1. Chapter 1 Auditing and Assurance Services
"If you want to be successful, it's just this simple:
Know what you're doing. Love what you're doing.
And believe in what you're doing."
-- Will Rogers
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Chapter 1 Objectives
1. Define information risk and explain how auditing and assurance services play a role in reducing this business risk.
2. Define and contrast auditing, attestation, and assurance services.
3. Describe and define the management assertions embodied in financial statements, and explain why auditors use them as a focal point of the audit.
4. Explain some characteristics of professional skepticism.
5. Describe the organization of public accounting firms and identify the various services they offer.
6. Describe the audits and auditors in governmental, internal, and operational auditing.
7. List and explain the requirements for becoming a certified information professional.
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3. User Demand for Reliable Information
User demand for reliable, relevant
information is a consequence of
Complexity
Remoteness
Time sensitivity
Consequences
Information risk is the risk (probability) that the information (mainly financial) disseminated by a company will be materially false or misleading.
Demand for auditing and assurance services
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4. Exhibit 1.1 Overview of Financial Statement Auditing
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5. Definition of Auditing
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 the assertions and established criteria and communicating the results to interested users.
Financial Statements
(including footnotes)
GAAP
Auditor's Report/
Other Reports
Persons who rely on the financial reports
Creditors
Investors
Source: American Accounting Association Committee on Basic Auditing Concepts A Statement of Basic Auditing Concepts, American Accounting Association (Sarasota, FL).
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Exhibit 1.2 The Relationships Among Auditing, Attestation, and Assurance Engagements
Assurance Services
Any Information
Attestation Services
Primarily Financial Information
Auditing
Financial Statements
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Assurance Services
Assurance services are independent professional services that improve the quality of information, or its context, for decision makers.
Examples
CPA WebTrust (
Systrust
Performance View
PrimePlus Services (formerly known as ElderCare)
Can you think of others?
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8. Attestation Engagements
An attestation engagement is one “in which a practitioner is engaged to issue or does issue a report on subject matter or an assertion about the subject matter that is the responsibility of another party.”
Some financial attestation engagements (other than audits)
Supplementary financial statistics
Pro forma financial information
Financial forecasts and projections
Some non-financial attestation engagements
Compliance with contractual requirements
Effectiveness of internal control systems
Inventory quantities and locations
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Sarbanes-Oxley Act of 2002
Congress passed the Sarbanes-Oxley Act in an attempt to address a number of weaknesses found in corporate financial reporting in the wake of the recent accounting scandals. The Act’s major provisions include:
Requirement of CEO/CFO certification of financial statements
Requirement of auditor examination of company internal controls
Creation of the Public Company Accounting Oversight Board (PCAOB) to serve as an auditing profession “watchdog.”
Prohibition of certain client services by firms conducting a client’s audit.
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10. Sarbanes-Oxley: Management’s Responsibility for Financial Reporting
One of its most important provisions (Section 302) states that the key company officials must certify the financial statements. Certification means that the company CEO and CFO must sign a statement indicating:
They have read the financial statements.
They are not aware of any false or misleading statements (or any key omitted disclosures).
They believe that the financial statements present an accurate picture of the company’s financial condition.
Source: U.S. Congress, Sarbanes-Oxley Act of 2002, Pub. L , 116 Stat/ 745 (2002).
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11. Management Assertions (SAS 31)
Existence (assets) or occurrence (transactions)
Rights and obligations – ownership/owership
Valuation or allocation
Completeness - all accounts included
Presentation and disclosure
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Exhibit 1.4 Example Assertions and their Relationships to the Financial Statements
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13. The New, Improved (?) Management Assertions (SAS 106)*
*(Recommended, but not required)
Assertions
About transactions
About account balances
Presentation and disclosure
Occurrence 
Existence
Completeness
Cutoff
Rights and obligations
Accuracy
Valuation or allocation
Classification
Understandability
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14. Professional Skepticism
Professional skepticism is an auditor’s tendency not to believe management’s assertions without sufficient corroboration.
A potential conflict of interest always exists between the auditor and the client.
Management wants to portray the company and its operations in the best possible light.
Auditors want to portray the company and its operations fairly.
Ask questions, get answers, then verify the answers.
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15. Exhibit 1.5 Professional Service Firm Organization
Executive Committee
Managing Partner
Practice Offices
Partners-in-Charge
Tax Consulting
Services
Audit, Assurance and
Business Advisory
Services
Consulting
Services
Partner
Partner
Manager
Manager
Manager
Manager
Manager
Manager
Senior (In-charge) Accountants
Staff Accountants (or Associates)
Senior (In-charge) Accountants
Staff Accountants (or Associates)
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16. The Public Accounting Profession
Assurance services
Audit engagements
Assurance engagements
Attestation engagements
Compilations
Reviews
Tax consulting services
Consulting services
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17. Prohibited Services to Audit Clients
Sarbanes-Oxley and the PCAOB prohibit professional service firms from providing any of the following services to an audit client:
bookkeeping and related services
design or implementation of financial information systems
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)
Professional service firms may provide client tax services (with some restrictions) and other non-prohibited services to audit clients if the company’s audit committee has approved them in advance.
In summary, Sarbanes-Oxley prohibits professional service firms from performing any client services in which the auditors may find themselves making management decisions or auditing their own firm’s work.
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18. Types of Audits and Auditors
Financial (External Auditors/CPAs)
Ensure that financial statements are fairly presented in accordance with GAAP.
Operational (Internal Auditors/CIAs)
Improve operational economy
Improve operational efficiency
Compliance (Governmental Auditors)
Ensure compliance with company and/or governmental rules and regulations
Forensic (Fraud Auditors/CFEs)
Most audits are a combination of financial, operational, and compliance audits.
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19. Organization of the Profession
“Big Four” Accounting Firms
D&T, E&Y, KPMG, PwC
National
e.g., Grant Thornton, BDO Seidman
Local/Regional
e.g., Melton & Melton (Texas), Postlethwaite & Netterville (Louisiana), Goodman & Company (Virginia)
Sole Proprietor
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Become Certified!
Education
Examination
Experience
State Certificate and License for CPA
Skills sets and your education
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The New CPA Exam
Computerized
Four parts
Auditing and attestation—4.5 hrs
Financial accounting and reporting—4 hrs
Regulation—3 hrs.
Business environment—2.5 hrs
Skill sets—research, communication, analysis, judgment and understanding
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Engagement Overview
OBTAIN
(OR RETAIN)
CLIENT
ENGAGEMENT
PLANNING
INTERNAL
CONTROL
EVALUATION
EVIDENCE
GATHERING
REPORTING
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