AUDITING CHAPTER 1

1. AUDITINGCHAPTER 1 Introduction to Audit & Other Assurance Services By David N. Ricchiute

2. 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 GBW 8th ed., Ch. 1

3. INTRODUCTION • Audits reduce • Information risk • Cost of capital • Professional challenges • Rebuild confidence in auditor credibility • Incorporate changes stemming from Sarbanes-Oxley Act GBW 8th ed., Ch. 1

4. ASSURANCE SERVICES • Three-party contracts • Common attestation services • Agreed-upon procedures engagements • Review engagements • Financial statement audit GBW 8th ed., Ch. 1

5. ATTESTATION SERVICES • Agreed-upon procedures engagements • Uses procedures agreed by contracting parties • Review engagements • Limited assurance whether financial statements conform to GAAP GBW 8th ed., Ch. 1

6. PROFESSIONAL SERVICE FIRMS • Attestation & audit offered by public accounting firms • Professional staff are certified public accountants • Organized as limited liability partnerships (LLP) GBW 8th ed., Ch. 1

7. FINANCIAL STATEMENT AUDIT • Performed by certified public accountants • Auditor offers assurances about management’s financial statement assertions GBW 8th ed., Ch. 1

8. 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 GBW 8th ed., Ch. 1

9. DEMAND FOR AUDITS • Minimize information risk • Unbiased monitor reduces information risk • Reports on quality of financial statement information GBW 8th ed., Ch. 1

10. VALUE OF AUDIT • Reduces information risk to interested parties • Investors, creditors, employees, suppliers, regulatory agencies, tax agencies, etc. • Reduces cost of capital to company GBW 8th ed., Ch. 1

11. FINANCIAL STATEMENTS • Representations of management • Responsible for assertions embodied in financial statements • Examined by auditor GBW 8th ed., Ch. 1

12. WHO IS AUDIT CLIENT? • Board of directors • Auditor is engaged by board of directors • Board of directors • Elected by shareholders • Represents shareholder interests GBW 8th ed., Ch. 1

13. 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 GBW 8th ed., Ch. 1

14. 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 GBW 8th ed., Ch. 1

15. SCIENTIFIC METHOD OF INQUIRY Scientific Method Auditing GBW 8th ed., Ch. 1

16. 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 GBW 8th ed., Ch. 1

17. 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 GBW 8th ed., Ch. 1

18. 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 GBW 8th ed., Ch. 1

19. 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 GBW 8th ed., Ch. 1

20. 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 GBW 8th ed., Ch. 1

21. 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 GBW 8th ed., Ch. 1

22. 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 GBW 8th ed., Ch. 1

23. CONSULTING & OTHER ASSURANCE SERVICES • Business valuation • Financial planning • Litigation support • Information system design & processing • Forecasts & projections • Sarbanes-Oxley prohibits many services to public companies GBW 8th ed., Ch. 1

24. 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) GBW 8th ed., Ch. 1