AUDITING%20CHAPTER%201

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AUDITINGCHAPTER 1

• Introduction to Audit Other Assurance Services
• By
• David N. Ricchiute

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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

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INTRODUCTION

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

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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

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PROFESSIONAL SERVICE FIRMS

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

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FINANCIAL STATEMENT AUDIT

• Performed by certified public accountants
• Auditor offers assurances about managements
  financial statement assertions

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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

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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 managements 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 conclude Evaluate evidence to support or refute hypothesis
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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

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AUDIT STANDARD SETTINGSecurities 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

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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
  )