Matakuliah : Manajemen Kinerja Sistem Komputer Tahun : Feb - 2010 07. Informing Outsiders: Management Assertions and Independent Certification Pertemuan 13-14
07. Informing Outsiders: Management Assertions and Independent Certification
01. Informing Outsiders through Voluntary Assertions
Management's ability to benefit from information disclosure to outsiders is limited by three factors The need for a language or measurement rules to express information relevant to others. Management's interest in the subject matter of the information that they assert is properly displayed, Laws, regulations, and competitive disadvantages regarding information disclosure.
Independent Assurers and Certifiable Assertions. Measurement criteria GAAP -based financial statements are one type of criterion and a certifiable set of assertions that can add value for management. Figure 7.1 lists several types of assertion that management can make voluntarily to better information outsiders. Management as information resources Management as the source of information leads to concern by outside decision makers that management has been lazy or careless in applying measurement methods to prepare information.
Laws, regulations, and Competitive Disadvantage of Disclosure Assurance professionals can assist management in determining value-adding disclosures that comply with regulation such as SEC rules.
Figure 7.2 shows Linda Jo's belief about Tim's assessment of misstatement in un-audited earnings on the far right.
Figure 7.3 A full-page advertisement in the wall street journal announced two responses to assure travelers of the "validity and integrity" of US Air's operating standards
02. What Do Financial Statement Audits Require of Management and Auditors?
An engagement letter for the audit of LJ Appliances, Inc An engagement letter for the audit of LJ Appliances, Inc., is reproduces as figure 7.4
Auditor's Responsibilities. In the engagement letter, Alex and Louis, CPA's, agrees to conduct an audit of LJ's GAAP-based financial statement in accordance with Generally Accepted Auditing Standards (GAAS). Management's Responsibilities. Management is responsible for internal control, compliance with applicable laws and regulations, and making all financial records and related information available to the auditor.
Management Judgments (and Discretion) In addition to maintenance of basic records of transactions and allocations, management also is responsible for making financial statement estimates and judgments.
Figure 7.5 Illustrative Representation Letter.
03. What Does the Financial Statement Auditor Do?
Auditors' Reports on Financial Statements. An auditor's report on financial statements is based on the auditor's risk assessments and auditing procedures and expresses the auditor's opinion about compliance of the financial statement with GAAP measurement criteria.
Figure 7.6 presents a basic, generic "standard report" of the external auditor for LJ Appliance, Inc.
Materiality and Reasonable Assurance Materiality Defined According to US GAAS, financial statements are materially misstated "when they contain errors or irregularities whose effect, individually or in the aggregate, is important enough to cause them not to be presented in conformity with GAAP." Materiality in Practice In practice, materiality standars are determined by what is " generally accepted". Reasonable Assurance in Practice As with materiality, reasonable assurance doesn't have a mathematical expression.
04. What's in It for the Auditor?
What does an audit firm get from being the financial statement auditor for a client ? One benefit is a substantial (and continuing) annual audit fee. Auditors also establish contact with CEOs, CFOs, and prominent directors of major corporations, and the nature of GAAP-based financial statements exposes auditors to the entire range of opportunities and risks faced by a business as well as its performance.
05. The Engagement Risk Approach
The engagement risk model has three components : Audit Risk (Au R) Au R is the risk that the auditor will unknowingly certify that financial statements are free of material misstatement when, in fact , they are materially misstated. Client Business Risk (CBR) CBR is the risk of loss to the auditor because of the auditor's client experiences declining performance in the future. Auditor's Business Risk (ABR) ABR is the risk that the auditor will suffer damage to his or her reputation or pocketbook because of association with the client.
Figure 7.7 The three risks are partially overlapping , as diagrammed in figure 7.7. But, as figure 7.7 shows, some portion of CBR and ABR are not covered by GGAP ands GAAS --- they would exist even if the audited financial statement fully comply with GAAP and GAAS.
Figure 7.8 Engagement Risk Approach to Financial Statement Audits.
Figure 7.9 Five common conditions Accompanying Management Misrepresentation Fraud.