AUDITING
CHAPTER 1
Introduction to Audit & Other
Assurance Services
By
David N. Ricchiute
TOPICS
Nature audit & attestation services
Demand for financial statement audits
Audit standard-setting process
Influences on accounting & auditing
Other audits & nonattest services
Other attestation services
Consulting & other assurance services
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INTRODUCTION
Audits reduce


Information risk
Cost of capital
Professional challenges


Rebuild confidence in auditor credibility
Incorporate changes stemming from
Sarbanes-Oxley Act
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ASSURANCE SERVICES
Three-party contracts
Common attestation
services


Agreed-upon procedures
engagements
Review engagements
Financial statement audit
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ATTESTATION SERVICES
Agreed-upon procedures engagements

Uses procedures agreed by contracting
parties
Review engagements

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Limited assurance whether financial
statements conform to GAAP
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PROFESSIONAL SERVICE
FIRMS
Attestation & audit offered by public
accounting firms
Professional staff are certified public
accountants
Organized as limited liability
partnerships (LLP)
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FINANCIAL STATEMENT
AUDIT
Performed by certified public
accountants
Auditor offers assurances about
management’s financial statement
assertions
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INFORMATION RISK MODEL
Definition: risk that information is
materially misstated
Interested parties rely on information
in decision making
Audit provides assurance about
quality of financial statement
information
Assurance offsets information risk
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DEMAND FOR AUDITS
Minimize information risk
Unbiased monitor reduces
information risk

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Reports on quality of financial
statement information
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VALUE OF AUDIT
Reduces information risk to interested
parties

Investors, creditors, employees, suppliers,
regulatory agencies, tax agencies, etc.
Reduces cost of capital to company
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FINANCIAL STATEMENTS
Representations of management

Responsible for assertions embodied
in financial statements
Examined by auditor
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WHO IS AUDIT CLIENT?
Board of directors

Auditor is engaged by board of directors
Board of directors


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Elected by shareholders
Represents shareholder interests
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DEFINING THE AUDIT
PROCESS
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 those assertions and established
criteria and communicating the results to
interested users.
Committee on Basic Auditing Concepts, “A Statement of Basic Auditing
concepts,” The Accounting Review, supplement to v. 47, 1972, p. 18
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UNDERSTANDING THE
AUDIT PROCESS
Investigation


Gathering, investigating evidence
Using scientific method of inquiry
Report

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Issue opinion whether management’s
financial statement assertions correspond
in all material respects to GAAP
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SCIENTIFIC METHOD OF
INQUIRY
Scientific Method
Observe problem
Auditing
Opinion on fair
presentation of
financials
Formulate hypothesis
Financial statements are
fairly presented
Gather evidence
Assess risk; design
procedures
Evaluate evidence &
Evaluate evidence to
conclude
support or refute
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hypothesis
AUDIT STANDARD SETTING:
AICPA
Trade association for CPAs

Audit Standards Board (ASB)
 Senior technical body that issues authoritative pronouncements
for non-public company audits and attestation services

Accounting & Review Services Committee:
 Senior technical body that issues pronouncements for non-
public company accounting & review services
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AUDIT STANDARD SETTING
Securities & Exchange Commission
Created 1934 to protect investors
Oversight authority for accounting and
auditing


Regulates registration & exchange of
securities
Issues Staff Accounting Bulletins (SAB)
 Unofficial interpretations to guide practitioners
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AUDIT STANDARD SETTING:
PCAOB
Created 2003 by Congress in SarbanesOxley Act

Private sector non-profit organization
Issues audit, attestation standards for

Oversees auditors of public companies to

public companies
 Protect investors
 May adopt AICPA auditing standards or
establish new standards
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AUDITING DESCRIBED
Auditing is analytic, not constructive; it is critical,
investigative, concerned with the basis for accounting
measurements and assertions. Auditing emphasizes
proof, the support for financial statements and data.
Thus auditing has its principal roots, not in
accounting which it reviews, but in logic on which it
leans heavily for ideas and methods.
R.K. Mautz & H.A. Sharaf. The Philosophy of Auditing. Sarasota: AAA,
1961, p. 14
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ACCOUNTING STANDARD
SETTERS
Financial Accounting Standards Board
(FASB) & Governmental Accounting
Standards Board (GASB)


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Independent standard-setting bodies
issuing authoritative standards (GAAP) for
non-governmental and governmental
entities
Auditor must express opinion on financial
statements in conformity with GAAP
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RELATIONSHIP OF
ACCOUNTING & AUDITING
Hypothesis: financial statements are
fairly presented in accordance with
GAAP



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FASB writes accounting standards that
become part of GAAP
GASB writes accounting standards for
governmental accounting
GAAP standards are criteria for fair
presentation
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OTHER AUDIT & ATTEST
SERVICES
Operational audits

Assess effectiveness & efficiency of operations
Compliance audits


Assess whether entity has complied with
applicable laws & regulations
Mostly for Not-for-Profit organizations
Agreed-upon procedures

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Attest service with contractual procedures
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CONSULTING & OTHER
ASSURANCE SERVICES
Business valuation
Financial planning
Litigation support
Information system design & processing
Forecasts & projections
Sarbanes-Oxley prohibits many services
to public companies
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AICPA VISION STATEMENT
CPAs are trusted professional who enable
people and organizations to shape their
future. Combining insight with integrity, CPAs
deliver value by communicating the total
picture with clarity and objectivity, translating
complex information into critical knowledge,
anticipating and creating opportunities and
designing pathways that transform vision into
reality
Source: AICPA Vision Project (http://www.aicpa.org)
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