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The Demand for Audit and Other Assurance Services

The Demand for Audit and Other Assurance Services. Chapter 1. Why are we here????????.

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The Demand for Audit and Other Assurance Services

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  1. The Demand for Auditand Other Assurance Services Chapter 1

  2. Why are we here???????? 1. SP = PV of all future dividends. Current earnings→ Future earnings (?) → Future dividends (?). Same applies for loan from bank (private company), ability to pay back loan = Current earnings→ Future earnings (?). • 2. SEC Act of 1933 – F/S, SOX Section 404 – I/C (2002) (Integrated audit) • 3. Common source for 2 Acts????? • 4. Assurance, audit – what comes to mind??

  3. Housekeeping • In the Cases and S-E for exams, you will be asked to “think” and I will grade you on your ability to provide original, interesting thoughts. • Critical thinking is the purposeful and reflective judgment about what to believe or what to do in response to observations, experience, verbal or written expressions, or arguments. • Analytical thinking is the ability to scrutinize and break down facts and thoughts into their strengths and weaknesses. Developing the capacity to think in a thoughtful, discerning way, to solve problems, analyze data, and recall and use information. • NOT MEMORIZING AND REGURGITATING A LIST OF ITEMS • Some questions may request direct responses – but where possible – THINK!

  4. Housekeeping Examples: (1) SOX→Independence→PartnerRotation→Unintended Consequences? (2) Brainstorming: where help and not help (WHY?), how would you implement best practices? What best practices are perhaps not cost / beneficial (why?)? What are the hurdles? (3) NASs – good or bad? Both? Where do you fall (why)? Empirical Question? If yes, how would you test??? (4) Tell me something I don’t know – outside, relevant research to further your understanding. A/Ps and current industry average. 2. Please obtain feedback, but consistent with the real world – no dry runs / reviews of initial drafts. 3. No cell phones, texting, etc. Laptops / calculators allowed for lectures.

  5. Learning Objective 1 Describe auditing

  6. Nature of Auditing Auditing is the accumulation and evaluation of evidence (per GAAS) about information (F/S) to determine and report on the degree of correspondence between the information (F/S) and established criteria (GAAP). Auditing should be done by a competent (?), independent (?) person.

  7. Accumulating andEvaluating Evidence Evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria (GAAP). Think of economic events and examples of evidence? Examples???

  8. Competent, Independent Person The auditor must be qualified to understand the criteria (GAAP, COSO) used and must be competent to know the types and amount of evidence to accumulate to reach the proper conclusion after the evidence has been examined (GAAS). How? The competence of the individual performing the audit is of little value if he or she is biased in the accumulation and evaluation of evidence. Audit Quality = Detect and Report Misstatement Enron, Andersen, and SPEs

  9. Reporting The final stage in the auditing process is preparing the Audit Report, which is the communication of the auditor’s findings to users. See page 8 of annual report in your book. See page 9 for mgt responsibilities for preparing F/S and reporting on I/Cs Examples of users? Research Results: Use of F/Ss and audit report = 5.13, where 1 = “very unimportant” and 7 = “very important.” SP info = 5.46, Advice from professionals = 5.06

  10. Learning Objective 2 Distinguish between auditing and accounting.

  11. Distinction BetweenAuditing and Accounting Accounting is the recording, classifying, and summarizing of economic events (debits and credits) for the purpose of providing financial information used in decision making. Language of business Auditingis determining whether recorded information properly reflects the economic events that occurred during the accounting period. Spell check on steroids!

  12. Learning Objectives 4 List the causes of information risk, and explain how this risk can be reduced.

  13. Causes of Information Risk 1. Remoteness of information (?) 2. Biases and motives of the provider (?) 3. Voluminous data (?) 4. Complex exchange transactions (?)

  14. Reducing Information Risk 1. User verifies information 2. User shares information risk with management 3. Audited financial statements are provided

  15. Learning Objective 5 Describe assurance services and distinguish audit services from other assurance and nonassurance services provided by CPAs.

  16. Assurance Services Assurance services are professional services that improve the quality of information for decision makers. Assurance services can be performed by CPAs or by a variety of other professionals. Not INSURANCE – why????

  17. 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.

  18. Attestation Services Audits of historical financial statements and internal controls over financial reporting Review of historical financial statements Attestation on information technology: WebTrust and SysTrust Other attestation services – debt covenant compliance, agreed upon procedures

  19. Assurance, Attestation, and Nonassurance Services NONASSURANCE SERVICES Accounting and Bookkeeping Management Consulting Tax Services

  20. Learning Objective 6 Differentiate the three main types of audits.

  21. Types of Audits Financial Statement Audit Operational Audit Efficiency Effectiveness Compliance Audit- Ex. IRS, state grant, debt covenant

  22. Financial Statement Audit Example Annual audit of Boeing’s financial statements Information Boeing's financial Statements and internal controls Established Criteria Generally accepted accounting Principles and COSO framework Available Evidence Documents, records, and outside sources of evidence

  23. Operational Audit Example Evaluate computerized payroll system for efficiency and effectiveness Information Number of records processed, costs of the department, and number of errors Established Criteria Company standards for efficiency and effectiveness in payroll department Available Evidence Error reports, payroll records, and payroll processing costs

  24. Compliance Audit Example Determine whether bank requirements for loan continuation have been met Information Company records Established Criteria Loan agreement provisions Available Evidence Financial statements and calculations by the auditor

  25. Learning Objective 7 Identify the primary types of auditors.

  26. Types of Auditors Certified Public Accounting Firms Govt. Accountability Office Auditors Internal Revenue Agents Internal Auditors

  27. Learning Objective 8 Describe the requirements for becoming a CPA.

  28. Three Requirements for Becoming a CPA Educational Requirement Uniform CPA Examination Requirement Experience Requirement

  29. CPA Examination Sections Auditing and Attestation Financial Accounting and Reporting Regulations Business Environment and Concepts

  30. End of Chapter 1

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