1. 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.

2. Accumulating Evidence 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.
Transaction
data
Written and
electronic
Communications
with outsiders
Observations
Client
Testimony

3. Competent, Independent Person
Competence
Judgment and Experience
Independence
Evaluation of Evidence
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.
Proper Conclusion

4. Audit of a Tax Return Example

5. Distinguish 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.

6. Economic Demand for Auditing
Demand Driver Information risk
Auditing can have a significant effect
on information risk.
Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate.
What is meant by “Information risk”?
--risk that decisions were based on inaccurate information

7. Causes of Information Risk
Remoteness of information
Biases and motives of the provider
Voluminous data
It is nearly impossible for a decision maker to have much firsthand knowledge about the organization with which they do business. Information from others must be relied upon.
If information is provided by someone whose goals are inconsistent with those of the decision maker, the information may be biased in favor of the provider.
The higher the volume of transactions, the greater the risk that improperly recorded information is included in the records.
Exchange transactions between organizations have become increasingly complex and therefore more difficult to record properly.
Complex exchange transactions

8. Reducing Information Risk
User verifies information
User shares information risk with management
Audited financial statements are provided
The user may go to the business premises to examine records and obtain information about the reliability of the statements.
There is considerable legal precedent that management is responsible for providing reliable information to users.

9. Relationships Among Auditors, Client, and External Users
Client or audit
committee hires
auditor
Auditor issues
report relied
upon by users to reduce
information risk
Client
External
Users
Provides capital
Client provides financial statements to users

10. Assurance Services An independent professional service
Can be performed by CPAs or by a variety
of other professionals
Assurance services are independent professional services that improve the quality of information for decision makers.

11. Attestation Services A type of assurance service
CPA reports on the reliability of an assertion
That is made by another party.

12. Attestation Services 1. Audit 3. Review Historical Financial
Five Categories
1. Audit
3. Review
Historical
Financial
Statements
In the audit of historical financial statements, management asserts that the statements are fairly stated in accordance with applicable US or international accounting standards.
For an audit of internal controls over financial reporting, management asserts that internal controls have been developed and implemented following well-established criteria.
For a review of historical financial statements, management asserts that the statements are fairly stated in accordance with accounting standards which are the same as for audits.
For attestations on information technology, management makes various assertions about the reliability and security of electronic information.
CPAs provide numerous other attestation services and many of these are natural extensions of the audit of historical financial statements as users seek independent assurances about other types of information.
2. Internal
Control over
Financial
Reporting
5. Other
4. Information
Technology

13. Green Initiatives Bring Assurance Opportunities, Competition www. sasb
Green Initiatives Bring Assurance Opportunities, Competition
Global interest has triggered a surge in reports.
95% of the Global Fortune 250 released
environmental, social, and governance data.
Presented in standalone reports or integrated
into annual financial reports.

14. Assurance, Attestation, and Nonassurance Services

15. Types of Audits
Operational
Compliance
Financial Statement

16. Operational Audit Example Evaluate computerized payroll system
for efficiency and effectiveness
Information
Number of records processed, costs of
the department, and number of errors
Established
Criteria
Company standards for efficiency and
effectiveness in payroll department
The operational audit evaluates the efficiency and effectiveness of any part of an organization's operating procedures and methods.
Available
Evidence
Error reports, payroll records, and
payroll processing costs
1-16

17. Compliance Audit Example Determine whether bank requirements
for loan continuation have been met
Information
Company records
Established
Criteria
Loan agreement provisions
A compliance audit is conducted to determine whether the auditee is following specific procedures, rules or regulations set by some higher authority. Some examples may include determining whether accounting personnel are following procedures prescribed by the controller, review wage rates for compliance with minimum wage laws, and examine contractual agreements with bankers and other lenders to be sure the company is complying with legal requirements.
Available
Evidence
Financial statements and
calculations by the auditor 17

18. Audit of Financial Statements
Example
Annual audit of Boeing’s financial
statements
Information
Boeing's financial statements
Established
Criteria
Generally accepted accounting
principles
Available
Evidence
Documents, records, and outside
sources of evidence

19. Certified Public Accounting Firms

20. Activities of CPA Firms
Accounting and bookkeeping services
Tax services
Management consulting services
Many small companies with limited accounting staff rely on CPA firms to prepare their financial statements.
CPA firms prepare corporate and individual tax returns for both audit and non-audit clients. Almost every CPA firm performs tax services.
Most CPA firms provide certain services that enable their clients to operate their businesses more effectively. The ability to provide this value added service often distinguishes one firm from another.

