The Demand for Audit
and Assurance Services
Chapter 1
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Learning Objective 1
Describe assurance services
and distinguish audit services
from other assurance and
nonassurance services
provided by CPAs.
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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.
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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.
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Other Assurance Services
Most other assurance services do not meet the
formal definition of attestation services.
The CPA must be independent.
The CPA must provide assurance.
The CPA is not required to provide a written report.
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Other Assurance Services
The Elliott Committee was charged with
researching and developing new assurance
services opportunities for CPAs to provide
to business and individual clients who need
relevant and reliable information for
critical decision making.
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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
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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.
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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.
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Other Assurance
Services Examples
Controls over and risks related to investments,
including policies related to derivatives…
assessing the processes in a company’s
investment practices to identify risks and to
determine the effectiveness of those processes.
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Other Assurance
Services Examples
Mystery shopping…
performing anonymous shopping to
assess sales personnel dealings with
customers and procedures they follow.
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Other Assurance
Services Examples
Assess risks of accumulation, distribution,
and storage of digital information…
assessing security risks and related
controls over data and other information
stored electronically, including the
adequacy of backup and off-site storage.
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Other Assurance
Services Examples
Fraud and illegal acts risk assessment…
developing fraud risk profiles and assessing the
adequacy of company systems and policies in
preventing and detecting fraud and illegal acts.
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Assurance, Attestation, and
Nonassurance Services
ASSURANCE SERVICES
ATTESTATION SERVICES
Audits
Reviews
Other Attestation Services
(e.g., WebTrust, SysTrust)
Certain
Management
Consulting
Other Assurance Services
(e.g., CPA Performance View)
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Assurance, Attestation, and
Nonassurance Services
NONASSURANCE SERVICES
Other Management
Consulting
Certain
Management
Consulting
Accounting and
Bookkeeping
Tax
Services
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Learning Objective 2
Explain the importance
of auditing in reducing
information risk.
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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.
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Learning Objective 3
List the causes of information
risk, and explain how this
risk may be reduced.
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Causes of Information Risk
1. Remoteness of information
2. Biases and motives of the provider
3. Voluminous data
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Reducing Information Risk
1. User verifies information
2. User shares information risk with management
3. Audited financial statements are provided
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Capital Costs to Shrink Elliott’s
Example
Assuming a cost of capital of 13%, Elliott
estimates this rate is composed of the following:
5.5% risk-free interest rate
3.5% economic risk premium (business risk)
4.0% information cost (information risk)
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Capital Costs to Shrink Elliott’s
Example
Elliott believes the following factors will
drastically reduce information risk:
Advanced technology
New accounting and auditing standards
Auditors finding more efficient ways to audit
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Learning Objective 4
Describe auditing.
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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.
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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.
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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.
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Reporting
The final stage in the auditing process
is preparing the Audit Report, which
is the communication of the
auditor’s findings to users.
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Audit of a Tax Return
Example
Competent,
independent
person
Internal
revenue
agent
Accumulates and
evaluates evidence
Examines cancelled
checks and other
supporting records
Information
Federal tax
returns filed
by taxpayer
Report on results
Determines
correspondence
Report on tax
deficiencies
Established criteria
Internal Revenue
Code and all
interpretations
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Learning Objective 5
Distinguish between
auditing and accounting.
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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.
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Learning Objective 6
Differentiate the three
main types of audits.
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Types of Audits
Financial Statement Audit
Operational Audit
Efficiency
Effectiveness
Compliance Audit
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Financial Statement Audit
Example
Information
Established
Criteria
Available
Evidence
Annual audit of Boeing’s
financial statements
Boeing's financial
statements
Generally accepted accounting
principles
Documents, records, and outside
sources of evidence
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Operational Audit
Evaluate computerized payroll system
Example
for efficiency and effectiveness
Number of records processed, cost of
Information
the department, and number of errors
Established Company standards for efficiency and
effectiveness in payroll department
Criteria
Error reports, payroll records, and
Available
payroll processing costs
Evidence
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Compliance Audit
Determine whether bank requirements
Example
for loan continuation have been met
Information
Established
Criteria
Available
Evidence
Company records
Loan agreement provisions
Financial statements and
calculations by the auditor
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Learning Objective 7
Explain the strategic systems
approach to auditing.
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Strategic Systems Audit
The auditor must have a thorough understanding
of the entity and its environment.
Client’s industry
Operations
Regulations
Relationships
Business strategies
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Learning Objective 8
Identify the primary
types of auditors.
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Types of Auditors
Certified Public Accounting Firms
General Accounting Office Auditors
Internal Revenue Agents
Internal Auditors
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Learning Objective 9
Describe the requirements
for becoming a CPA.
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Three Requirements for
Becoming a CPA
Educational Requirement
Uniform CPA Examination Requirement
Experience Requirement
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CPA Examination Sections
Audit and Attestation
Accounting and Reporting
Regulations
Business Environments and Concepts
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Learning Objective 10
Describe the impact of
e-commerce on CPAs.
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Impact of E-commerce
CPAs need to understand how key
technologies are transforming all
aspects of business.
Information Technology
Hardware
Software
Internet
Communications
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End of Chapter 1
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