Chapter 1 – Auditing and
Assurance Services
Presentation Outline
I. The Demand for Reliable Information
II. Understanding Assurance Services
III. Management Assertions
IV. Sarbanes-Oxley Act of 2002
V. Becoming a CPA
I. The Demand for Reliable
Information
A. Understanding a Client’s Business
B. Environmental Conditions
C. Information Risk
A. Understanding a Client’s
Business
Business risk is the
risk that an entity will
fail to meet its
objectives.
Failing to reach
objectives can
eventually result in
temptation to misstate
financial statements
to avoid business
failure.
B. Environmental Conditions
I lost my
savings in a
bad
investment!
• Complexity – Decisions makers
are not trained to collect, compile,
and summarize the key operating
information themselves.
• Remoteness – Investors are not
able to personally visit locations to
check on investments.
• Time sensitivity – Decisions must
often be made on a moment’s
notice.
• Consequences – A drop in
investment value can wipe out
one’s life savings.
C. Information Risk
 Information risk is the
probability that the
information circulated by a
company will be false or
misleading.
 Client management has an
incentive to make the
business appear better than
it actually may be.
 This can create a conflict of
interest between client
management and investors.
Financial
Statements
II. Understanding Assurance
Services
A. Definition of Assurance Services
B. Definition of Attestation Services
C. Definition of Auditing
D. Overview of Financial Statement Auditing
E. Graphical Representation of Assurance
Services
A. Assurance Service Elements
Assurance services are (1) independent (2)
professional services that (3) improve the
quality of information, or its context, (4)
for decision makers. Assurance services
include many areas of information, including
nonfinancial areas.
(See examples on page 7 of text)
B. Definition of Attestation Services
 Attestation involves an
engagement resulting in
the issuance of a report
on subject matter or an
assertion about the
subject matter that is the
responsibility of another
party.
 Auditing is a specific type
of attestation.
(See examples on p. 6 of
text)
C. Definition of Auditing
(See Auditing Insight on p. 5 of text)
Financial Statements
(including footnotes)
Persons who rely on
the financial reports
•Creditors
•Investors
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
GAAP
and communicating the results to
Auditor's Report/
interested users.
Other Reports
Source: American Accounting Association Committee on
Basic Auditing Concepts. 1973. A Statement of Basic
Auditing Concepts, American Accounting Association
(Sarasota, FL).
D. Overview of Financial Statement
Auditing
E. Graphical Representation of Assurance Services
The Relationships Among Auditing, Attestation,
and Assurance Engagements
Assurance Services
Any Information
Attestation Services
Primarily Financial Information
Auditing
Financial Statements
III. Management Assertions
A. Presentation and Disclosure
B. Existence or Occurrence
C. Rights and Obligations
D. Completeness
E. Valuation or Allocation
A. Presentation and Disclosure
Footnote disclosure of important
accounting policies must be relevant and
reliable.
Transactions must be classified in the
correct accounts.
Information must be transparent (i.e.,
understandable to a reasonably
sophisticated person).
B. Existence or Occurrence
Assets, liabilities, and equities on the
balance sheet actually exist.
Each of the revenue and expense
transactions actually occurred.
C. Rights and Obligations
Amounts reported as assets of the
company represent its property rights.
Amounts reported as liabilities represent
its obligations.
D. Completeness
All transactions, events, assets, liabilities, and equities
that should have been recorded have been recorded.
All disclosures that should have been discussed in the
footnotes are there.
Cutoff refers to accounting for revenue, expense, and
other transactions in the proper period (neither
postponing some recordings to the next period (i.e.,
completeness) nor accelerating next period’s
transactions into the current year accounts (i.e.,
existence or occurrence)). The cutoff date refers to
the client’s year-end balance sheet date.
E. Valuation or Allocation
Determine whether proper values have
been assigned to assets, liabilities, and
equities.
Examples include collectibility of
receivables, recalculating depreciation,
obtaining lower of cost or market data, etc.
IV. Sarbanes-Oxley Act of 2002
(SOX)
A. Major Provisions of Sarbanes-Oxley
B. Management Responsibility Under SOX
C. Prohibited Services to Audit Clients
A. Major Provisions of Sarbanes-Oxley
Congress passed the Sarbanes-Oxley Act in an attempt
to address a number of weaknesses found in
corporate financial reporting in the wake of the recent
accounting scandals. The Act’s major provisions
include:
Requirement of CEO/CFO certification of financial
statements (Section 302)
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.
B. Management’s Responsibility Under SOX
One of its most important provisions (Section 302) states that
the key company officials must certify the financial statements.
Certification means that the company CEO and CFO must
sign a statement indicating:
1. They have read the financial statements.
2. They are not aware of any false or misleading statements
(or any key omitted disclosures).
3. 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).
C. Prohibited Services to Audit Clients
 SOX 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.
 SOX prohibits professional service firms from performing any
client services where auditors may find themselves making
management decisions or auditing their own firm’s work.
V. Becoming a
A. Education
B. Examination
C. Experience
Note that successful candidates actually receive a CPA certificate
from their State Board of Accountancy. Reciprocal
CPA certificates for other states are also possible.
A. Education
 Most states require 150
semester hours of college
education to sit for the
exam.
 Continuing professional
education of 120 contact
hours (not college semester
or quarter hours) over three
year reporting periods with
no less than 20 hours in any
one year is a common
requirement in most states.
B. Examination
 The AICPA Board of Examiners administers the
Uniform CPA Exam as a computer-based
examination in four parts
1. Auditing and attestation—4.5 hrs
2. Financial accounting and reporting—4 hrs
3. Regulation—3 hrs.
4. Business environment—2.5 hrs
 Consists of multiple-choice testlets (24-30 questions
each) and simulation problems where students
electronically research a solution to a problem.
 Revealing exam material can result in certifications
being revoked.
 Testing is on demand with 75% considered a
passing score.
C. Experience
 Although not a requirement
to sit for the CPA exam,
accounting experience
supervised by a competent
accountant is required to
become certified.
 Generally 2 years for
persons with a bachelors
degree and 1 year for
those with a masters.
 Some states require the
experience to be in public
accounting.
Summary
Audit process considers business risk,
information risk.
Environmental factors result in need for audits.
Understanding assurance, attestation, and
auditing
The effect of Sarbanes-Oxley on the audit
process.
CPA requirements include education,
examination, and experience.