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Auditing March 30, 2015 1 BUS 425 – Auditing Chapter 1 The Demand for Audit Services.

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Presentation on theme: "Auditing March 30, 2015 1 BUS 425 – Auditing Chapter 1 The Demand for Audit Services."— Presentation transcript:

1

2 Auditing March 30, 2015 1 BUS 425 – Auditing Chapter 1 The Demand for Audit Services

3 Auditing March 30, 2015 2 The company had recorded billions of dollars of regular fees paid to local telephone companies as capital assets. This accounting trick allowed the company to turn a $662 million loss into a $2.4 billion profit in 2001. WorldCom – Cynthia Cooper

4 Auditing March 30, 2015 3 Line cost expense3,062 Cash3,062 Adjusting JE PP&E 3,062 Line cost expense3,062 WorldCom – Cynthia Cooper

5 Auditing March 30, 2015 4

6 Auditing 5 Juancarlos What is the definition of Auditing?

7 Auditing March 30, 2015 6 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. Page 2 financial statements GAAP

8 Auditing March 30, 2015 7 Page 33

9 Auditing March 30, 2015 8 Peter What is audit evidence?

10 Auditing March 30, 2015 9 Evidence ---- is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria. page 2

11 Auditing March 30, 2015 10 Evidence ---- electronic data about transactions documented data about transactions written communications observations by the auditor oral testimony (responses to questions)

12 Auditing March 30, 2015 11 Levi What is the objective of AU-C 330

13 Auditing March 30, 2015 12 AU-C 330 response to RoMM The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the assessed risk of material misstatement through designing and implementing appropriate responses to those risks.

14 Auditing March 30, 2015 13 Bart What is the objective of AU-C 500

15 Auditing March 30, 2015 14 AU-C 500 Audit Evidence The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.

16 Auditing March 30, 2015 15 Page 59

17 Auditing March 30, 2015 16 Vouch or Trace project Go to web site http://clubs.cob.calpoly.edu/~cmiller/ACTG%20425%20page.html http://clubs.cob.calpoly.edu/~cmiller/ACTG%20425%20page.html look up sales journal - talk about overstatement / occurrence look at sales journal – talk about overstatement / valuation look at sales orders – talk about understatement / completeness

18 Auditing March 30, 2015 17 Independent Auditor’s Report Report on the Financial Statements We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.2 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. [Auditor's signature, city and state, date of report]

19 Auditing March 30, 2015 18 Independent Auditor’s Report Report on the Financial Statements We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility

20 Auditing March 30, 2015 19 Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

21 Auditing March 30, 2015 20 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Other Legal and Regulatory Requirements Auditor's signature Auditor's city and state Date of the auditor's report

22 Auditing March 30, 2015 21 n The magnitude of an omission or misstatement of accounting information that, in light of the surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement, Materiality page 118

23 Auditing March 30, 2015 22

24 Auditing March 30, 2015 23

25 Auditing March 30, 2015 24

26 Auditing March 30, 2015 25 John What is “our” operational definition of independence?

27 Auditing March 30, 2015 26 A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing professional auditing or attestation services. Independence

28 Auditing March 30, 2015 27 Independence enhances the auditor’s ability to act with integrity, to be objective, and to maintain an attitude of professional skepticism. Independence includes independence of mind (fact) Independence of appearance Independence

29 Auditing March 30, 2015 28 Jeanette What does FASB stand for ?

30 Auditing March 30, 2015 29 Priya What is the Sarbanes Oxley Act of 2002?

31 Auditing March 30, 2015 30 Algernon Which of the following are government agencies ? FASB SEC PCAOB

32 Auditing March 30, 2015 31 Julia What does GAAS stand for ? What does GAAP stand for ?

33 Auditing March 30, 2015 32 GAAP FASB FAS ASC 310-10-25-3 ASU GAAS public private PCAOB AICPA AS SAS

34 Auditing March 30, 2015 33 Jordan n What is Business Risk? n What is Information Risk?

35 Auditing March 30, 2015 34 Business Risk - the risk (probability) that an entity will fail to meet its objectives Information Risk - the probability that the information upon which the decision was made was inaccurate.

36 Auditing March 30, 2015 35 Joseph n What is the Risk-Free interest rate?

37 Auditing March 30, 2015 36 Mackenzie You are a bank lending officer In relation to the risk-free interest rate What interest rate would you charge to a company with a great deal of business risk?

38 Auditing March 30, 2015 37 Melissa You are a bank lending officer In relation to the risk-free interest rate What interest rate would you charge to a company with a great deal of information risk?

39 Auditing March 30, 2015 38 Garren n What are some conditions that create demand for auditing?

40 Auditing March 30, 2015 39 conditions which create demand for audits Page 5 Remoteness owner separate from management Motives of the provider Voluminous data Complex transactions

41 Auditing March 30, 2015 40 Who? Talk about the difference between assurance attestation auditing

42 Auditing March 30, 2015 41

43 Auditing March 30, 2015 42 Assurance – improves the quality of information Attestation – report regarding the reliability of specific assertions made by management Audit – opinion regarding management’s assertions embodied in financial statements

44 Auditing March 30, 2015 43 Important n Specified audit objectives AU-C 200, 315, 500, 700 & Independence) n Unmodified Audit Report n Management’s Assertions p. 59

45 Auditing March 30, 2015 44 Cody What are the three lines of service typically provided by a public accounting firm ?

46 Auditing March 30, 2015 45 Typical lines of business Audit (accounting, attestation, audit) Tax Consulting (advisory services)

47 Auditing March 30, 2015 46 Jeffrey What are the various job levels or career levels in a public accounting firm ?

48 Auditing March 30, 2015 47 CPA partnership structure PartnerP Senior MngrSM SM Manager X YZ Senior X X X Y Y Y Z Z StaffXXXXXXXXXYYY YYY YYY ZZZ ZZ

49 Auditing March 30, 2015 48 Education cpa exam As of Dec. 31, 2013 / Jan. 1, 2014 Bachelors degree 225 quarter hours 36 business 36 + 30 accounting –20 accounting –10 ethics + 1 year experience http://www.dca.ca.gov/

50 Auditing March 30, 2015 49

51 Auditing March 30, 2015 50

52 Auditing March 30, 2015 51

53 Auditing March 30, 2015 52

54 Auditing March 30, 2015 53

55 Auditing March 30, 2015 54 transactions Account balances Presentation & disclosure occurrenceexistence occurrence & rights & obligations completeness accuracy valuation & allocation accuracy & valuation classification classification & understandability cutoff rights & obligations

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