Introduction to Auditing and Assurance Services

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Introduction to Auditing and Assurance Services

• "If you want to be successful, it's just this
  simple
• Know what you're doing. Love what you're doing.
  And believe in what you're doing."
  
• 
  Will Rogers

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• INFORMATION RISK
• Risk (probability) that the information
  (mainly financial) disseminated by a company will
  be materially false or misleading
• Users demand independent third party
  assessment of the information
• .

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Assurance and Attestation Services
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The Attest Function
Management
The CPA
Suitable Criteria
Subject Matter
Gathers Evidence
Issues Report
Subject Matter
The Attest Report
May be managements assertion about the subject
matter.
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Levels of Assurance

• Auditors can render three types of conclusions
  about financial statements
• Audit (Positive assurance)
• Review (Negative assurance)
• Compilation (Disclaimer of opinion -- No
  assurance)

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Agreed Upon Procedures Engagements (AT 201)

• Consists of performing procedures normally part
  of an audit
• Inventory Observation
• Confirmation of Receivables
• Scope is less than in an audit
• Accountant reports procedures and findings
• No opinion or negative assurance provided
• Restricted distribution of report to users who
  established scope of engagement

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Study of Auditing
LO 1
The study of auditing is different from other
accounting courses that you have taken in college
because
Technical, analytical and logical skills
Gather and assess the evidence against assertions
More conceptual in nature
Improving the reliability of information for
decision makers
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Auditing vs 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.
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Definition of Auditing

• A Systematic Process
• Objectively Obtaining and Evaluating Evidence
• Assertions about Economic Activities and Events
• Degree of Correspondence between Assertions and
  Established Criteria
• Communicating Results to Interested Users

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Audit Evidence

• Evidence focuses on whether financial statements
  are presented in accordance with GAAP
• Examples
• Balance sheet contains all liabilities
• Income statement
• Sales really occurred
• Sales have been recorded at appropriate amounts
• Recorded costs and expenses are applicable to
  period
• All expenses have been recognized
• Financial statement amounts
• Accurate, properly classified and summarized
• Notes are informative and complete

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Audit of a Tax Return Example
Determines correspondence
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Overview of Financial Statement Auditing
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Relationships Among Auditors, Client, and
External Users
Client
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Overview of the Financial Statement Audit Process
LO 5
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Problems and Warning Signs
LO 1
1990
2000
During the economic boom of the late 1990s and
the early 2000s, accounting firms aggressively
sought opportunities to market a variety of
high-margin nonaudit services to their audit
clients.
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An Explosion of Scandals
LO 1
WorldCom
Enron
Tyco
Adelphia
Xerox
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Accounting Professions Decade of Unprecedented
Turmoil Change

• 1. Failure of one of the largest public
  accounting firms (Andersen)
• 2. Four of the largest bankruptcies ever - each
  in a company where financial statement
  misrepresentation had taken place
• 3. Billions of investment and retirement dollars
  lost
• 4. Perception that auditors were not
• independent from their clients

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SEC Concerns About the Auditing Profession

• Auditors unwilling to confront clients over
  questionable accounting practices
• Consulting fees impairing auditor independence
• Accountants using technical interpretations of
  GAAP to push the limits of accounting

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Public Oversight Board (POB) Concerns

• Analytical procedures used to replace direct
  tests of account balances
• Audit firms failure in evaluating internal
  control and applying substantive procedures to
  address weaknesses in control
• Audit documentation, related to audit planning,
  not meeting professional standards
• Ignoring warning signs of fraud and other
  problems
• Not providing sufficient warning about companies
  with 'going concerns issues

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Government Regulation
LO 1
In July 2002, Congress passed the Sarbanes-Oxley
Public Company Accounting Reform and Investor
Protection Act.
The Sarbanes-Oxley Act effectively ended the
professions era of self-regulation, creating
and transferring authority to set and enforce
standards to the Public Company Accounting
Oversight Board (PCAOB).
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Sarbanes/Oxley Act

• Established the Public Companies Accounting
  Oversight Board (PCAOB)
• Requires CEO and CFO to certify financial
  statements
• Requires both companies and auditors to provide
  a comprehensive report on internal controls
• Gives Audit Committees expanded powers as the
  'audit client' and for pre-approving any
  non-audit services by its external auditors
• Requires Audit Committees to report their
  activities to the public

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Sarbanes/Oxley Act (Cont)

• Audit Committees --- at least one person who is a
  financial expert.
• Audit engagement partners rotation --- every five
  years
• A "cooling off" period of an audit partner or
  manager before taking a high-level position with
  an audit client
• Increased disclosure of material "off-balance
  sheet" transactions or agreements
• Requires the GAO to make a study a of accounting
  issues of the effect of consolidation on
  competition within the accounting profession, and
  an analysis of mandatory audit firm rotation

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Prohibited Services to Audit Clients

• Bookkeeping and related services
• Design or implementation of financial information
  systems
• Appraisal or valuation services
• Actuarial services
• Internal audit outsourcing
• Management or human resources services
• Investment or broker/dealer services
• Legal and expert services (unrelated to the
  audit)
• Professional service firms may provide client tax
  services (with some restrictions) and other
  non-prohibited services to audit clients if the
  companys audit committee has approved them in
  advance.

