Chapter 1
Auditing and Assurance
Services
ACCT-4080
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1. Introduction - What is Auditing?
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Misunderstandings
Overview of auditing
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Ultimate purpose of audit
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To issue an opinion on the fairness of financial
statements (and in some cases, on the client’s
internal control structure)
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1. Introduction – Purpose of Audit
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Ultimate purpose of audit (formal def)
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To obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether
the financial statements are prepared, in all material
respects, in accordance with an applicable financial
reporting framework and to report on the financial
statements and communicate the findings as
required by GAAS.
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1. Introduction – Who is Client?
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Who is the client?
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Stanford University professor Maureen McNichols questioned how
independent an auditing firm can be when its job depends on the
client.
“When a firm hires its auditor, it is hard for the auditor to be truly
independent … Audit firms speak of the companies they audit as
their clients. When you look at the Web sites of public accounting
firms, you see language that describes how their purpose is to
provide value to their clients and to build relationships, to help
clients solve complex business problems and enhance their ability
to build value. I believe public accounting firms were created to
serve a different client, the investing public”
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1. Introduction – Who is Client?
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In the United States, Deloitte LLP and its subsidiaries have 57,000 professionals with
a single focus: serving our clients and helping them solve their toughest problems.
We work in four key business areas — audit, financial advisory, tax and consulting —
but our real strength comes from combining the talents of those groups to address
clients’ needs.
Ernst & Young is a global leader in assurance, tax, transaction and advisory services.
Worldwide, our 135,000 people are united by our shared values and an unwavering
commitment to quality. We make a difference by helping our people, our clients and
our wider communities achieve their potential.
KPMG delivers a globally consistent set of multidisciplinary services based on deep
industry knowledge. Our industry focus helps KPMG professionals develop a rich
understanding of clients' businesses and the insight, skills, and resources required to
address industry-specific issues and opportunities.
Imagine the power of 180,000 people with a common purpose — building
relationships that create value for you and your business. This is PwC. Every day, our
people work with you to build the value you are looking for.
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1. Introduction – Who is Client?
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US Chief Justice Warren Burger in 1984 Supreme Court
decision in US v. Arthur Young:
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By certifying the public reports that collectively depict a
corporation’s financial status, the independent auditor
assumes a public responsibility transcending any
employment relationship with the client. The independent
public accountant performing this special function owes
ultimate allegiance to the corporation’s creditors and
stockholders, as well as to the investing public. This “public
watchdog” function demands … complete fidelity to the
public trust.
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1. Introduction – Confidence/Ethics
Center for Audit Quality Survey of Investors
How much confidence do you personally have in audited financial information released by publiclytraded U.S. companies? Would you say you have...?
2012
2011
2010
2009
2008
2007
A great deal of confidence
Quite a bit of confidence
Some confidence
Very little confidence
No confidence at all
(Don't know/refused)
7
21
41
19
6
6
7
19
42
19
7
6
8
22
40
20
5
5
6
22
42
21
5
3
11
25
37
15
5
6
8
30
42
13
3
4
CONFIDENT (NET)
Great deal/quite a bit
Some
69
28
41
69
27
42
70
30
40
70
28
42
73
36
37
80
38
42
NOT CONFIDENT (NET)
Very little
None at all
25
19
6
26
19
7
25
20
5
27
21
5
20
15
5
16
13
3
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1. What is Auditing? - Ethics
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1. What is Auditing? - Ethics
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2. Why Study Auditing?
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Required
To obtain employment
On CPA, CMA, CFE, CIA, etc., exams
Other reasons
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3. Definitions of Auditing
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AAA definition
AICPA definition
Information risk
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3. Definition of Auditing
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AAA definition:
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.
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3. Definitions of Auditing
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AICPA definition:
The objective of the ordinary examination
of financial statements by the independent
auditor is the expression of an opinion on
the fairness with which they present, in all
material respects, financial position,
results of operations, and cash flows in
conformity with GAAP.
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3. Definitions of Auditing
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Information risk
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Information risk is the risk that the financial
statements will not be reliable (i.e., they will be
false or misleading)
Consequence of unreliable financial statements:
users make wrong decisions
Wrong decisions lead to inefficient capital markets
∴ auditing is the process that improves the
reliability of financial information
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4. Does Auditing Add Value
to Financial Data?
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Conditions creating a demand for
auditing
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complexity
remoteness
time-sensitivity
consequences
*conflict of interest
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4. Does Auditing Add Value
to Financial Data?
