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.

Accumulating Evidence 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. Transaction data Written and electronic Communications with outsiders Observations Client Testimony

Competent, Independent Person Competence Judgment and Experience Independence Evaluation of Evidence 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. Proper Conclusion

Audit of a Tax Return Example

Distinguish 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.

Economic Demand for Auditing Demand Driver Information risk Auditing can have a significant effect on information risk. Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. What is meant by “Information risk”? --risk that decisions were based on inaccurate information

Causes of Information Risk Remoteness of information Biases and motives of the provider Voluminous data It is nearly impossible for a decision maker to have much firsthand knowledge about the organization with which they do business. Information from others must be relied upon. If information is provided by someone whose goals are inconsistent with those of the decision maker, the information may be biased in favor of the provider. The higher the volume of transactions, the greater the risk that improperly recorded information is included in the records. Exchange transactions between organizations have become increasingly complex and therefore more difficult to record properly. Complex exchange transactions

Reducing Information Risk User verifies information User shares information risk with management Audited financial statements are provided The user may go to the business premises to examine records and obtain information about the reliability of the statements. There is considerable legal precedent that management is responsible for providing reliable information to users.

Relationships Among Auditors, Client, and External Users Client or audit committee hires auditor Auditor issues report relied upon by users to reduce information risk Client External Users Provides capital Client provides financial statements to users

Assurance Services An independent professional service Can be performed by CPAs or by a variety of other professionals Assurance services are independent professional services that improve the quality of information for decision makers.

Attestation Services A type of assurance service CPA reports on the reliability of an assertion That is made by another party.

Attestation Services 1. Audit 3. Review Historical Financial Five Categories 1. Audit 3. Review Historical Financial Statements In the audit of historical financial statements, management asserts that the statements are fairly stated in accordance with applicable US or international accounting standards. For an audit of internal controls over financial reporting, management asserts that internal controls have been developed and implemented following well-established criteria. For a review of historical financial statements, management asserts that the statements are fairly stated in accordance with accounting standards which are the same as for audits. For attestations on information technology, management makes various assertions about the reliability and security of electronic information. CPAs provide numerous other attestation services and many of these are natural extensions of the audit of historical financial statements as users seek independent assurances about other types of information. 2. Internal Control over Financial Reporting 5. Other 4. Information Technology

Green Initiatives Bring Assurance Opportunities, Competition www. sasb Green Initiatives Bring Assurance Opportunities, Competition www.sasb.org Global interest has triggered a surge in reports. 95% of the Global Fortune 250 released environmental, social, and governance data. Presented in standalone reports or integrated into annual financial reports.

Assurance, Attestation, and Nonassurance Services

Types of Audits Operational Compliance Financial Statement

Operational Audit Example Evaluate computerized payroll system for efficiency and effectiveness Information Number of records processed, costs of the department, and number of errors Established Criteria Company standards for efficiency and effectiveness in payroll department The operational audit evaluates the efficiency and effectiveness of any part of an organization's operating procedures and methods. Available Evidence Error reports, payroll records, and payroll processing costs 1-16

Compliance Audit Example Determine whether bank requirements for loan continuation have been met Information Company records Established Criteria Loan agreement provisions A compliance audit is conducted to determine whether the auditee is following specific procedures, rules or regulations set by some higher authority. Some examples may include determining whether accounting personnel are following procedures prescribed by the controller, review wage rates for compliance with minimum wage laws, and examine contractual agreements with bankers and other lenders to be sure the company is complying with legal requirements. Available Evidence Financial statements and calculations by the auditor 17

Audit of Financial Statements Example Annual audit of Boeing’s financial statements Information Boeing's financial statements Established Criteria Generally accepted accounting principles Available Evidence Documents, records, and outside sources of evidence

Certified Public Accounting Firms

Activities of CPA Firms Accounting and bookkeeping services Tax services Management consulting services Many small companies with limited accounting staff rely on CPA firms to prepare their financial statements. CPA firms prepare corporate and individual tax returns for both audit and non-audit clients. Almost every CPA firm performs tax services. Most CPA firms provide certain services that enable their clients to operate their businesses more effectively. The ability to provide this value added service often distinguishes one firm from another.

