1. Auditing and Assurance Services
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Auditing and Assurance Services
ACCT-4080
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2. 1. Introduction - What is Auditing?
Misunderstandings
Overview of auditing
Ultimate purpose of audit
To issue an opinion on the fairness of financial statements (and in some cases, on the client’s internal control structure)
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3. 1. Introduction – Purpose of Audit
Ultimate purpose of audit (formal def)
To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework and to report on the financial statements and communicate the findings as required by GAAS.
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4. 1. Introduction – Who is Client?
What is independence in auditing?
Who is your client in auditing?
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5. 1. Introduction – Who is Client?
Who is the client?
Stanford University professor Maureen McNichols questioned how independent an auditing firm can be when its job depends on the client.
“When a firm hires its auditor, it is hard for the auditor to be truly independent … Audit firms speak of the companies they audit as their clients. When you look at the Web sites of public accounting firms, you see language that describes how their purpose is to provide value to their clients and to build relationships, to help clients solve complex business problems and enhance their ability to build value. I believe public accounting firms were created to serve a different client, the investing public”
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6. 1. Introduction – Who is Client?
Statements on websites of Big 4 firms:
In the United States, Deloitte LLP and its subsidiaries have 57,000 professionals with a single focus: serving our clients and helping them solve their toughest problems. We work in four key business areas — audit, financial advisory, tax and consulting — but our real strength comes from combining the talents of those groups to address clients’ needs.
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
KPMG delivers a globally consistent set of multidisciplinary services based on deep industry knowledge. Our industry focus helps KPMG professionals develop a rich understanding of clients' businesses and the insight, skills, and resources required to address industry-specific issues and opportunities.
Imagine the power of 180,000 people with a common purpose — building relationships that create value for you and your business. This is PwC. Every day, our people work with you to build the value you are looking for.
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7. 1. Introduction – Who is Client?
US Chief Justice Warren Burger in 1984 Supreme Court decision in US v. Arthur Young:
By certifying the public reports that collectively depict a corporation’s financial status, the independent auditor assumes a public responsibility transcending any employment relationship with the client. The independent public accountant performing this special function owes ultimate allegiance to the corporation’s creditors and stockholders, as well as to the investing public. This “public watchdog” function demands … complete fidelity to the public trust.
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8. 1. Introduction – Salaries (Robert Half)
Large Firms
Accounting 408
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9. 1. Introduction – Salaries (Robert Half)
Midsize Firms
Accounting 408
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10. 1. Introduction – Salaries (Robert Half)
Small Firms
Accounting 408
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11. 2. Why Study Auditing? Required To obtain employment
On CPA, CMA, CFE, CIA, etc., exams
Other reasons
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12. 3. Definitions of Auditing
AAA definition
AICPA definition
Information risk
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13. 3. Definition of Auditing
AAA definition: 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.
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14. 3. Definitions of Auditing
AICPA definition: The objective of the ordinary examination of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and cash flows in conformity with GAAP.
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15. 3. Definitions of Auditing
Information risk
Information risk is the risk that the financial statements will not be reliable (i.e., they will be false or misleading)
Consequence of unreliable financial statements: users make wrong decisions
Wrong decisions lead to inefficient capital markets
∴ auditing is the process that improves the reliability of financial information
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16. 4. Does Auditing Add Value to Financial Data?
Conditions creating a demand for auditing
complexity
remoteness
time-sensitivity
consequences
*conflict of interest
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17. 4. Does Auditing Add Value to Financial Data?
Other evidence
market forces
agency theory
information theory
insurance hypothesis
by products
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18. 5. Significant Events in History of Auditing
Ancient to 1850
1850 to 1900
1900 to 1940
1940 to 1975
1975 to 1985
1985 to 1995
1995 to 2002
2002
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19. 6. Types of Audits Compliance audits Operational audits
Financial statement audits
Governmental audits
Information systems audits
Fraud audits
Quality audits
Environmental audits
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20. 7. Types of Auditors External auditors Internal auditors
Governmental auditors
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21. 8. Professional Services
Assurance Services
Any Information
Attestation Services
Primarily Financial Information
Audit Services
Financial Statements
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22. 8. Professional Services
Attestation
affirm to be genuine
when a CPA expresses a conclusion about the reliability of subject matter or an assertion that is the responsibility of another party
includes financial and nonfinancial services
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23. 8. Professional Services
Attestation Services
examinations, reviews, or agreed upon procedures
Examples
agreed upon procedures
financial forecasts and projections
pro forma financial information
compliance with contractual requirements
examination of MD&A
reporting on controls at a service organization
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24. 8. Professional Services
Assurance Services Examples
Risk assessment
Business performance measurement
Information systems reliability
Electronic commerce
Third party reimbursement maximization
XBRL reporting
Customer satisfaction surveys
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25. 9. Professional Skepticism
Standards require you to exercise professional skepticism
Potential conflict of interest always exists between
auditor
management of the entity being audited
Neither assume management is
dishonest
nor assume unquestioned honesty
hold no preconceived conclusions on any side of issue
Have an attitude that includes a questioning mind and a critical assessment of evidence
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26. 10. Financial Statement Assertions
AU-C 315
Management makes assertions regarding financial statements
Auditors use assertions to guide audit planning and evidence gathering
Little Match Company
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27. 10. Financial Statement Assertions (Con’t)
Account Balances
Transactions
Disclosures
Existence *
Occurrence *
Occurrence
Rights and obligations *
Rights and obligations
Completeness *
Completeness
Valuation and allocation *
Accuracy
Valuation and allocation
Cutoff
Classification
Classification* Understandability *
* PCAOB Assertions
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28. ACCT-4080
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29. 11. SOX and PCAOB Sarbanes-Oxley Act of 2002
Passed by Congress in response to accounting related corporate scandals
Applies to audits of issuers
Some major provisions
Creation of PCAOB
Requirement for audit of internal controls
CEO/CFO certification of f/s
Prohibition of certain client services
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30. 11. SOX and PCAOB Prohibited services to audit clients
bookkeeping and related services
design or implementation of financial IT sys
appraisal or valuation services
actuarial services
internal audit outsourcing
management or human resources services
investment or broker/dealer services
legal and expert services (unrelated to the audit)
Some tax services and other non-prohibited services okay if preapproved by Audit Comm
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31. 12. Public Accounting Firms
Big 4
National
Regional
Local
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32. 13. Certification
CPA
CMA
CFE
CIA
CISA
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33. 13. Certification Components 150 hour rule for CPA Exam CPA Exam
education, examination, experience, CPE
150 hour rule for CPA Exam
CPA Exam
Auditing and attestation—4 hrs
Financial accounting and reporting—4 hrs
Regulation—4 hrs.
Business environment concepts—4 hrs
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34. 14. Organizations of the Accounting Profession
PCAOB
AICPA
State Boards of Public Accountancy
State Societies of CPAs
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35. 15. CPA Mobility To practice in another state
Driver’s license model
Legislation adopted in 52 jurisdictions so far
To obtain permit to practice in another state
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36. Review Questions for Discussion
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1.5
1.6
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1.11
1.14
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1.17
1.19
1.20
1.21
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