1. Chapter 11 Auditing and Assurance Services ACCT-4080

2. Chapter 12 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) ACCT-4080

3. Chapter 13 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 t o report on the financial statements and communicate the findings as required by GAAS. ACCT-4080

4. Chapter 14 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” ACCT-4080

5. Chapter 15 1. Introduction – Who is Client? 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. ACCT-4080

6. Chapter 16 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. ACCT-4080

7. Chapter 17 1. Introduction – Confidence/Ethics ACCT-4080 Center for Audit Quality Survey of Investors How much confidence do you personally have in audited financial information released by publicly- traded U.S. companies? Would you say you have...? 201220112010200920082007 A great deal of confidence7786118 Quite a bit of confidence211922 2530 Some confidence414240423742 Very little confidence19 20211513 No confidence at all675553 (Don't know/refused)665364 CONFIDENT (NET)69 70 7380 Great deal/quite a bit282730283638 Some414240423742 NOT CONFIDENT (NET)252625272016 Very little19 20211513 None at all675553

8. Chapter 18 1. What is Auditing? - Ethics ACCT-4080

9. Chapter 19 1. What is Auditing? - Ethics ACCT-4080

10. Chapter 110 2. Why Study Auditing? Required To obtain employment On CPA, CMA, CFE, CIA, etc., exams Other reasons ACCT-4080

11. Chapter 111 3. Definitions of Auditing AAA definition AICPA definition Information risk ACCT-4080

12. Chapter 112 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. ACCT-4080

13. Chapter 113 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. ACCT-4080

14. Chapter 114 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 ACCT-4080

15. Chapter 115 4. Does Auditing Add Value to Financial Data? Conditions creating a demand for auditing complexity remoteness time-sensitivity consequences * conflict of interest ACCT-4080

16. Chapter 116 4. Does Auditing Add Value to Financial Data? Other evidence market forces agency theory information theory insurance hypothesis by products ACCT-4080

17. Chapter 117 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 ACCT-4080

18. Chapter 118 6. Types of Audits Financial statement audits Compliance audits Operational audits (Governmental audits) Information systems audits Fraud audits Quality audits Environmental audits ACCT-4080

19. Chapter 119 7. Types of Auditors External auditors Internal auditors Governmental auditors ACCT-4080

20. Chapter 120 8. Professional Services ACCT-4080 Assurance Services Any Information Attestation Services Primarily Financial Information Audit Services Financial Statements

21. Chapter 121 8. Professional Services Attestation Services examinations, reviews, or agreed upon procedures Examples financial forecasts and projections pro forma financial information compliance with contractual requirements effectiveness of internal control systems examination of MD&A reporting on controls at a service organization ACCT-4080

22. Chapter 122 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 ACCT-4080

23. Chapter 123 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 ACCT-4080

24. Chapter 124 10. Financial Statement Assertions AU-C 315 Management makes assertions regarding financial statements Auditors use assertions to guide evidence gathering ACCT-4080

25. Chapter 125 10. Financial Statement Assertions (Con’t) Account BalancesTransactionsDisclosures Existence *Occurrence *Occurrence Rights and obligations *Rights and obligations Completeness *Completeness Valuation and allocation *AccuracyValuation and allocation Accuracy Cutoff ClassificationClassification* Understandability * ACCT-4080 * PCAOB Assertions

26. Chapter 126ACCT-4080

27. Chapter 127 11. SOX and PCAOB Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act 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 ACCT-4080

28. Chapter 128 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 ACCT-4080

29. Chapter 129 12. Public Accounting Firms Big 4 National Regional Local ACCT-4080

30. Chapter 130 13. Certification CPA CMA CFE CIA CISA ACCT-4080

31. Chapter 131 13. Certification Components education, examination, experience, CPE 150 hour rule for CPA Exam CPA Exam Auditing and attestation—4 hrs Financial accounting and reporting—4 hrs Regulation—3 hrs. Business environment concepts—3 hrs ACCT-4080

32. Chapter 132 14. Organizations of the Accounting Profession PCAOB AICPA State Boards of Public Accountancy State Societies of CPAs ACCT-4080

33. Chapter 133 15. CPA Mobility To practice in another state Driver’s license model Legislation adopted in 51 jurisdictions so far To obtain permit to practice in another state ACCT-4080

34. Chapter 134 16. Updates Firm mobility and updated definition of attest included in updated UAA Journal of Accountancy MAY 20, 2014 The definition of attest in the newly amended UAA requires that only CPAs operating within a CPA firm can perform: Audits in accordance with Statements on Auditing Standards (SAS); Reviews under Statements on Standards for Accounting and Review Services (SSARS); and Examinations, reviews, and agreed-upon procedures under Statements on Standards for Attestations Engagements (SSAE). Any engagement performed under PCAOB standards. An exception would be public officials and public employees, who are not prohibited by the UAA from performing any of their duties. So, for example, state audit organizations would continue to be able to perform engagements under the SAS, SSARS, and SSAE. ACCT-4080

35. Chapter 135 16. Updates The UAA also has been updated to provide for CPA firm mobility across state lines under a no-notice, no-fee, no-escape regime. This would allow firms registered in one state to provide attest services to clients in another state without registering the firm or paying fees in the second state. Under the UAA provisions, CPA firms would be subject to the laws and regulations of both their home state and the second state, and they would have to meet the peer review and CPA ownership requirements of any mobility state in which they are seeking to perform those attest services. CPAs and CPA firms can already provide nonattest services out-of-state without registering. ACCT-4080

36. Chapter 136 Review Questions for Discussion Chapter 1 1.3 1.5 1.6 1.9 1.14 ACCT-4080 1.15 1.17 1.19 1.20 1.21