Auditing and Assurance Services Chapter 1 Auditing and Assurance Services "If you want to be successful, it's just this simple: Know what you're doing. Love what you're doing. And believe in what you're doing." -- Will Rogers McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

User Demand for Reliable Information 1-2 User Demand for Reliable Information Today’s information More complex Demanded by remote users Demanded in a more timely manner Has far reaching consequences Information risk the risk (probability) that the information (mainly financial) disseminated by a company will be materially false or misleading. users demand an independent third party assessment of the information

Exhibit 1.2 Overview of Financial Statement Auditing 1-3 Exhibit 1.2 Overview of Financial Statement Auditing

Definition of Auditing 1-4 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. 1973. A Statement of Basic Auditing Concepts, American Accounting Association (Sarasota, FL).

1-5 The Relationships Among Auditing, Attestation, and Assurance Engagements Assurance Services Any Information Attestation Services Primarily Financial Information Auditing Financial Statements

1-6 Assurance Services Assurance services are independent professional services that improve the quality of information, or its context, for decision makers. Examples Consumer reports Underwriters laboratories CPA WebTrust Performance View PrimePlus Services

Attestation Engagements 1-7 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) Supplementary financial statistics Pro forma financial information Financial forecasts and projections Some non-financial attestation engagements Compliance with contractual requirements Effectiveness of internal control systems Inventory quantities and locations

Sarbanes-Oxley Act of 2002 1-8 In response to several accounting related corporate scandals Congress passed the Sarbanes-Oxley Act The Act’s major provisions include: Requirement of CEO/CFO certification of financial statements Requirement of auditor examination of company internal controls Creation of the Public Company Accounting Oversight Board (PCAOB) to serve as an auditing profession “watchdog.” Prohibition of certain client services by firms conducting a client’s audit.

Sarbanes-Oxley: Management’s Responsibility For Financial Reporting 1-9 Sarbanes-Oxley: Management’s Responsibility For Financial Reporting One of its most important provisions (Section 302) states that the key company officials must certify the financial statements. 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. 107-204, 116 Stat/ 745 (2002).

PCAOB Management Assertions 1-10 PCAOB Management Assertions Existence or occurrence – Assets included in accounts exists and events that give rise to transactions have taken place 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 and cutoff - All transactions have been recorded Valuation or allocation – Transactions are recorded at the correct amount in the proper period Presentation and disclosure – All accounts are presented in the appropriate place and all information required has been disclosed in the statements and footnotes.

1-11 Exhibit 1.5 Example Assertions and their Relationships to the Financial Statements

Professional Skepticism 1-12 Professional Skepticism Professional skepticism - auditor’s questioning, evaluative, attitude toward evidence Management’s assertions without sufficient corroboration. Financial trends need investigation Documents are checked for authenticity or alteration Ask questions, get answers, then verify the answers. 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 portray the company and its operations fairly.

Professional Service Firm Organization 1-13 Professional Service Firm Organization Executive Committee Managing Partner Practice Offices Partners-in-Charge Tax Consulting Services Audit, Assurance and Business Advisory Services Consulting Services Partner Partner Manager Manager Manager Manager Manager Manager Senior (In-charge) Accountants Staff Accountants (or Associates) Senior (In-charge) Accountants Staff Accountants (or Associates)

The Public Accounting Profession 1-14 The Public Accounting Profession Assurance services Audit engagements Assurance engagements Attestation engagements Compilations Reviews Tax consulting services Consulting services

Prohibited Services to Audit Clients 1-15 Sarbanes-Oxley and the PCAOB prohibit 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. In summary, Sarbanes-Oxley prohibits professional service firms from performing any client services in which the auditors may find themselves making management decisions or auditing their own firm’s work.

Types of Audits and Auditors 1-16 Types of Audits and Auditors Financial (External Auditors/CPAs) Ensure that financial statements are accurate. 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) Most audits are a combination of financial, operational, and compliance audits.

Organization of the Profession 1-17 Organization of the Profession “Big Four” Accounting Firms D&T, E&Y, KPMG, PwC National Grant Thornton, BDO Seidman Local/Regional Melton & Melton (Houston) Plante Moran (Michigan/Illinois/Wisconsin) Goodman & Company (Virginia) Sole Proprietor

Become Certified! Education Examination Experience State License! 1-18 After that CPE