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Powers Granted to the PCAOB

• Set Auditing Standards
• Set Financial Accounting Standards
• Set Internal Control and Risk Management
  Reporting Standards
• Perform Quality Reviews and Recommend Penalties
• Establish Quality Control Standards for the
  Audits of Public Companies
• Require Registration of Public Accounting Firms
  doing audits of public companies for license to
  perform such audits

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Types of Audits

• Operational

• Compliance

• Financial Statement

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Types of Auditors

• Financial (External Auditors/CPAs)
• Ensure that financial statements are accurate.
• Operational (Internal and Governmental
  Auditors/CIAs)
• Improve operational economy
• Improve operational efficiency
• Compliance (Internal and Governmental Auditors)
• Ensure compliance with company and/or
  governmental rules and regulations
• Forensic (Fraud Auditors/CFEs)
• Most audits are a combination of financial,
  operational, and compliance audits.

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Professional Skepticism

• Professional skepticism - auditors questioning,
  evaluative, attitude toward evidence
• Managements assertions without sufficient
  corroboration.
• Financial trends need investigation
• Documents are checked for authenticity or
  alteration
• Ask questions, get answers, then verify the
  answers.
• A potential conflict of interest always exists
  between the auditor and the client.
• Management wants to portray the company and its
  operations in the best possible light.
• Auditors want to portray the company and its
  operations fairly.

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CPAs Encouraged to ConductThemselves at a High
Level
Conduct of CPA Firm Personnel
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Professional/Regulatory Organizations

• SEC --- oversees the PCAOB and all companies
  publicly traded on the U.S. capital markets
• AICPA --- primary governing organization of the
  public accounting profession

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Professional/Regulatory Organizations

• State Boards of Accountancy --- responsible for
  certifying and licensing CPAs in their state.
• Institute of Internal Auditors --- issues
  internal auditing standards and administers the
  Certified Internal Auditor program
• U. S. General Accounting Office --- nonpartisan
  audit agency for Congress. The GAO develops
  auditing standards for governmental audits.

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Other Parties

• FASB
• Sets GAAP for entities other than federal, state
  and local governments
• GASB
• Standards of financial accounting for state and
  local government entities
• FASAB
• Accounting standards for the US government

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Securities and Exchange Commission
Purpose of the Securities and Exchange
Commission (SEC) is to assist in providing
investors with reliable information upon which
to make investment decisions.
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Securities and Exchange Commission
Forms S-1 to S-16
Form 10-K
Form 8-K
Form 10-Q
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AICPAs Traditional Role

• Establish Standards --- Now only private
  companies
• Research and Publication
• Continuing Professional Education
• Self-Regulation
• CPA Examination

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Establishes Standards--Examples

• AICPA Auditing Standards Board
• Issues official pronouncements on auditing
  matters for nonpublic companies (nonissuers)
• Statements on Auditing Standards (SASs)
• Statements on Standards for Attestation
  Engagements (SSAEs)
• Accounting and Review Services Committee
• Statements on Standards for Accounting and Review
  Services (SSARS)
• Standards for compilations or reviews not audits
  of financial statements

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Research and Publication

• Magazines
• Journal of Accountancy (Monthly)
• The Tax Advisor
• Audit Publications
• Industry Audit and Accounting Guides
• Audit Risk Alerts
• Auditing Practice Releases
• Other Publications
• Accounting Research Studies
• Statements of Position
• Accounting Trends Techniques

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Professional Regulation

• Development of CPE Programs
• AICPA
• State Societies
• Other Professional Organizations
• Code of Professional Conduct Ethical Rules for
  CPAs
• Membership requirements of the AICPA

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CPA Exam

• National exam prepared and graded by the AICPA
• Computerized
• Four Parts
• Auditing and Attestation4.5 hrs
• Financial Accounting and Reporting4 hrs
• Regulation3 hrs.
• Business Environment2.5 hrs
• Skill SetsResearch, Communication, Analysis,
  Judgment, Understanding

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Organization of the Profession

• Big Four Accounting Firms
• DT, EY, KPMG, PWC
• National
• Grant Thornton, BDO Seidman, Tilly Baker
• Local/Regional
• Clifton Gunderson, C.P.A.
• Wipfile, C.P.A.
• Sole Proprietor

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Public Accounting Professional Services

• Assurance Services
• Audit Engagements
• Assurance Engagements
• Attestation Engagements
• Compilations
• Reviews
• Tax Consulting Services
• Consulting Services
• Litigation Support

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Professional Service Firm Organization
Executive Committee Managing Partner
Practice Offices Partners-in-Charge
Consulting Services
Audit, Assurance and Business Advisory Services
Tax Consulting Services
Partner
Partner
Manager
Manager
Manager
Manager
Manager
Manager
Senior (In-charge) Accountants Staff Accountants
(or Associates)
Senior (In-charge) Accountants Staff Accountants
(or Associates)
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Firm Organizational Structure
Proprietorship
Professional Corporation
General Partnership
Limited Liability Company
General Corporation
Limited Liability Partnership
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Typical Structure of a National CPA Firm
Partners
Managers
Seniors
Staff
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Entry-level CPAs are expected to practically walk
on water. In addition to technical ability to do
the job, they need communication and people
skills, computer savvy, a strong sense of
ethics---and even a nose that can detect fraud.
Journal of
Accountancy

June, 2005 p77
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Hierarchy of a TypicalCPA Firm
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Hierarchy of a TypicalCPA Firm
Level
Experience
Responsibilities
Manager
5-10 years
Helps the plan, manages the audit, reviews
work, and works with the client
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Requirements to Become Certified!

• Education
• Examination
• Experience
• State Certificate and License for CPA
• Skills sets and your education

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End of Chapter 1