An Introduction to Assurance and Financial Statement Auditing Chapter 1 An Introduction to Assurance and Financial Statement Auditing McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Analytical and logical skills Much more conceptual in nature The Study of Auditing The study of auditing is different from other accounting courses that you have taken in college because … OTHER COURSES AUDITING Rules, techniques and computations to prepare and analyze financial information Analytical and logical skills Much more conceptual in nature 1-2

LO# 2 The Role of Auditing Figure 1-1 Overview of the Principal-Agent Relationship Leading to the Demand for Auditing 1-3

Relationships among Auditing, Attest, and Assurance Services LO# 4 Relationships among Auditing, Attest, and Assurance Services 1-4

Auditing, Attest, and Assurance Services Defined LO# 5 Auditing, Attest, and Assurance Services Defined Attest Assurance Services Auditing 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. 1-5

Auditing, Attest, and Assurance Services Defined LO# 5 Auditing, Attest, and Assurance Services Defined Assurance Services Auditing Attest Attest services occur when a practitioner is engaged to issue ... a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. 1-6

Auditing, Attest, and Assurance Services Defined LO# 5 Auditing, Attest, and Assurance Services Defined Attest Assurance Services Auditing Independent professional services that improve the quality of information, or its context, for decision makers. 1-7

Fundamental Concepts in Conducting a Financial Statement Audit LO# 6 Fundamental Concepts in Conducting a Financial Statement Audit Materiality Audit Risk Evidence 1-8

Overview of the Financial Statement Audit Process LO# 6 Overview of the Financial Statement Audit Process 1-9 9

Sampling: Inferences Based on Limited Observations LO# 7 Sampling: Inferences Based on Limited Observations Auditors use (1) their knowledge about the transactions and/or (2) a sampling approach to examine the transactions. It would be too costly for the auditor to examine every transaction. 1-10

Major Phases of the Audit LO# 8 Major Phases of the Audit Client acceptance/continuance Preliminary engagement activities Plan the audit Consider and audit internal control Audit business processes and related account (e.g. revenue generation) Complete the audit Evaluate results and issue audit report 1-11

LO# 9 Issue the Audit Report The title line of the audit report includes the word “Independent,” and usually, the report is addressed to the stockholders of the company. The audit report includes an introductory paragraph, a scope paragraph, an opinion paragraph, an explanatory paragraph referring to the audit of internal control, the name of the auditor or audit firm, and the date of the audit report. Unqualified Qualified Adverse 1-12

Auditing Demands Logic, Reasoning, and Resourcefulness An auditor needs to understand more than just the accounting concepts and techniques. Auditing is a fundamentally logical process of thinking and reasoning – so use your common sense and reasoning skills! As you learn new auditing concepts, take some time to understand the underlying logic and how the concepts interrelate with other concepts. Being a good auditor sometimes requires imagination and innovation. 1-13

End of Chapter 1 1-14