2. 1 - 1 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Assurance Services and the CPA Profession Chapter 1

3. 1 - 2 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 1 Describe assurance services and distinguish audit services from other assurance and nonassurance services provided by CPAs.

4. 1 - 3 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

5. 1 - 4 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

6. 1 - 5 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

7. 1 - 6 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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

8. 1 - 7 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Assurance Services on Information Technology WebTrust is an attestation service, and the WebTrust seal is a symbolic representation of the CPA’s report on management’s assertions about its disclosure of electronic commerce practices.

9. 1 - 8 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

10. 1 - 9 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Assurance Services on Other Types of Information CPA Performance View CPA ElderCare Services CPA Risk Advisory Services

11. 1 - 10 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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

12. 1 - 11 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Assurance, Attestation, and Nonassurance Services NONASSURANCE SERVICES Other Management Consulting Tax Services Certain Management Consulting Accounting and Bookkeeping

13. 1 - 12 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 2 Explain the causes of information risk and the importance of auditing in reducing this risk.

14. 1 - 13 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

15. 1 - 14 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Causes of Information Risk 1. Remoteness of information 2. Biases and motives of the provider 3. Voluminous data

16. 1 - 15 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Reducing Information Risk 1. User verifies information 2. User shares information risk with management 3. Audited financial statements are provided

17. 1 - 16 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 3 Describe auditing and distinguish between auditing and accounting. Describe auditing and distinguish between auditing and accounting.

18. 1 - 17 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

19. 1 - 18 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

20. 1 - 19 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

21. 1 - 20 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Reporting The final stage in the auditing process is preparing the Audit Report which is the communication of the auditor’s findings to users.

22. 1 - 21 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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

23. 1 - 22 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/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.

24. 1 - 23 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 4 Differentiate the three main types of audits. Differentiate the three main types of audits.

25. 1 - 24 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Types of Audits Financial Statement Audit Operational Audit Compliance Audit EfficiencyEffectiveness

26. 1 - 25 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Operational Audit Example Evaluate computerized payroll system for efficiency and effectiveness Information Number of records processed, cost of the department, and number of errors Established Criteria Company standards for efficiency and effectiveness in payroll department Available Evidence Error reports, payroll records, and payroll processing costs

27. 1 - 26 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Compliance Audit Example Determine whether bank requirements for loan continuation have been met InformationCompany records Established Criteria Loan agreement provisions Available Evidence Financial statements and calculations by the auditor

28. 1 - 27 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Financial Statement Audit Example Annual audit of Boeing’s financial statements Information Boeing's financial statements Established Criteria Generally accepted accounting principles Available Evidence Documents, records, and outside sources of evidence

29. 1 - 28 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 5 Identify the primary types of auditors. Identify the primary types of auditors.

30. 1 - 29 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Types of Auditors Internal Auditors Certified Public Accounting Firms Internal Revenue Agents General Accounting Office Auditors

31. 1 - 30 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 6 Discuss how e-commerce and the Internet affect CPA firm operations. Discuss how e-commerce and the Internet affect CPA firm operations.

32. 1 - 31 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley E-Commerce and CPA Firm Operations CPA firms are using the Internet to market their services. They also use the Internet to connect their global professional staff. Sender’s mail server Sender’s mail server Receiver’s mail server Receiver’s mail server

33. 1 - 32 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 7 Describe the requirements for becoming a CPA. Describe the requirements for becoming a CPA.

34. 1 - 33 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Three Requirements for Becoming a CPA Educational Passing the CPA Exam Experience

35. 1 - 34 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 8 Describe the AICPA and its role in setting standards. Describe the AICPA and its role in setting standards.

36. 1 - 35 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley The AICPA sets professional requirements for CPAs, conducts research, and publishes materials on many different subjects related to accounting, auditing, attestation and assurance services, management consulting services, and taxes. AICPA

37. 1 - 36 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Vision for the Future The AICPA has established the CPA Vision Project to provide a core purpose and a vision for the CPA profession in the year 2011 and beyond. The core purpose of the CPA Vision Project is “CPAs…making sense of a changing and complex world.”

38. 1 - 37 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Vision for the Future The future success of the CPA profession relies a great deal on public perceptions of CPAs’ abilities and roles. CPAs must become market driven and not dependent on regulations to keep them in business. The market demands less audit and accounting and more value-adding consulting services.

39. 1 - 38 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Vision for the Future Specialization is critical for the future of the CPA profession. The market demands that CPAs be conversant in global business practices and strategies.

40. 1 - 39 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley The AICPA is empowered to set standards (guidelines) and rules that all members and other practicing CPAs must follow. The requirements are set by committees made up of AICPA members. Establishing Standards and Rules

41. 1 - 40 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Establishing Standards and Rules 1.Auditing Standards 2.Compilation and Review Standards 3.Other Attestation Standards 4.Code of Professional Conduct

42. 1 - 41 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 9 Use generally accepted auditing standards as a basis for further study. Use generally accepted auditing standards as a basis for further study.

43. 1 - 42 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 1. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor. 2. In all matters relating to the assignment, an independence in mental attitude is to bemaintained by the auditor or auditors. General Standards 3. Due professional care is to be exercised in the planning and performance of the audit and the preparation of the report.

44. 1 - 43 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 1. The work is to be adequately planned and assistants, if any, are to be properly supervised. 2. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed. Standards of Field Work

45. 1 - 44 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Standards of Field Work 3. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.

46. 1 - 45 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 1. The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles. 2. The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. Standards of Reporting

47. 1 - 46 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley 3. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. 4. The report shall contain an expression of opinion regarding the financial statements, taken as a whole. Standards of Reporting

48. 1 - 47 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Summary of General Standards Generally Accepted Auditing Standards General 1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care Field Work 1. Proper planning and supervision 2. Internal control understanding 3. Sufficient competent evidence Reporting 1. Statements prepared in accordance with GAAP 2. Circumstances when GAAP not followed 3. Adequacy of disclosures 4. Expression of opinion on financial statements

49. 1 - 48 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 10 Identify quality control standards and practices within the accounting profession. Identify quality control standards and practices within the accounting profession.

50. 1 - 49 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Elements of Quality Control Independence, integrity, and objectivity Personnel management Acceptance and continuation of clients and engagements Engagement performance Monitoring

51. 1 - 50 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Relationships Quality control standards Generally accepted auditing standards Division of CPA firms Peer review

52. 1 - 51 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley Learning Objective 11 Summarize the role of the Securities and Exchange Commission in accounting and auditing. Summarize the role of the Securities and Exchange Commission in accounting and auditing.

53. 1 - 52 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley The overall purpose of the Securities and Exchange Commission (SEC) is to assist in providing investors with reliable information upon which to make investment decisions. Securities and Exchange Commission

54. 1 - 53 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley CPAs Encouraged to Conduct Themselves at a High Level CPA examination GAAS and interpretations Conduct of CPA firm personnel Continuing education requirements

55. 1 - 54 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley CPAs Encouraged to Conduct Themselves at a High Level Conduct of CPA firm personnel SEC Peer review Quality control

56. 1 - 55 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley CPAs Encouraged to Conduct Themselves at a High Level Conduct of CPA firm personnel Legal liability Division of CPA firms Code of Professional Conduct

57. 1 - 56 ©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley End of Chapter 1