CHAPTER 1 AUDITING AND THE PUBLIC ACCOUNTING PROFESSION Fall 2007 u What is auditing? u Types of Audits u Independent Auditor Relationships u Services Performed by CPA Firms u Accounting Oversight Zoo u Relationship between Accounting and Auditing

Auditing Defined 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 those assertions and established criteria and communicating the results to interested users.

Auditing in Plain English… An audit is… a logical series of steps (GAAS) performed without bias (independent CPA) to get support (evidence) about whether representations of management (mgmt’s f/s) correspond to established standards (GAAP). The results of the audit are communicated in writing (audit report) to people who will rely on the findings (the “users”).

Types of Audits Financial Are the f/s fairly stated under GAAP? Compliance Has the company established and maintained adequate internal controls (per COSO) over financial reporting? Operational

Financial Statement Audits Why are audits necessary? Who benefits from audited financial statements?

Independent Auditor Relationships Management Responsible for f/s Assumption of management honesty Need for professional skepticism Is not “the client” Board of Directors Act on behalf of owners Has oversight over management Audit committee

Assurance Services are independent professional services that improve the quality of information, or its context, for decision makers. What does independence mean? What makes a CPA a professional? Assurance Services Performed by CPA Firms

Attestation: CPA firm issues a written communication expressing a conclusion about the reliability of a written assertion that is the responsibility of another party. a.Audit or Examination – positive assurance b.Review – negative assurance c.Agreed Upon Procedures – negative or positive assurance Accounting & compilations: NO assurance Primary Assurance and Accounting Services Performed by CPA Firms

Limitations of a Financial Statement Audit Economic limits: 1. Reasonable Cost 2. Reasonable Length of Time Limitations associated with the established accounting framework: 1. Alternative Accounting Principles 2. Accounting Estimates

Who’s Who in the Accounting Oversight Zoo??? Who does the work? CPA Firms Who licenses CPAs? State Boards of Accountancy Who sets GAAP? FASB GASB SEC and PCAOB Who sets GAAS and Ethical Standards? AICPA SEC and PCAOB Who monitors quality CPA Firms: internally, for each other PCAOB

Quality Control Quality control standards (AICPA established, PCAOB ratified) –Independence, integrity & objectivity –Personnel Management –Acceptance and continuation of clients and engagements –Engagement performance –Monitoring PCAOB inspections for registered firms

Relationship Between Accounting and Auditing (Fig 2-1)