©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley The Demand for Audit and Assurance Services Chapter 1

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Assurance Services Assurance services are professional services that improve the quality of information for decision makers. Assurance services can be performed by CPAs or by a variety of other professionals.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Attestation Services An attestation service is a type of assurance service in which the CPA firm issues a report about the reliability of an assertion that is the responsibility of another party.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Assurance, Attestation, and Nonassurance Services ASSURANCE SERVICES Other Attestation Services (e.g., WebTrust, SysTrust) Other Assurance Services (e.g., CPA Performance View) Certain Management Consulting ATTESTATION SERVICES Audits Reviews

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Assurance, Attestation, and Nonassurance Services NONASSURANCE SERVICES Other Management Consulting Tax Services Certain Management Consulting Accounting and Bookkeeping

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Competent, Independent Person 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Accumulating 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Reporting The final stage in the auditing process is preparing the Audit Report, which is the communication of the auditor’s findings to users.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Audit of a Tax Return Example Internal revenue agent Examines cancelled checks and other supporting records Federal tax returns filed by taxpayer Internal Revenue Code and all interpretations Report on tax deficiencies Competent, independent person Information Established criteria Determines correspondence Accumulates and evaluates evidence Report on results

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Distinction 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.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Types of Audits Financial Statement Audit Operational Audit EfficiencyEffectiveness Compliance Audit

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Financial Statement Audit Example Information Established Criteria Available Evidence Annual audit of Boeing’s financial statements Boeing's financial statements Generally accepted accounting principles Documents, records, and outside sources of evidence

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Operational Audit Example Information Established Criteria Available Evidence Evaluate computerized payroll system for efficiency and effectiveness Number of records processed, cost of the department, and number of errors Company standards for efficiency and effectiveness in payroll department Error reports, payroll records, and payroll processing costs

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Compliance Audit Example Information Established Criteria Available Evidence Determine whether bank requirements for loan continuation have been met Company records Loan agreement provisions Financial statements and calculations by the auditor

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Strategic Systems Audit The auditor must have a thorough understanding of the entity and its environment. Client’s industry Regulations Operations Relationships Business strategies

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Types of Auditors Internal Auditors Certified Public Accounting Firms Internal Revenue Agents General Accounting Office Auditors

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Three Requirements for Becoming a CPA Educational Requirement Uniform CPA Examination Requirement Experience Requirement

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley CPA Examination Sections Audit and Attestation Accounting and Reporting Regulations Business Environments and Concepts

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley Impact of E-commerce CPAs need to understand how key technologies are transforming all aspects of business. Information Technology Hardware SoftwareCommunications Internet

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley End of Chapter 1