Chapter 1

The Demand for Audit and

Other Assurance Services

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Learning Objectives

• Describe auditing
1

• Distinguish accounting and auditing

2

• Understand economic demand for auditing

3

• Describe assurance services and distinguish audit services from

4 other assurance and non-assurance services provided by CPAs.

• Differentiate the three main types of audits

5

• Identify the primary types of auditors.

6

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Nature of Auditing

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.

LO 1 Describe auditing 1-3

Distinguish Auditing and Accounting

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.

LO 2 Distinguish accounting and auditing 1-4

Economic Demand for Auditing

Information risk reflects the possibility that the information upon

which the business risk decision was made was inaccurate.

LO 3 Understand economic demand for auditing 1-5

Causes of Information Risk

 Remoteness of information

 Biases and motives of the provider

 Voluminous data

 Complex exchange transactions

LO 3 Understand economic demand for auditing 1-6

Reducing Information Risk

 User verifies information

 User shares information risk with management

 Audited financial statements are provided

LO 3 Understand economic demand for auditing 1-7

Assurance Services

An assurance service is an independent

professional service that improves the
quality of information for decision makers.

Assurance services can be performed by

CPAs or by a variety of other professionals.

LO 4 Describe assurance services and distinguish audit services from

other assurance and non-assurance services provided by CPAs. 1-8
Attestation Services

An attestation service is a type of assurance

service in which the CPA firm issues a
report about the reliability of an assertion
that is the responsibility of another party.

LO 4 Describe assurance services and distinguish audit services from

other assurance and non-assurance services provided by CPAs. 1-9
Attestation Services

1. Audit of historical financial statements

2. Attestation of internal control over financial
reporting
3. Review of historical financial statements
4. Attestation services on information technology
5. Other attestation services
LO 4 Describe assurance services and distinguish audit services from
other assurance and non-assurance services provided by CPAs. 1 - 10
Other Assurance Services

Most of the other assurance services that CPAs

provide do not meet the formal definition
of attestation services.

The CPA is not required to issue a written report.

The assurance does not have to be about the

reliability of another party’s assertion about
compliance with specified criteria.

LO 4 Describe assurance services and distinguish audit services from

other assurance and non-assurance services provided by CPAs. 1 - 11
Other Assurance Services - Examples

• Assess the processes in a company’s investment practices to

identify risks and to determine the effectiveness of those
processes.
• Develop fraud risk profiles, and assess the adequacy of company
systems and policies in preventing and detecting fraud and illegal
acts
• Certify a company’s compliance with ISO 9000 quality control
standards, which help ensure company products are of high
quality

LO 4 Describe assurance services and distinguish audit services from

other assurance and non-assurance services provided by CPAs. 1 - 12
Non-Assurance Services

CPA firms perform numerous other services that generally fall

outside the scope of assurance services. Three specific examples
are:
1. Accounting and bookkeeping services
2. Tax services
3. Management consulting services

LO 4 Describe assurance services and distinguish audit services from

other assurance and non-assurance services provided by CPAs. 1 - 13
Assurance, Attestation, and
Nonassurance Services
ASSURANCE SERVICES

ATTESTATION SERVICES

Audits Reviews
Internal Control Certain
over Financial Reporting Management
Consulting
Other Attestation Services
(e.g., WebTrust, SysTrust)

Other Assurance Services

LO 4 Describe assurance services and distinguish audit services from

other assurance and non-assurance services provided by CPAs. 1 - 14
Assurance, Attestation, and
Nonassurance Services

NONASSURANCE SERVICES

Other Management
Consulting

Certain
Accounting and
Management
Consulting Bookkeeping

Tax
Services

LO 4 Describe assurance services and distinguish audit services from

other assurance and non-assurance services provided by CPAs. 1 - 15
Types of Audits

 Operational

 Compliance

 Financial Statement

LO 5 Differentiate the three main types of audits 1 - 16

Operational Audit
An operational audit evaluates the efficiency and effectiveness of any part of
an organization’s operating procedures and methods.

LO 5 Differentiate the three main types of audits 1 - 17

 Operational Audit

Evaluate computerized payroll system for efficiency

Example
and effectiveness

Number of records processed, costs of the department,

Information
and number of errors

Established Company standards for efficiency and effectiveness

Criteria in payroll department

Available Error reports, payroll records, and payroll processing

Evidence costs

LO 5 Differentiate the three main types of audits 1 - 18

Compliance Audit

A compliance audit is conducted to determine whether the auditee

is following specific procedures, rules, or regulations set by
some higher authority

LO 5 Differentiate the three main types of audits 1 - 19

 Compliance Audit

Determine whether bank requirements for loan

Example
continuation have been met

Information Company records

Established
Loan agreement provisions
Criteria

Available
Financial statements and calculations by the auditor
Evidence

LO 5 Differentiate the three main types of audits 1 - 20

Financial Statement Audit

A financial statement audit is conducted to determine whether the

financial statements (the information being verified) are stated in
accordance with specified criteria.

LO 5 Differentiate the three main types of audits 1 - 21

 Financial Statement Audit

Example Annual audit of Boeing’s financial statements

Information Boeing's financial statements

Established
Generally accepted accounting principles
Criteria

Available
Documents, records, and outside sources of evidence
Evidence

LO 5 Differentiate the three main types of audits 1 - 22

Types of Auditors

 Independent certified public accounting firms

 Governmental general accounting office auditors

 Internal auditors

LO 6 Identify the primary types of auditors. 1 - 23

Discussion Questions

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Discussion Questions (cont)

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Discussion Questions (cont)

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End of Chapter 1

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