Chapter 1 The Demand for Audit Services BUS 425 – Auditing Chapter 1 The Demand for Audit Services

WorldCom – Cynthia Cooper The company had recorded billions of dollars of regular fees paid to local telephone companies as capital assets. This accounting trick allowed the company to turn a $662 million loss into a $2.4 billion profit in 2001.

WorldCom – Cynthia Cooper Line cost expense 3,062 Cash 3,062 Adjusting JE PP&E 3,062

Rudra What is the definition of Auditing?

GAAP financial statements 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. Page 4 (2) GAAP

Karly What is audit evidence?

Courtney What is the objective of AU-C 330

AU-C 330 response to RoMM The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the assessed risk of material misstatement through designing and implementing appropriate responses to those risks.

Tessie What is the objective of AU-C 500

AU-C 500 Audit Evidence The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.

Table 6-3 Page 159 (167)

Go to web site http://calpoly.edu/~cmiller/ACTG%20425%20page.html Vouch or Trace project Go to web site http://calpoly.edu/~cmiller/ACTG%20425%20page.html look up sales journal - talk about overstatement / occurrence look at sales journal – talk about overstatement / accuracy look at sales orders – talk about understatement / completeness

Independent Auditor’s Report Report on the Financial Statements We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.2 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. [Auditor's signature, city and state, date of report]

Independent Auditor’s Report Report on the Financial Statements We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility

Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the (1) amounts and (2) disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes (3) evaluating the appropriateness of accounting policies used and the (4) reasonableness of significant accounting estimates made by management, as well as (5) evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.  

  Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Other Legal and Regulatory Requirements Auditor's signature Auditor's city and state Date of the auditor's report

Materiality page 60 (62) A misstatement in the financial statements can be considered material if knowledge of the misstatement will affect the decision of a reasonable user of the financial statements

--- What is “our” operational definition of independence?

Independence A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing professional auditing or attestation services.

Independence Independence enhances the auditor’s ability to act with integrity, to be objective, and to maintain an attitude of professional skepticism. Independence includes independence of fact (mind) Independence of appearance

--- What does FASB stand for ?

------ Describe the Sarbanes Oxley Act of 2002?

------- Which of the following are government agencies ? FASB SEC PCAOB

-------- What does GAAS stand for ? What does GAAP stand for ?

GAAP FASB FAS ASC 310-10-25-3 ASU GAAS public private PCAOB AICPA AS SAS

------- What is Business Risk? What is Information Risk?

Business Risk - the risk (probability) that an entity will fail to meet its objectives Information Risk - the probability that the information upon which the decision was made was inaccurate.

-------- What is the Risk-Free interest rate?

------- You are a bank lending officer In relation to the risk-free interest rate What interest rate would you charge to a company with a great deal of business risk?

--------- You are a bank lending officer In relation to the risk-free interest rate What interest rate would you charge to a company with a great deal of information risk?

------ What are some conditions that create demand for auditing?

conditions which cause information risk Page 6/7 (5) Remoteness owner separate from management Motives of the provider Voluminous data Complex transactions

-------- Talk about the difference between assurance attestation auditing

Assurance – improves the quality of information Attestation – report regarding the reliability of specific assertions made by management Audit – opinion regarding management’s assertions embodied in financial statements

Important Specified audit objectives Unmodified Audit Report AU-C 200, 315, 500, 700 & Independence) Unmodified Audit Report Management’s Assertions p. 159 (167)

-------- What are the three lines of service typically provided by a public accounting firm ?

Typical lines of business Audit (accounting, attestation, audit) Tax Consulting (advisory services)

-------- What are the various job levels or career levels in a public accounting firm ?

CPA partnership structure Partner P Senior Mngr SM SM Manager X Y Z Senior X X X Y Y Y Z Z Staff XXX XXX XXX YYY YYY YYY ZZZ ZZ

Education cpa exam Bachelors degree 225 quarter hours 36 business 36 + 30 accounting 20 accounting 10 ethics + 1 year experience http://www.dca.ca.gov/