2 Assurance Services ?? Need for Assurance ? Illustration using an Audit Engagement as an example
3 Assurance Services ?? Definition ( ISA 100 Assurance Engagements ) An engagement where a professional accountant evaluates or measures a subject matter that is the responsibility of another party against suitable criteria, and expresses an opinion which provides the indented user with a level of assurance about the subject matter.
4 Assurance Services ?? Levels of Assurance 1.Absolute Assurance 2.High-level of Assurance 3.Moderate Assurance 4.No Assurance Examples ? The graphical illustration
5 Audit Engagements Definition (SLAuS – Glossary of Terms) The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.
6 Audit Engagements Definition of ‘Audit’ A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to the interested users.
7 Audit Engagements Accounting & Auditing - Difference Accounting: Generation of financial information which is the responsibility of the management Auditing: Process that evaluates this information against a criteria
8 Audit Engagements Types of Audits (by objective) 1.Financial Statement Audits 2.Compliance Audits (of laws and regulations) 3.Operational Audits (Operational Efficiency, Effectiveness and Economy of operations) Type of Audits (by affiliation – relationship) 1.External Auditors 2.Internal Auditors 3.Government Auditors
9 Audit Engagements Theoretical Framework Postulates (basic ground rules) -Financial data/ information are verifiable -No long term conflict between mgt and auditors -Internal control structures reduce fraud & errors -SLAS leads to fair presentation -True in past is true for future -FS are free of unusual irregularities (e.g. Fraud) -Auditors are independent in expressing their opinion -Auditor is professionally obligated
10 Audit Engagements Why FS are Audited ? -Potential conflict (Mgrs and Users) -Information is critical in decision making -Expertise is important in preparing and verifying information -Users are not allowed directly to access information
11 Audit Engagements Limitations ? -Sampling technique -Most of audit evidence is not conclusive but persuasive -Limitations of acc and internal control systems -Human weaknesses as fatigue, carelessness -An exercise of postmortem -Auditing is judgmental
12 Nature of Auditing Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be done by a competent, independent person.
13 Information and Established Criteria To do an audit, there must be information in a verifiable form and some standards (criteria) by which the auditor can evaluate the information.
14 Accumulating Evidence and Evaluating Evidence Evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria.
15 Competent, Independent Person The auditor must be qualified to understand the criteria 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. 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.
16 Reporting The final stage in the auditing process is preparing the Audit Report, which is the communication of the auditor’s findings to users.
17 Distinguish Between Auditing and 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.
18 Explain the importance of auditing in reducing information risk.
19 Economic Demand for Auditing Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. Auditing can have a significant effect on information risk.
20 Causes of Information Risk Remoteness of information Biases and motives of the provider Voluminous data Complex exchange transactions
21 Reducing Information Risk User verifies information. User shares information risk with management. Audited financial statements are provided.
22 AUDITING, ATTEST, AND ASSURANCE SERVICES DEFINED AUDITING (broadly defined) 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 parties. AUDITING (narrowly defined) is a written report on the examination of financial statements for an entity.
23 AUDITING, ATTEST, AND ASSURANCE SERVICES DEFINED ATTEST services occur when a practitioner is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. ASSURANCE services are independent professional services that improve the quality of information, or its context, for decision makers.
24 THE RELATIONSHIP AMONG AUDITING, ATTEST, AND ASSURANCE SERVICES Attestation Auditing Assurance
25 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.
26 Attestation Services An attestation service is a type of assurance service in which the firm issues a report about the reliability of an assertion that is the responsibility of another party.
27 Attestation Services 1. Audit of historical financial statements 2. Effectiveness of internal control over financial reporting financial reporting 3. Review of historical financial statements 4. Other attestation services
28 Relationships Among Auditors, Client, and External Users Client Auditor Client or audit committee hires auditor ExternalUsers Auditor issues report relied upon by users
29 Assurance, Attestation, and Nonassurance Services Other Assurance Services CertainManagementConsulting Other Attestation Services (e.g., WebTrust, SysTrust) ATTESTATION SERVICES Audits Reviews Internal Control over Financial Reporting ASSURANCE SERVICES
30 Assurance, Attestation, and Nonassurance Services CertainManagementConsulting NONASSURANCE SERVICES Other Management Consulting TaxServices Accounting and Bookkeeping
32 Operational Audit Example Evaluate computerized payroll system for efficiency and effectiveness Information Number of records processed, costs of the department, and number of errors EstablishedCriteria Company standards for efficiency and effectiveness in payroll department AvailableEvidence Error reports, payroll records, and payroll processing costs
33 Compliance Audit Example Determine whether bank requirements for loan continuation have been met Information Company records EstablishedCriteria Loan agreement provisions AvailableEvidence Financial statements and calculations by the auditor
34 Financial Statement Audit Example Annual audit of Boeing’s financial statements Information Boeing's financial statements EstablishedCriteria Generally accepted accounting principles AvailableEvidence Documents, records, and outside sources of evidence