21. Sarbanes-Oxley Act This Act is considered by many observers to
be the most important legislation affecting
the auditing profession since the 1930s.
The provisions of the Act apply to publicly
held companies and their audit firms.

22. Sarbanes-Oxley Act SEC PCAOB (Public Company Accounting
Oversight Board)
The Sarbanes-Oxley Act established the PCAOB which is overseen by the SEC. The PCAOB provides oversight for auditors of public companies, establishes auditing and quality control standards for public company audits and performs inspections of the quality controls at audit firms performing those audits.

23. Securities and Exchange Commission
The purpose is to assist in providing investors
with reliable information upon which to make
investment decisions
The Securities Act of 1933
The Securities Exchange Act of 1934
The 1933 Act requires most companies planning to issue new securities to the public to submit a registration statement to the SEC for approval.
The 1934 Act provides additional protection by requiring public companies and others to file detailed annual reports with the Commission. The Commission examines these statements for completeness and adequacy before permitting the company to sell its securities through the exchanges.

24. Securities and Exchange Commission
Form S-1
Form 8-K
Form 10-K
Form 10-Q
Form S-1 applies to new securities.
Form 8-K is field to report significant events that are of interest to public investors.
Form 10-K must be filed annually within days after the close of each fiscal year, depending on the size of the company.
Form 10-Q must be filed quarterly for all publicly held companies.

25. AICPA Performs the following services for CPAs:
Sets professional requirements
Conducts research
Publishes materials related to services
performed
Such services include the following:
Accounting, auditing, attestation and assurance services,
management consulting services, and taxes.
All AICPA members and other practicing CPAs must follow the
standards and guidelines set by the AICPA.
Empowered to set standards (guidelines)
and rules

26. Establishing Standards and Rules
1. Auditing standards
2. Compilation and review standards
3. Other attestation standards
4. Code of Professional Conduct

27. Statements on Auditing Standards
Classification of Statements on Auditing Standards
GAAS and Standards of Performance

28. International Standards on Auditing
IFAC is the worldwide organization
for the accountancy profession.
The IAASB works to improve the
uniformity of auditing practices and
related services throughout the world.

29. International Standards on Auditing
ISAs do not override a country's regulations governing the audit of financial or other information as each country’s own regulations generally govern audit practices.

30. GAAS
These standards represent the minimum standards of performance.

31. PCAOB Auditing Standards – United States
General Standards
1. Adequate training and proficiency
2. Independence in mental attitude
3. Due professional care
The auditor must have adequate technical training and proficiency to perform the audit.
The auditor must maintain independence in mental attitude in all matters relating
to the audit.
The auditor must exercise due professional care in the performance of the audit and the
preparation of the report.

32. PCAOB Auditing Standards – United States
Standards of Field Work
1. Proper planning and supervision
2. Understanding of the entity
3. Sufficient appropriate evidence
The auditor must adequately plan the work and must properly supervise any assistants.
The auditor must obtain a sufficient understanding of the entity and its environment, including its
internal control, to assess the risk of material misstatement and to design further audit
procedures.
The auditor must obtain sufficient and appropriate audit evidence by performing audit procedures
to afford a reasonable basis for an opinion regarding the financial statements under audit.

33. PCAOB Auditing Standards – United States
Standards of Reporting
1. Statements prepared in accordance with GAAP
2. Circumstances when GAAP not followed
3. Adequacy of disclosures
4. Expression of opinion on financial statements
The report shall state whether the financial statements are presented in accordance with
generally accepted accounting principles.
The report shall identify those circumstances in which such principles have not been
consistently observed in the current period in relation to the preceding period.
Informative disclosures in the financial statements are to be regarded as reasonably
adequate unless otherwise stated in the report.
The report shall contain an expression of opinion regarding the financial statements,
taken as a whole.

34. Relationship Between ASB and PCAOB Auditing Standards
The PCAOB initially adopted GAAS as interim standards.
The term generally accepted auditing standards is no longer used for public company audits.
The term ASB will be used for audits of private companies.
Public company audits refer to PCAOB auditing standards.
Public
company
audits
Private
company
audits

35. Statements on Auditing Standards
The principles in the Preface of the Codification
of Auditing Standards provide a framework for
auditing standards.
Statements on Auditing Standards (SASs)
provide guidance to auditors in obtaining
reasonable assurance to form an opinion on
financial statements and are the most
authoritative references available to auditors.

36. Relationships