©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley The Demand for Audit and Assurance Services Chapter 1

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 1 Describe assurance services and distinguish audit services from other assurance and nonassurance services provided by CPAs.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Attestation Services An attestation service is a type of assurance service in which the CPA firm issues a report about the reliability of an assertion that is the responsibility of another party.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Other Assurance Services Most other assurance services do not meet the formal definition of attestation services. The CPA must be independent. The CPA is not required to provide a written report. The CPA must provide assurance.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Other Assurance Services The Elliott Committee was charged with researching and developing new assurance services opportunities for CPAs to provide to business and individual clients who need relevant and reliable information for critical decision making.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Assurance Services on Information Technology There is an increased demand for assurance about computer controls surrounding information transacted electronically and the security of the information related to the transactions. – assurance over Web site controls – assurance about information system reliability

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Assurance Services on Information Technology WebTrust is an attestation service, and the WebTrust seal is a symbolic representation of the CPAs report on managements assertions about its disclosure of electronic commerce practices.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Assurance Services on Information Technology SysTrust is an attest-type engagement to evaluate and test system reliability in areas such as security and data integrity.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Other Assurance Services Examples Controls over and risks related to investments, including policies related to derivatives… assessing the processes in a companys investment practices to identify risks and to determine the effectiveness of those processes.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Other Assurance Services Examples Mystery shopping… performing anonymous shopping to assess sales personnel dealings with customers and procedures they follow.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Other Assurance Services Examples Assess risks of accumulation, distribution, and storage of digital information… assessing security risks and related controls over data and other information stored electronically, including the adequacy of backup and off-site storage.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Other Assurance Services Examples Fraud and illegal acts risk assessment… developing fraud risk profiles and assessing the adequacy of company systems and policies in preventing and detecting fraud and illegal acts.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Assurance, Attestation, and Nonassurance Services ASSURANCE SERVICES Other Attestation Services (e.g., WebTrust, SysTrust) Other Assurance Services (e.g., CPA Performance View) Certain Management Consulting ATTESTATION SERVICES Audits Reviews

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Assurance, Attestation, and Nonassurance Services NONASSURANCE SERVICES Other Management Consulting Tax Services Certain Management Consulting Accounting and Bookkeeping

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 2 Explain the importance of auditing in reducing information risk.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 3 List the causes of information risk, and explain how this risk may be reduced. List the causes of information risk, and explain how this risk may be reduced.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Causes of Information Risk 1. Remoteness of information 2. Biases and motives of the provider 3. Voluminous data

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Reducing Information Risk 1. User verifies information 2. User shares information risk with management 3. Audited financial statements are provided

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Capital Costs to Shrink Elliotts Example Assuming a cost of capital of 13%, Elliott estimates this rate is composed of the following: 5.5% risk-free interest rate 3.5% economic risk premium (business risk) 4.0% information cost (information risk)

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Capital Costs to Shrink Elliotts Example Elliott believes the following factors will drastically reduce information risk: Advanced technology New accounting and auditing standards Auditors finding more efficient ways to audit

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 4 Describe auditing.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Accumulating 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Reporting The final stage in the auditing process is preparing the Audit Report, which is the communication of the auditors findings to users.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Audit of a Tax Return Example Internal revenue agent Examines cancelled checks and other supporting records Federal tax returns filed by taxpayer Internal Revenue Code and all interpretations Report on tax deficiencies Competent, independent person Information Established criteria Determines correspondence Accumulates and evaluates evidence Report on results

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 5 Distinguish between auditing and accounting. Distinguish between auditing and accounting.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Distinction 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 6 Differentiate the three main types of audits. Differentiate the three main types of audits.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Types of Audits Financial Statement Audit Operational Audit EfficiencyEffectiveness Compliance Audit

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Financial Statement Audit Example Information Established Criteria Available Evidence Annual audit of Boeings financial statements Boeing's financial statements Generally accepted accounting principles Documents, records, and outside sources of evidence

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Operational Audit Example Information Established Criteria Available Evidence Evaluate computerized payroll system for efficiency and effectiveness Number of records processed, cost of the department, and number of errors Company standards for efficiency and effectiveness in payroll department Error reports, payroll records, and payroll processing costs

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Compliance Audit Example Information Established Criteria Available Evidence Determine whether bank requirements for loan continuation have been met Company records Loan agreement provisions Financial statements and calculations by the auditor

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 7 Explain the strategic systems approach to auditing. Explain the strategic systems approach to auditing.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Strategic Systems Audit The auditor must have a thorough understanding of the entity and its environment. Clients industry Regulations Operations Relationships Business strategies

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 8 Identify the primary types of auditors. Identify the primary types of auditors.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Types of Auditors Internal Auditors Certified Public Accounting Firms Internal Revenue Agents General Accounting Office Auditors

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 9 Describe the requirements for becoming a CPA. Describe the requirements for becoming a CPA.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Three Requirements for Becoming a CPA Educational Requirement Uniform CPA Examination Requirement Experience Requirement

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley CPA Examination Sections Audit and Attestation Accounting and Reporting Regulations Business Environments and Concepts

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Learning Objective 10 Describe the impact of e-commerce on CPAs. Describe the impact of e-commerce on CPAs.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Impact of E-commerce CPAs need to understand how key technologies are transforming all aspects of business. Information Technology Hardware SoftwareCommunications Internet

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley End of Chapter 1