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Other evidence
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market forces
agency theory
information theory
insurance hypothesis
by products
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5. Significant Events in
History of Auditing
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Ancient to 1850
1850 to 1900
1900 to 1940
1940 to 1975
1975 to 1985
1985 to 1995
1995 to 2002
2002
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6. Types of Audits
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Financial statement audits
Compliance audits
Operational audits
(Governmental audits)
Information systems audits
Fraud audits
Quality audits
Environmental audits
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7. Types of Auditors
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External auditors
Internal auditors
Governmental auditors
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8. Professional Services
Assurance Services
Any Information
Attestation Services
Primarily Financial Information
Audit Services
Financial Statements
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8. Professional Services
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Attestation Services
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examinations, reviews, or agreed upon procedures
Examples
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financial forecasts and projections
pro forma financial information
compliance with contractual requirements
effectiveness of internal control systems
examination of MD&A
reporting on controls at a service organization
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8. Professional Services
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Assurance Services Examples
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Risk assessment
Business performance measurement
Information systems reliability
Electronic commerce
Third party reimbursement maximization
XBRL reporting
Customer satisfaction surveys
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9. Professional Skepticism
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Standards require you to exercise professional skepticism
Potential conflict of interest always exists between
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Neither assume management is
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auditor
management of the entity being audited
dishonest
nor assume unquestioned honesty
hold no preconceived conclusions on any side of issue
Have an attitude that includes a questioning mind and a
critical assessment of evidence
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10. Financial Statement
Assertions
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AU-C 315
Management makes assertions regarding
financial statements
Auditors use assertions to guide evidence
gathering
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10. Financial Statement
Assertions (Con’t)
Account Balances
Existence *
Transactions
Occurrence *
Rights and obligations *
Completeness *
Disclosures
Occurrence
Rights and obligations
Completeness
Valuation and allocation * Accuracy
Completeness
Valuation and allocation
Accuracy
Cutoff
Classification
Classification*
Understandability *
* PCAOB Assertions
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11. SOX and PCAOB
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Sarbanes-Oxley Act of 2002
Passed by Congress in response to accounting related corporate
scandals
Applies to audits of issuers
Some major provisions
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Creation of PCAOB
Requirement for audit of internal controls
CEO/CFO certification of f/s
Prohibition of certain client services
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11. SOX and PCAOB
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Prohibited services to audit clients
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bookkeeping and related services
design or implementation of financial IT sys
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)
Some tax services and other non-prohibited services okay if
preapproved by Audit Comm
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12. Public Accounting Firms
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Big 4
National
Regional
Local
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13. Certification
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CPA
CMA
CFE
CIA
CISA
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13. Certification
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Components
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education, examination, experience, CPE
150 hour rule for CPA Exam
CPA Exam
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Auditing and attestation—4 hrs
Financial accounting and reporting—4 hrs
Regulation—3 hrs.
Business environment concepts—3 hrs
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14. Organizations of the
Accounting Profession
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PCAOB
AICPA
State Boards of Public Accountancy
State Societies of CPAs
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15. CPA Mobility
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To practice in another state
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Driver’s license model
Legislation adopted in 51 jurisdictions so
far
To obtain permit to practice in another
state
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16. Updates
Firm mobility and updated definition of attest included in updated UAA
Journal of Accountancy MAY 20, 2014
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The definition of attest in the newly amended UAA requires that only CPAs operating
within a CPA firm can perform:
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Audits in accordance with Statements on Auditing Standards (SAS);
Reviews under Statements on Standards for Accounting and Review Services (SSARS); and
Examinations, reviews, and agreed-upon procedures under Statements on Standards for
Attestations Engagements (SSAE).
Any engagement performed under PCAOB standards.
An exception would be public officials and public employees, who are not prohibited
by the UAA from performing any of their duties. So, for example, state audit
organizations would continue to be able to perform engagements under the SAS,
SSARS, and SSAE.
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16. Updates
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The UAA also has been updated to provide for CPA firm mobility
across state lines under a no-notice, no-fee, no-escape regime.
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This would allow firms registered in one state to provide attest
services to clients in another state without registering the firm or
paying fees in the second state. Under the UAA provisions, CPA firms
would be subject to the laws and regulations of both their home state
and the second state, and they would have to meet the peer review
and CPA ownership requirements of any mobility state in which they
are seeking to perform those attest services. CPAs and CPA firms can
already provide nonattest services out-of-state without registering.
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Review Questions for Discussion
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Chapter 1
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1.5
1.6
1.9
1.14
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1.15
1.17
1.19
1.20
1.21
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