1. CHAPTER 1 An Overview of Auditing

2. What does an auditor do?

3. evidence auditor accumulates and evaluates What does an auditor do?

4. auditor evidence What are some types of evidence auditors find helpful? What does an auditor do? accumulates and evaluates

5. to determine correspondence between auditor evidence management assertions established criteria What does an auditor do? accumulates and evaluates

6. then communicates results to established criteria auditor management assertions interested users evidence What does an auditor do? accumulates and evaluates to determine correspondence between

7. What is AUDITING ?

8. 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.

9. What is the distinction between auditing and accounting? accountant? auditor?

10. One of the auditor’s responsibilities is to determine whether accounting rules have been applied correctly. What is the distinction between auditing and accounting?

11. Could one be a proficient accountant without an extensive knowledge of auditing?

12. Could one be a proficient auditor without an extensive knowledge of accounting?

13. Types of audits and auditors 1. audit of financial statements - are state- ments fairly presented? Conducted by independent (external) auditors, e.g., a CPA firm. Ace Company 19x4 Financial Statements

14. 1. audit of financial statements - are state- ments fairly presented? Conducted by independent (external) auditors, e.g., a CPA firm. 2. operational audit - is the organization efficient and effective? Usually conducted by internal auditors. Types of audits and auditors

15. 2. operational audit - is the organization efficient and effective? Usually conducted by internal auditors. Types of audits and auditors 3. compliance audit - is the organization complying with a set of rules? May be conducted by government auditors, e.g., IRS, GAO.

16. What is internal auditing?

17. Many organiza- tions employ in- ternal auditors to help the organ- ization achieve greater efficiency and effectiveness. What is internal auditing?

18. How do internal and external auditing differ?

19. Internal auditors usually focus on im- proving the efficiency and effectiveness of their employer.

20. How do internal and external auditing differ? Internal auditors usually focus on im- proving the efficiency and effectiveness of their employer. External auditors (CPA firms) usually focus on the fairness of the financial statements of their clients.

21. There may be very little overlap between the responsibilities of internal and external auditors. internal auditors external auditors

22. What is the primary economic reason for an audit? An audit will cost our company hundreds of dollars!! What’s the point?

23. What is the primary economic reason for an audit? An audit will cost our company hundreds of dollars!! What’s the point? An audit can help reduce information risk - the risk that information upon which a business decision is made is inaccurate.

24. client management external auditors Important Characteristics of a Financial Audit 1. auditors are independent of client management

25. 2. auditors base their opinions on the results of selective testing Important Characteristics of a Financial Audit $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$

26. 1. auditors are independent of client management 2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause Important Characteristics of a Financial Audit

27. 1. auditors are independent of client management 2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause 4. auditors form opinions regarding the fairness of financial statements - auditors are never absolutely certain Important Characteristics of a Financial Audit opinion = guarantee

28. 1. auditors are independent of client management 2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause 4. auditors form opinions regarding the fairness of financial statements - auditors are never absolutely certain 5. auditors report on financial statements as a whole - not on individual items Important Characteristics of a Financial Audit Ace Company 19x4 Financial Statements

29. 1. auditors are independent of client management 2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause 4. auditors form opinions regarding the fairness of financial statements - auditors are never absolutely certain 5. auditors report on financial statements as a whole - not on individual items 6. auditors are concerned with financial presenta- tion - NOT the client’s financial stability or the wisdom of client management Important Characteristics of a Financial Audit

30. rule-making politics: Who makes accountingrules?

31. Who makes accounting rules? the Financial Accounting Standards Board FASB

32. What is the nature of the FASB? rule-making politics:

33. The FASB is an independent board representing the varied interests of many accounting and business groups. What is the nature of the FASB?

34. rule-making politics: Who makes auditingrules?

35. auditing rules? the Auditing Standards Board ASB

36. What is the nature of the ASB? rule-making politics:

37. The ASB is part of the American Institute of Certified Public Account- ants (AICPA), a national profession- al organization which CPAs may choose to join. What is the nature of the ASB?

38. What is the purpose of the audit report? Ace Corp. Audit Report

39. How do audit clients know that they are receiving competent audits?

40. They may not!!! Because of concerns regarding audit quality, the AICPA issued a Statement of Quality Control Standards How do audit clients know that they are receiving competent audits?

41. Statement of Quality Control Standards CPA firms are required to establish quality control policies and procedures that address five elements of quality control: - independence, integrity, and objectivity - personnel management - acceptance/continuation of clients and engagements - engagement performance - monitoring

42. What is a Peer Review?

43. - a review of a CPA firm’s compliance with its quality control system What is a Peer Review?

44. - a review of a CPA firm’s compliance with its quality control system - required every three years What is a Peer Review?

45. - a review of a CPA firm’s compliance with its quality control system - required every three years - firms choose the firm to review them or request a review team from the AICPA or state CPA society What is a Peer Review?

46. - a review of a CPA firm’s compliance with its quality control system - required every three years - firms choose the firm to review them or request a review team - the firm being reviewed pays the reviewer What is a Peer Review?

47. - a review of a CPA firm’s compliance with its quality control system - required every three years - firms choose the firm to review them or request a review team - the firm being reviewed pays the reviewer - upon review completion, the reviewer prepares a report stating conclusions and recommendations What is a Peer Review?

48. The AICPA Division for CPA Firms has two sections: - SEC Practice Section - for firms with audit clients whose stock is publicly traded ACECORP.

49. - SEC Practice Section - for firms with audit clients whose stock is publicly traded - Private Companies Practice Section - for firms with audit clients whose stock is not publicly traded The AICPA Division for CPA Firms has two sections: Joe’s Gas Station

50. Membership in either section is optional except firms with SEC clients must join the SEC Practice Section. The AICPA Division for CPA Firms has two sections: - SEC Practice Section - for firms with audit clients whose stock is publicly traded - Private Companies Practice Section - for firms with audit clients whose stock is not publicly traded

51. - members of either practice section must undergo peer reviews The AICPA Division for CPA Firms

52. - members of either practice section must undergo peer reviews - members of neither practice sections also must undergo peer reviews which are less extensive than those required of practice section members The AICPA Division for CPA Firms

53. Report title: Independent Auditor’s Report The Standard Unqualified Audit Report

54. Report title: Independent Auditor’s Report Address: To the Stockholders of Ace Corporation: report may also be addressed to company or board of directors, not management

55. Report title: Independent Auditor’s Report Address: To the Stockholders of Ace Company: Introductory paragraph: What statements were audited? What time period? What are client and auditor responsibilities?

56. Report title: Independent Auditor’s Report Address: To the Stockholders of Ace Company: Introductory paragraph: We have audited the accompanying balance sheets of Ace Company as of December 31, 19x5 and 19x4, and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

57. Scope paragraph: What is an audit?

58. Scope paragraph: We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

59. Opinion paragraph: What opinion did the auditor form?

60. Opinion paragraph: In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ace Company as of December 31, 19x5 and 19x4 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.

61. Opinion paragraph: In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ace Company as of December 31, 19x5 and 19x4 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Name of firm: Taylor & Tower, CPAs Audit report date: February 27, 19x6 field work completion date