1. Auditing and Assurance Services
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
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

2. User Demand for Reliable Information
1-2
User Demand for Reliable Information
Today’s information
More complex
Demanded by remote users
Demanded in a more timely manner
Has far reaching consequences
Information risk
the risk (probability) that the information (mainly financial) disseminated by a company will be materially false or misleading.
users demand an independent third party assessment of the information

3. Exhibit 1.2 Overview of Financial Statement Auditing
1-3
Exhibit 1.2 Overview of Financial Statement Auditing

4. Definition of Auditing
1-4
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).

5. 1-5
The Relationships Among Auditing, Attestation, and Assurance Engagements
Assurance Services
Any Information
Attestation Services
Primarily Financial Information
Auditing
Financial Statements

6. 1-6
Assurance Services
Assurance services are independent professional services that improve the quality of information, or its context, for decision makers.
Examples
Consumer reports
Underwriters laboratories
CPA WebTrust
Performance View
PrimePlus Services

7. Attestation Engagements
1-7
Attestation Engagements
An attestation engagement - a practitioner is assesses and reports 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

8. Sarbanes-Oxley Act of 2002 1-8
In response to several accounting related corporate scandals Congress passed the Sarbanes-Oxley Act
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.

9. Sarbanes-Oxley: Management’s Responsibility For Financial Reporting
1-9
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.
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).

10. PCAOB Management Assertions
1-10
PCAOB Management Assertions
Existence or occurrence – Assets included in accounts exists and events that give rise to transactions have taken place
Rights and obligations- Entity has a legal claim on all assets and revenues reported and has a legal responsibility for all liabilities and expenses
Completeness and cutoff - All transactions have been recorded
Valuation or allocation – Transactions are recorded at the correct amount in the proper period
Presentation and disclosure – All accounts are presented in the appropriate place and all information required has been disclosed in the statements and footnotes.

11. 1-11
Exhibit 1.5 Example Assertions and their Relationships to the Financial Statements

12. Professional Skepticism
1-12
Professional Skepticism
Professional skepticism - auditor’s questioning, evaluative, attitude toward evidence
Management’s assertions without sufficient corroboration.
Financial trends need investigation
Documents are checked for authenticity or alteration
Ask questions, get answers, then verify the answers.
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.

13. Professional Service Firm Organization
1-13
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)

14. The Public Accounting Profession
1-14
The Public Accounting Profession
Assurance services
Audit engagements
Assurance engagements
Attestation engagements
Compilations
Reviews
Tax consulting services
Consulting services

15. Prohibited Services to Audit Clients
1-15
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.

16. Types of Audits and Auditors
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Types of Audits and Auditors
Financial (External Auditors/CPAs)
Ensure that financial statements are accurate.
Operational (Internal and Governmental Auditors/CIAs)
Improve operational economy
Improve operational efficiency
Compliance (Internal and 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.

17. Organization of the Profession
1-17
Organization of the Profession
“Big Four” Accounting Firms
D&T, E&Y, KPMG, PwC
National
Grant Thornton, BDO Seidman
Local/Regional
Melton & Melton (Houston)
Plante Moran (Michigan/Illinois/Wisconsin)
Goodman & Company (Virginia)
Sole Proprietor

18. Become Certified! Education Examination Experience State License! 1-18
After that CPE