Sarbanes-Oxley Act This Act is considered by many observers to be the most important legislation affecting the auditing profession since the 1930s. The provisions of the Act apply to publicly held companies and their audit firms.

Sarbanes-Oxley Act SEC PCAOB (Public Company Accounting Oversight Board) The Sarbanes-Oxley Act established the PCAOB which is overseen by the SEC. The PCAOB provides oversight for auditors of public companies, establishes auditing and quality control standards for public company audits and performs inspections of the quality controls at audit firms performing those audits.

Securities and Exchange Commission The purpose is to assist in providing investors with reliable information upon which to make investment decisions The Securities Act of 1933 The Securities Exchange Act of 1934 The 1933 Act requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval. The 1934 Act provides additional protection by requiring public companies and others to file detailed annual reports with the Commission. The Commission examines these statements for completeness and adequacy before permitting the company to sell its securities through the exchanges.

Securities and Exchange Commission Form S-1 Form 8-K Form 10-K Form 10-Q Form S-1 applies to new securities. Form 8-K is field to report significant events that are of interest to public investors. Form 10-K must be filed annually within 60-90 days after the close of each fiscal year, depending on the size of the company. Form 10-Q must be filed quarterly for all publicly held companies.

AICPA Performs the following services for CPAs: Sets professional requirements Conducts research Publishes materials related to services performed Such services include the following: Accounting, auditing, attestation and assurance services, management consulting services, and taxes. All AICPA members and other practicing CPAs must follow the standards and guidelines set by the AICPA. Empowered to set standards (guidelines) and rules

Establishing Standards and Rules 1. Auditing standards 2. Compilation and review standards 3. Other attestation standards 4. Code of Professional Conduct

Statements on Auditing Standards Classification of Statements on Auditing Standards GAAS and Standards of Performance

International Standards on Auditing IFAC is the worldwide organization for the accountancy profession. The IAASB works to improve the uniformity of auditing practices and related services throughout the world.

International Standards on Auditing ISAs do not override a country's regulations governing the audit of financial or other information as each country’s own regulations generally govern audit practices.

GAAS These standards represent the minimum standards of performance.

PCAOB Auditing Standards – United States General Standards 1. Adequate training and proficiency 2. Independence in mental attitude 3. Due professional care The auditor must have adequate technical training and proficiency to perform the audit. The auditor must maintain independence in mental attitude in all matters relating to the audit. The auditor must exercise due professional care in the performance of the audit and the preparation of the report.

PCAOB Auditing Standards – United States Standards of Field Work 1. Proper planning and supervision 2. Understanding of the entity 3. Sufficient appropriate evidence The auditor must adequately plan the work and must properly supervise any assistants. The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement and to design further audit procedures. The auditor must obtain sufficient and appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

PCAOB Auditing Standards – United States Standards of Reporting 1. Statements prepared in accordance with GAAP 2. Circumstances when GAAP not followed 3. Adequacy of disclosures 4. Expression of opinion on financial statements The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles. The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. The report shall contain an expression of opinion regarding the financial statements, taken as a whole.

Relationship Between ASB and PCAOB Auditing Standards The PCAOB initially adopted GAAS as interim standards. The term generally accepted auditing standards is no longer used for public company audits. The term ASB will be used for audits of private companies. Public company audits refer to PCAOB auditing standards. Public company audits Private company audits

Statements on Auditing Standards The principles in the Preface of the Codification of Auditing Standards provide a framework for auditing standards. Statements on Auditing Standards (SASs) provide guidance to auditors in obtaining reasonable assurance to form an opinion on financial statements and are the most authoritative references available to auditors.

Relationships