Chapter 1
1
An Introduction to Auditing
Auditing and Assurance Services:
Understanding the Integrated Audit
First Edition
Karen L. Hooks
Prepared by Richard J. Campbell
Copyright 2011, Wiley and Sons
Chapter 1
2
An Introduction to Auditing
Prepared by Richard J. Campbell
Learning Objectives
3
1. Recognize an integrated audit and a financial statement audit
report.
2. Describe the overall purpose and value of an audit, and
identify the differences among an integrated audit, and audit
of internal control, an audit of internal control over financial
reporting, and a financial statement audit.
3. Define and contrast the responsibilities and expectations of
different parties affected by the audit.
4. Learn the roles and interaction of the governing and standardsetting bodies and other entities that affect auditing.
5. Understand the link between independent auditors and
accountants who provide other professional services.
Important Basics of Auditing
4
 Financial statement audit
 Audit of ICFR
 Integrated audit
 What it means when an auditor issues
an “unqualified” or “clean” audit
report on ICFR and the financial
statements
An Integrated Audit
5
Exhibit 1-1
A Definition of Auditing
6
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 these assertions and
established criteria and communicating the
results to interested users.
American Accounting Association, Committee on Basic Auditing Concepts, A Statement of Basic Auditing Concepts
(Sarasota, FL: American Accounting Association, 1973)
Difference in Accountants and Auditors
7
 To be an accountant, it is necessary to have
accounting knowledge.
 Understand business transactions
 Know what information to capture
 Know controls needed for activity and
information
 Be able to report it for various purposes
 Be able to record it according to accounting
standards
 To be an auditor, it is also it is necessary to know
audit processes and audit reporting
Roles of Auditors and Management
8
By giving an opinion on financial statement fairness and
ICFR effectiveness the auditor is indirectly reporting on
management’s assertions.
The Auditing Process
9
 Management produces financial statements and ICFR
report
 Auditor gathers and evaluates evidence
 Many forms of evidence; anything the auditor uses
 Auditor uses established standards to compare
evidence to the financial statements and ICFR report
 Looks for correspondence between what is presented
and the underlying evidence
 Uses processes described/required in auditing
standards.
 Auditor issues report
Beneficiaries of Audits
10
Exhibit 1-3
Value of an Audit
11
 To society: capital markets benefit
 To owners and prospective owners: remote ownership, complex
transactions, investment decisions
 To corporate governance, the Board of Directors and audit
committee: representing shareholders’ interests
 To management
 running the company with good information
 cost of and access to capital
 operating efficiency and effectiveness
 credibility of performance indicators
 properly accounting for complex transactions
Value of an Audit
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 Constituents: society, owners and prospective
owners, corporate governance, management
 All of these constituents need good information.
Even nonpublic companies elect to have audits,
although they are not required to do so by any
law or regulation.
Standard Setters, Governing Authorities
13
 Standard setters and governing authorities involved with U.S.
audits
 Congress
 States
 Securities and Exchange Commissions (SEC)
 Public Companies Accounting Oversight Board (PCAOB)
 American Institute of CPAs (AICPA)
 FASB/GASB
 International Accounting Standards Board (IASB)
 International Auditing and Assurance Board (IAASB)
Sarbanes Oxley Act of 2002
14
SOX required:
 The SEC to set up an auditing governance
organization (PCAOB)
 Management of public companies to provide an
audited ICFR report
 An ICFR audit of public companies
 Dodd-Frank (2010) permanently exempts “non-
accelerated” filers from an ICFR audit
 Financial statement and ICFR audits to be one
engagement
PCAOB Responsibility and Authority
15
 Registration of firms
 The SEC will not accept a company’s filings unless
they have been audited by a registered firm
 Lots of information required in registration process
 Firm must agree to assist in any investigations
 Inspections
 Required by SOX
 SOX required the SEC to have the PCAOB perform
inspections
 Sets auditing standards and other rules
PCAOB Auditing Standards
16
 AS 1: References in Auditors’ Reports to the
Standards of the Public Company Accounting
Oversight Board
 AS 2: An Audit of Internal Control Over Financial
Reporting Performed in Conjunction With an Audit of
Financial Statements (superseded)
 AS 3: Audit Documentation
 AS 4: Reporting on Whether a Previously Reported
Material Weakness Continues to Exist
PCAOB Auditing Standards continued
17
 AS 5: An Audit of Internal Control Over Financial
Reporting That is Integrated with an Audit of Financial
Statements
 AS 6: Evaluating Consistency of Financial Statements
 AS 7: Engagement Quality Review
Newest, PCAOB Risk Assessment Standards
18
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AS No. 8, Audit Risk
AS No. 9, Audit Planning
AS No. 10, Supervision of the Audit Engagement
AS No. 11, Consideration of Materiality in Planning and
Performing an Audit
AS No. 12, Identifying and Assessing Risks of Material
Misstatement
AS No. 13, The Auditor’s Responses to the Risks of Material
Misstatements
AS No. 14, Evaluating Audit Results
AS No. 15, Audit Evidence
AICPA
19
 Voluntary membership
 Non-public company audit standards
 Standards for many other types of
engagements
 Code of conduct, applies to members
 Writes CPA and grades exam
State Governments
20
License to practice
 Requirements to sit for CPA exam
 Requirements to be licensed
 Continuing education requirements
 Conduct requirements
 Regulations on doing business
Other AICPA Standards
21
 Code of Professional Conduct
 Statements on Standards for Attestation Engagements
(SSAE)
 Statements on Standards for Accounting and Review
Services (SSAR)
 Statements on Quality Control Standards
 Statements on Standards for Tax Services (SSTS)
 Statements on Standards for Valuation Services (SSV)
 Statements on Standards for Consulting Services
(SSCS)
IAASB
22
 International code of conduct is
covered on the CPA Exam
 AICPA audit standards (SAS) and
IAASB audit standards (ISA) are
being aligned through the AICPA’s
“Clarification Project”
Other Audit Related Services
23
 Internal Auditing
 Operational Auditing
 Forensic Accounting
 General Accountability Office
Value of Audit Knowledge for Non-Auditors
24
In other words, why is this course required
at most universities for all accounting
majors?
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Understand purpose of auditor’s activities
Increase efficiency of interface with auditor
Enhanced communication
Implementation of ICFR
Appendix A- Working in a CPA Firm
25
Types of Audit Services:
 Integrated audits for larger public companies
 Financial statement audits for nonaccelerated filer public and non-public
companies
 Reviews of interim financial statements for
public companies
 Reviews and compilations for non-public
companies
Other Types of CPA-Provided Services
26
 Attest engagements
 Assurance engagements
 Tax engagements
 Accounting and bookkeeping
 Business advising/management
consulting
CPA Services, “Assurance” and “Nonassurance”
27
Exhibit A-1 – CPA Services
Common Firm Structures
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 Sole proprietorship
 Professional corporation
 General partnership
 Limited liability company
 Limited liability partnership
Firm Sizes
29
 Big Four
 International networks; national
 Regional; large local
 Small local
Common Auditor Position Titles
30
 Partner/Owner
 Manager
 In Charge Accountant
 Staff Accountant
Copyright
31
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