1. Chapter 1 An Introduction to Auditing Auditing and Assurance Services: Understanding the Integrated Audit First Edition Karen L. Hooks Prepared by Richard J. Campbell Copyright 2011, Wiley and Sons 1

2. Chapter 1 An Introduction to Auditing Prepared by Richard J. Campbell 2

3. Learning Objectives 1. Recognize an integrated audit and a financial statement audit report. 2. Describe the overall purpose and value of an audit, and identify the differences among an integrated audit, and audit of internal control, an audit of internal control over financial reporting, and a financial statement audit. 3. Define and contrast the responsibilities and expectations of different parties affected by the audit. 4. Learn the roles and interaction of the governing and standard- setting bodies and other entities that affect auditing. 5. Understand the link between independent auditors and accountants who provide other professional services. 3

4. Important Basics of Auditing  Financial statement audit  Audit of ICFR  Integrated audit  What it means when an auditor issues an “unqualified” or “clean” audit report on ICFR and the financial statements 4

5. An Integrated Audit Exhibit 1-1 5

6. A Definition of Auditing 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 these assertions and established criteria and communicating the results to interested users. American Accounting Association, Committee on Basic Auditing Concepts, A Statement of Basic Auditing Concepts (Sarasota, FL: American Accounting Association, 1973) 6

7. Difference in Accountants and Auditors  To be an accountant, it is necessary to have accounting knowledge.  Understand business transactions  Know what information to capture  Know controls needed for activity and information  Be able to report it for various purposes  Be able to record it according to accounting standards  To be an auditor, it is also it is necessary to know audit processes and audit reporting 7

8. Roles of Auditors and Management By giving an opinion on financial statement fairness and ICFR effectiveness the auditor is indirectly reporting on management’s assertions. 8

9. The Auditing Process  Management produces financial statements and ICFR report  Auditor gathers and evaluates evidence  Many forms of evidence; anything the auditor uses  Auditor uses established standards to compare evidence to the financial statements and ICFR report  Looks for correspondence between what is presented and the underlying evidence  Uses processes described/required in auditing standards.  Auditor issues report 9

10. Beneficiaries of Audits Exhibit 1-3 10

11. Value of an Audit  To society: capital markets benefit  To owners and prospective owners: remote ownership, complex transactions, investment decisions  To corporate governance, the Board of Directors and audit committee: representing shareholders’ interests  To management  running the company with good information  cost of and access to capital  operating efficiency and effectiveness  credibility of performance indicators  properly accounting for complex transactions 11

12. Value of an Audit  Constituents: society, owners and prospective owners, corporate governance, management  All of these constituents need good information. Even nonpublic companies elect to have audits, although they are not required to do so by any law or regulation. 12

13. Standard Setters, Governing Authorities  Standard setters and governing authorities involved with U.S. audits  Congress  States  Securities and Exchange Commissions (SEC)  Public Companies Accounting Oversight Board (PCAOB)  American Institute of CPAs (AICPA)  FASB/GASB  International Accounting Standards Board (IASB)  International Auditing and Assurance Board (IAASB) 13

14. Sarbanes Oxley Act of 2002 SOX required:  The SEC to set up an auditing governance organization (PCAOB)  Management of public companies to provide an audited ICFR report  An ICFR audit of public companies  Dodd-Frank (2010) permanently exempts “non- accelerated” filers from an ICFR audit  Financial statement and ICFR audits to be one engagement 14

15. PCAOB Responsibility and Authority  Registration of firms  The SEC will not accept a company’s filings unless they have been audited by a registered firm  Lots of information required in registration process  Firm must agree to assist in any investigations  Inspections  Required by SOX  SOX required the SEC to have the PCAOB perform inspections  Sets auditing standards and other rules 15

16. PCAOB Auditing Standards  AS 1: References in Auditors’ Reports to the Standards of the Public Company Accounting Oversight Board  AS 2: An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements (superseded)  AS 3: Audit Documentation  AS 4: Reporting on Whether a Previously Reported Material Weakness Continues to Exist 16

17. PCAOB Auditing Standards continued  AS 5: An Audit of Internal Control Over Financial Reporting That is Integrated with an Audit of Financial Statements  AS 6: Evaluating Consistency of Financial Statements  AS 7: Engagement Quality Review 17

18. Newest, PCAOB Risk Assessment Standards  AS No. 8, Audit Risk  AS No. 9, Audit Planning  AS No. 10, Supervision of the Audit Engagement  AS No. 11, Consideration of Materiality in Planning and Performing an Audit  AS No. 12, Identifying and Assessing Risks of Material Misstatement  AS No. 13, The Auditor’s Responses to the Risks of Material Misstatements  AS No. 14, Evaluating Audit Results  AS No. 15, Audit Evidence 18

19. AICPA  Voluntary membership  Non-public company audit standards  Standards for many other types of engagements  Code of conduct, applies to members  Writes CPA and grades exam 19

20. State Governments License to practice  Requirements to sit for CPA exam  Requirements to be licensed  Continuing education requirements  Conduct requirements  Regulations on doing business 20

21. Other AICPA Standards  Code of Professional Conduct  Statements on Standards for Attestation Engagements (SSAE)  Statements on Standards for Accounting and Review Services (SSAR)  Statements on Quality Control Standards  Statements on Standards for Tax Services (SSTS)  Statements on Standards for Valuation Services (SSV)  Statements on Standards for Consulting Services (SSCS) 21

22. IAASB  International code of conduct is covered on the CPA Exam  AICPA audit standards (SAS) and IAASB audit standards (ISA) are being aligned through the AICPA’s “Clarification Project” 22

23. Other Audit Related Services  Internal Auditing  Operational Auditing  Forensic Accounting  General Accountability Office 23

24. Value of Audit Knowledge for Non-Auditors In other words, why is this course required at most universities for all accounting majors?  Understand purpose of auditor’s activities  Increase efficiency of interface with auditor  Enhanced communication  Implementation of ICFR 24

25. Appendix A - Working in a CPA Firm Types of Audit Services:  Integrated audits for larger public companies  Financial statement audits for non- accelerated filer public and non-public companies  Reviews of interim financial statements for public companies  Reviews and compilations for non-public companies 25

26. Other Types of CPA-Provided Services  Attest engagements  Assurance engagements  Tax engagements  Accounting and bookkeeping  Business advising/management consulting 26

27. CPA Services, “Assurance” and “Nonassurance” Exhibit A-1 – CPA Services 27

28. Common Firm Structures  Sole proprietorship  Professional corporation  General partnership  Limited liability company  Limited liability partnership 28

29. Firm Sizes  Big Four  International networks; national  Regional; large local  Small local 29

30. Common Auditor Position Titles  Partner/Owner  Manager  In Charge Accountant  Staff Accountant 30

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