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

2. 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.

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

5. Danny
What is the definition of Auditing?

6. 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

7. Cole
What is audit evidence?

8. Evidence ----
is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria.
page 4 (2)

9. Evidence ---- electronic data about transactions
documented data about transactions
written communications with outsiders
observations by the auditor
oral testimony (responses to questions)

10. Samantha
What is the objective of AU-C 330

11. 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.

12. Courtney
What is the objective of AU-C 500

13. 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.

14. Table 6-3
Page 159 (167)

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

16. 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]

17. 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

18. 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.

19. 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

20. 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

24. Varsha
What is Business Risk?
What is Information Risk?

25. 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.

26. Dorian
What is the Risk-Free interest rate?

27. Haley 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?

28. Michelle 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?

29. Mark Mc
What are some conditions that create demand for auditing?

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

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

32. Max
What are the three lines of service typically provided by a public accounting firm ?

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

34. Sofia
What are the various job levels or career levels in a public accounting firm ?

35. 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

36. Education cpa exam Bachelors degree 225 quarter hours 36 business
accounting
20 accounting
10 ethics
+ 1 year experience