Determines whether the
financial statements are stated in accordance with specific
criteria.
The criteria are normally U. S. GAAP or international
accounting standards.
As businesses increase in complexity, it is no longer sufficient
for auditors to focus only on accounting transactions. An
integrated approach to auditing considers both the risk of
misstatements and operating controls intended to prevent
misstatements. The auditor must also have a thorough
understanding of the entity and its environment.
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This understanding includes knowledge of the client’s
industry and its regulatory and operating environment,
including external relationships, such as with suppliers,
customers, and creditors. The auditor also considers the
client’s business strategies and processes and critical
success factors related to those strategies. This analysis
helps the auditor identify business risks associated
with the client’s strategies that may affect whether the
financial statements are fairly stated.
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NOTICE: It is more difficult to objectively evaluate whether the
efficiency and effectiveness of operations meets established
criteria than it is for compliance and financial statement audits.
Also, establishing criteria for evaluating the information in an
operational audit is extremely subjective. In this sense,
operational auditing is more like management
consulting than what is usually considered auditing.
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OBJECTIVE 1-7
Identify the primary types of
auditors.
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IDENTIFY THE PRIMARY TYPES OF AUDITORS
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1.CERTIFIED PUBLIC ACCOUNTING FIRMS
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2.GOVERNMENT ACCOUNTABILITY OFFICE AUDITORS
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3.INTERNAL REVENUE AGENTS
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4. INTERNAL AUDITORS
Internal auditors are employed by many types of organizations
to audit for management, much as the GAO does for Congress.
1-56
Users from outside the entity are unlikely to want to rely on
information verified solely by internal auditors because of their lack
of independence.
1-57
OBJECTIVE 1-8
Describe the requirements for
becoming a CPA.
1-58
REQUIREMENTS FOR BECOMING A CPA
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