2 User Demand for Reliable Information 1-2User Demand for Reliable InformationToday’s informationMore complexDemanded by remote usersDemanded in a more timely mannerHas far reaching consequencesInformation riskthe risk (probability) that the information (mainly financial) disseminated by a company will be materially false or misleading.users demand an independent third party assessment of the information
3 Exhibit 1.2 Overview of Financial Statement Auditing 1-3Exhibit 1.2 Overview of Financial Statement Auditing
4 Definition of Auditing 1-4Definition of AuditingAuditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to interested users.Financial Statements(including footnotes)GAAPAuditor's Report/Other ReportsPersons who rely on the financial reportsCreditorsInvestorsSource: American Accounting Association Committee on Basic Auditing Concepts A Statement of Basic Auditing Concepts, American Accounting Association (Sarasota, FL).
5 1-5The Relationships Among Auditing, Attestation, and Assurance EngagementsAssurance ServicesAny InformationAttestation ServicesPrimarily Financial InformationAuditingFinancial Statements
6 1-6Assurance ServicesAssurance services are independent professional services that improve the quality of information, or its context, for decision makers.ExamplesConsumer reportsUnderwriters laboratoriesCPA WebTrustPerformance ViewPrimePlus Services
7 Attestation Engagements 1-7Attestation EngagementsAn attestation engagement - a practitioner is assesses and reports on “subject matter or an assertion about the subject matter that is the responsibility of another party.”Some financial attestation engagements (other than audits)Supplementary financial statisticsPro forma financial informationFinancial forecasts and projectionsSome non-financial attestation engagementsCompliance with contractual requirementsEffectiveness of internal control systemsInventory quantities and locations
8 Sarbanes-Oxley Act of 2002 1-8 In response to several accounting related corporate scandals Congress passed the Sarbanes-Oxley ActThe Act’s major provisions include:Requirement of CEO/CFO certification of financial statementsRequirement of auditor examination of company internal controlsCreation of the Public Company Accounting Oversight Board (PCAOB) to serve as an auditing profession “watchdog.”Prohibition of certain client services by firms conducting a client’s audit.
9 Sarbanes-Oxley: Management’s Responsibility For Financial Reporting 1-9Sarbanes-Oxley: Management’s Responsibility For Financial ReportingOne of its most important provisions (Section 302) states that the key company officials must certify the financial statements.The company CEO and CFO must sign a statement indicating:They have read the financial statements.They are not aware of any false or misleading statements (or any key omitted disclosures).They believe that the financial statements present an accurate picture of the company’s financial condition.Source: U.S. Congress, Sarbanes-Oxley Act of 2002, Pub. L , 116 Stat/ 745 (2002).
10 PCAOB Management Assertions 1-10PCAOB Management AssertionsExistence or occurrence – Assets included in accounts exists and events that give rise to transactions have taken placeRights and obligations- Entity has a legal claim on all assets and revenues reported and has a legal responsibility for all liabilities and expensesCompleteness and cutoff - All transactions have been recordedValuation or allocation – Transactions are recorded at the correct amount in the proper periodPresentation and disclosure – All accounts are presented in the appropriate place and all information required has been disclosed in the statements and footnotes.
11 1-11Exhibit 1.5 Example Assertions and their Relationships to the Financial Statements
12 Professional Skepticism 1-12Professional SkepticismProfessional skepticism - auditor’s questioning, evaluative, attitude toward evidenceManagement’s assertions without sufficient corroboration.Financial trends need investigationDocuments are checked for authenticity or alterationAsk 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.
13 Professional Service Firm Organization 1-13Professional Service Firm OrganizationExecutive CommitteeManaging PartnerPractice OfficesPartners-in-ChargeTax ConsultingServicesAudit, Assurance andBusiness AdvisoryServicesConsultingServicesPartnerPartnerManagerManagerManagerManagerManagerManagerSenior (In-charge) AccountantsStaff Accountants (or Associates)Senior (In-charge) AccountantsStaff Accountants (or Associates)
14 The Public Accounting Profession 1-14The Public Accounting ProfessionAssurance servicesAudit engagementsAssurance engagementsAttestation engagementsCompilationsReviewsTax consulting servicesConsulting services
15 Prohibited Services to Audit Clients 1-15Sarbanes-Oxley and the PCAOB prohibit professional service firms from providing any of the following services to an audit client:bookkeeping and related servicesdesign or implementation of financial information systemsappraisal or valuation servicesactuarial servicesinternal audit outsourcingmanagement or human resources servicesinvestment or broker/dealer serviceslegal 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 company’s audit committee has approved them in advance.In summary, Sarbanes-Oxley prohibits professional service firms from performing any client services in which the auditors may find themselves making management decisions or auditing their own firm’s work.
16 Types of Audits and Auditors 1-16Types of Audits and AuditorsFinancial (External Auditors/CPAs)Ensure that financial statements are accurate.Operational (Internal and Governmental Auditors/CIAs)Improve operational economyImprove operational efficiencyCompliance (Internal and Governmental Auditors)Ensure compliance with company and/or governmental rules and regulationsForensic (Fraud Auditors/CFEs)Most audits are a combination of financial, operational, and compliance audits.
17 Organization of the Profession 1-17Organization of the Profession“Big Four” Accounting FirmsD&T, E&Y, KPMG, PwCNationalGrant Thornton, BDO SeidmanLocal/RegionalMelton & Melton (Houston)Plante Moran (Michigan/Illinois/Wisconsin)Goodman & Company (Virginia)Sole Proprietor
18 Become Certified! Education Examination Experience State License! 1-18 After that CPE