1. Auditing & Assurance Services, 6e

2. Auditing and Assurance Services
Chapter 01
Auditing and Assurance Services
“Our system of capital formation relies upon the confidence of millions of savers to invest in companies.
The auditor’s opinion is critical to that trust."
-- James R. Doty, Chairman
Public Company Accounting Oversight Board (PCAOB)
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3. Learning Objectives
Define information risk and explain how the financial statement auditing process helps to reduce this risk, thereby reducing the cost of capital for a company.
Define and contrast financial statement auditing, attestation, and assurance services.
Describe and define the assertions that management makes about the recognition, measurement, presentation, and disclosure of the financial statements and explain why auditors use them as the focal point of the audit.
Define professional skepticism and explain its key characteristics.
Describe the organization of public accounting firms and identify the various services that they offer.
Describe the audits and auditors in governmental, internal, and operational auditing.
List and explain the requirements for becoming a certified public accountant (CPA) and other certifications available to an accounting professional.
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4. 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 the assertions and established criteria and communicating the results to interested users.
Financial Statements
(including footnotes)
GAAP
Auditor's Report/
Other Reports
Persons who rely on the financial reports
Creditors
Investors
Source: American Accounting Association Committee on Basic Auditing Concepts A Statement of Basic Auditing Concepts, American Accounting Association (Sarasota, FL).
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5. Attestation Engagements
An 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)
Financial forecasts and projections
Examination of Management’s Discussion & Analysis
Pro forma financial information
Some non-financial attestation engagements
Effectiveness of internal control systems
Compliance with environmental regulations
Sustainability reporting engagements
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6. Sarbanes-Oxley Act of 2002
Management’s Responsibility For Financial Reporting
One of its most important provisions clearly indicates that the management team is responsible for the financial reporting process and the financial statements.
In fact, Section 302 of the Act states that the key company officials must certify the financial statements. That is, 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).
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7. Management’s Financial Statement Assertions (PCAOB)
Existence or occurrence – Assets and liabilities included in the accounts exist and recorded transactions are valid and have actually occurred.
Rights and obligations- Entity has a legal claim on all assets and revenues reported and has a legal responsibility for all liabilities and expenses
Completeness - All balances and transactions have been recorded in the financial statements
Valuation or allocation – Assets, liabilities and recorded transactions have been valued in accordance with GAAP
Presentation and disclosure – All accounts are presented in the appropriate place and all information required has been disclosed in the statements and footnotes.
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8. Management’s Financial Statement Assertions (ASB)
Assertions about Events and Transactions
Occurrence – Events giving rise to transactions are valid and have taken place
Completeness and Cutoff - All transactions have been recorded and are recorded in the appropriate period
Accuracy – Transactions are recorded at the correct amount
Classification – Transactions have been posted to the proper account
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9. Management’s Financial Statement Assertions (ASB)
Assertions about Account Balances
Existence – Balances include only assets and liabilities that exist
Rights and obligations – Entity has legal claim on all assets and revenues reported and has a legal responsibility for all liabilities and expenses
Completeness – Balances include all items that should be included in accordance with GAAP
Accuracy and valuation –Balances are reported at the proper amount in accordance with GAAP
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10. Management’s Financial Statement Assertions (ASB)
Assertions about Presentation and Disclosures
Occurrence and rights and obligations – items presented have occurred and are either owned by or represent the responsibility of the entity
Completeness – the proper disclosures have all been made by the entity
Classification and understandability – accounts in the disclosures have been appropriately grouped and users can comprehend the disclosures
Accuracy and valuation – the amounts in the disclosures have been properly measured and are valued in accordance with GAAP
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11. Professional Skepticism
Refers to an auditor’s questioning mindset towards representations made by management and evidential matter gathered
Inquiry alone is never enough. The auditor must obtain sufficient corroborative evidence.
Unusual financial trends need investigation
Documents are always checked for authenticity or possible alteration
Ask questions, get answers, then verify the answers.
Must be skeptical because 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 make sure that this portrayal is fair and accurate.
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12. A Professional Judgment Process
Clarify the issues and objectives
Consider the possible alternatives
Gather and evaluate the relevant evidence
Reach an audit conclusion
Carefully document rationale for the professional judgment reached
Source: “Elevating Professional Judgment in Accounting and Auditing: The
KPMG Professional Judgment Framework” (Montvale, NJ: KMPG, 2011).
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13. Prohibited Professional Services
In summary, Sarbanes-Oxley prohibits professional service firms from performing any client services for audit clients in which the auditors may find themselves making management decisions or auditing their own firm’s work.
Specifically, Sarbanes-Oxley prohibits professional service firms from providing any of the following services to an audit client:
bookkeeping and related services
design or implementation of financial information systems
appraisal or valuation services
actuarial services
internal audit outsourcing
management or human resources services
investment or broker/dealer services
legal 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.
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14. Types of Audits and Auditors
Financial (External Auditors/CPAs)
Ensure that financial statements are reliable
Operational (Internal and Governmental Auditors/CIAs)
Improve operational economy
Improve operational efficiency
Compliance (Internal and Governmental Auditors)
Ensure compliance with company and/or governmental rules and regulations
Forensic (Fraud Auditors/CFEs)
Designed to investigate a crime and will often involve gathering evidence designed to convict a fraudster
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15. The CPA Exam Significantly Revised in 2011 Computerized
14 Hours - Four parts
Auditing and Attestation (AUD)
Financial Accounting and Reporting (FAR)
Regulation (REG)
Business Environment and Concepts (BEC)
Multiple Choice Questions and Task-Based Simulations
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