Auditing and Assurance Services Chapter 1 Auditing and Assurance Services ACCT-4080 Chapter 1

1. Introduction - What is Auditing? Misunderstandings Overview of auditing Ultimate purpose of audit To issue an opinion on the fairness of financial statements (and in some cases, on the client’s internal control structure) ACCT-4080 Chapter 1

1. Introduction – Purpose of Audit Ultimate purpose of audit (formal def) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework and to report on the financial statements and communicate the findings as required by GAAS. ACCT-4080 Chapter 1

1. Introduction – Who is Client? What is independence in auditing? Who is your client in auditing? ACCT-4080 Chapter 1

1. Introduction – Who is Client? Who is the client? Stanford University professor Maureen McNichols questioned how independent an auditing firm can be when its job depends on the client. “When a firm hires its auditor, it is hard for the auditor to be truly independent … Audit firms speak of the companies they audit as their clients. When you look at the Web sites of public accounting firms, you see language that describes how their purpose is to provide value to their clients and to build relationships, to help clients solve complex business problems and enhance their ability to build value. I believe public accounting firms were created to serve a different client, the investing public” ACCT-4080 Chapter 1

1. Introduction – Who is Client? Statements on websites of Big 4 firms: In the United States, Deloitte LLP and its subsidiaries have 57,000 professionals with a single focus: serving our clients and helping them solve their toughest problems. We work in four key business areas — audit, financial advisory, tax and consulting — but our real strength comes from combining the talents of those groups to address clients’ needs. Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.   KPMG delivers a globally consistent set of multidisciplinary services based on deep industry knowledge. Our industry focus helps KPMG professionals develop a rich understanding of clients' businesses and the insight, skills, and resources required to address industry-specific issues and opportunities. Imagine the power of 180,000 people with a common purpose — building relationships that create value for you and your business. This is PwC. Every day, our people work with you to build the value you are looking for. ACCT-4080 Chapter 1

1. Introduction – Who is Client? US Chief Justice Warren Burger in 1984 Supreme Court decision in US v. Arthur Young: By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public. This “public watchdog” function demands … complete fidelity to the public trust. ACCT-4080 Chapter 1

1. Introduction – Salaries (Robert Half) Large Firms Accounting 408 Chapter 1

1. Introduction – Salaries (Robert Half) Midsize Firms Accounting 408 Chapter 1

1. Introduction – Salaries (Robert Half) Small Firms Accounting 408 Chapter 1

2. Why Study Auditing? Required To obtain employment On CPA, CMA, CFE, CIA, etc., exams Other reasons ACCT-4080 Chapter 1

3. Definitions of Auditing AAA definition AICPA definition Information risk ACCT-4080 Chapter 1

3. Definition of Auditing AAA definition: 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 users. ACCT-4080 Chapter 1

3. Definitions of Auditing AICPA definition: The objective of the ordinary examination of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and cash flows in conformity with GAAP. ACCT-4080 Chapter 1

3. Definitions of Auditing Information risk Information risk is the risk that the financial statements will not be reliable (i.e., they will be false or misleading) Consequence of unreliable financial statements: users make wrong decisions Wrong decisions lead to inefficient capital markets ∴ auditing is the process that improves the reliability of financial information ACCT-4080 Chapter 1

4. Does Auditing Add Value to Financial Data? Conditions creating a demand for auditing complexity remoteness time-sensitivity consequences *conflict of interest ACCT-4080 Chapter 1

4. Does Auditing Add Value to Financial Data? Other evidence market forces agency theory information theory insurance hypothesis by products ACCT-4080 Chapter 1

5. Significant Events in History of Auditing Ancient to 1850 1850 to 1900 1900 to 1940 1940 to 1975 1975 to 1985 1985 to 1995 1995 to 2002 2002 ACCT-4080 Chapter 1

6. Types of Audits Compliance audits Operational audits Financial statement audits Governmental audits Information systems audits Fraud audits Quality audits Environmental audits ACCT-4080 Chapter 1

7. Types of Auditors External auditors Internal auditors Governmental auditors ACCT-4080 Chapter 1

8. Professional Services Assurance Services Any Information Attestation Services Primarily Financial Information Audit Services Financial Statements ACCT-4080 Chapter 1

8. Professional Services Attestation affirm to be genuine when a CPA expresses a conclusion about the reliability of subject matter or an assertion that is the responsibility of another party includes financial and nonfinancial services ACCT-4080 Chapter 2

8. Professional Services Attestation Services examinations, reviews, or agreed upon procedures Examples agreed upon procedures financial forecasts and projections pro forma financial information compliance with contractual requirements examination of MD&A reporting on controls at a service organization ACCT-4080 Chapter 1

8. Professional Services Assurance Services Examples Risk assessment Business performance measurement Information systems reliability Electronic commerce Third party reimbursement maximization XBRL reporting Customer satisfaction surveys ACCT-4080 Chapter 1

9. Professional Skepticism Standards require you to exercise professional skepticism Potential conflict of interest always exists between auditor management of the entity being audited Neither assume management is dishonest nor assume unquestioned honesty hold no preconceived conclusions on any side of issue Have an attitude that includes a questioning mind and a critical assessment of evidence ACCT-4080 Chapter 1

10. Financial Statement Assertions AU-C 315 Management makes assertions regarding financial statements Auditors use assertions to guide audit planning and evidence gathering Little Match Company ACCT-4080 Chapter 1

10. Financial Statement Assertions (Con’t) Account Balances Transactions Disclosures Existence * Occurrence * Occurrence Rights and obligations * Rights and obligations Completeness * Completeness Valuation and allocation * Accuracy Valuation and allocation Cutoff Classification Classification* Understandability * * PCAOB Assertions ACCT-4080 Chapter 1

ACCT-4080 Chapter 1

11. SOX and PCAOB Sarbanes-Oxley Act of 2002 Passed by Congress in response to accounting related corporate scandals Applies to audits of issuers Some major provisions Creation of PCAOB Requirement for audit of internal controls CEO/CFO certification of f/s Prohibition of certain client services ACCT-4080 Chapter 1

11. SOX and PCAOB Prohibited services to audit clients bookkeeping and related services design or implementation of financial IT sys 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) Some tax services and other non-prohibited services okay if preapproved by Audit Comm ACCT-4080 Chapter 1

12. Public Accounting Firms Big 4 National Regional Local ACCT-4080 Chapter 1

13. Certification CPA CMA CFE CIA CISA ACCT-4080 Chapter 1

13. Certification Components 150 hour rule for CPA Exam CPA Exam education, examination, experience, CPE 150 hour rule for CPA Exam CPA Exam Auditing and attestation—4 hrs Financial accounting and reporting—4 hrs Regulation—4 hrs. Business environment concepts—4 hrs ACCT-4080 Chapter 1

14. Organizations of the Accounting Profession PCAOB AICPA State Boards of Public Accountancy State Societies of CPAs ACCT-4080 Chapter 1

15. CPA Mobility To practice in another state Driver’s license model Legislation adopted in 52 jurisdictions so far To obtain permit to practice in another state ACCT-4080 Chapter 1

Review Questions for Discussion Chapter 1 1.3 1.5 1.6 1.9 1.11 1.14 1.15 1.17 1.19 1.20 1.21 ACCT-4080 Chapter 1