1. The Financial Statement Auditing Environment
Chapter 2
The Financial Statement
Auditing Environment

2. Types of Auditors External Auditors Internal Auditors
LO# 1
Types of Auditors
External Auditors
Internal Auditors
Government Auditors
Forensic Auditors
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3. Types of Audit, Attest, and Assurance Services
LO# 2
Types of Audit, Attest, and Assurance Services
Audit Services:
Attest Services:
Assurance Services:
Non-assurance Services:
Internal Control Audits, Compliance Audits, Operational Audits, Forensic Audits
Reporting on nature and quantity of inventory stored in a client’s warehouse so that the client can obtain a bank loan
Auditing is a specialized form of assurance service
Tax Preparation and Planning Services, Management Advisory Services, Compilation and Review Services
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4. Public Accounting Firms
LO# 3
Public Accounting Firms
Public accounting firms range in size from a single proprietor to thousands of owners (or “partners”) and thousands of professional and administrative staff employees.
Big 4
PwC EY
Deloitte
KPMG
Mid-Tier
Grant Thornton
BDO Seidman
McGladrey LLP
Crowe Horwath
MaloneBailey
Regional
Local
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5. Public Accounting Firms in the EU
LO# 3
Public Accounting Firms in the EU
The Big 4 also dominate Public accounting in the EU. However, the next largest CPA firms, by audit revenue, vary:
France
Fiducial
Praxity
Mazars
Eurus/BKR
Germany
BDO
Nexia
Grant Thornton
Rodl & Partner
Italy
Praxity
Mazars
BDO
PKF Italy
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6. LO# 3
Audit Teams
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7. A Time of Challenge and Change
LO# 4
A Time of Challenge and Change
2001
2007
At the end of booms in 2001 and then again in 2007, CPA firms were blamed for their audit clients’ financial reporting frauds.
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8. An Explosion of Scandals
WorldCom
Enron
Parmalat
Countrywide
Lehman Brothers
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9. Government Regulation
LO# 4
Government Regulation
In 2002, Congress passed the Sarbanes-Oxley, and in 2010, the Dodd-Frank Act.
The PCAOB is considering mandatory rotation of the CPA firm that does the audit; the EU has recently passed rules in this area as well as is the area of the provision of non-audit services to audit clients
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10. Society’s Expectations and the Auditor’s Responsibilities
LO# 5
Society’s Expectations and the Auditor’s Responsibilities
The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.
Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected.
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11. Context of Financial Statement Auditing
LO# 6
Context of Financial Statement Auditing
The primary context with which an auditor is concerned is the industry or business of his or her audit client. In other words, the context provided by the client’s business impacts the auditor and the audit, and is thus a primary component of the environment in which financial statement auditing is conducted.
Thought Question:
How would your concerns about the inventory account differ for a Computer Hardware Manufacturer compared to a Financial Derivatives Broker?
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12. LO# 6
A Model of Business
Business organizations exist to create value for their stakeholders. Due to the way resources are invested and managed in the modern business world, a system of corporate governance is necessary, through which managers are overseen and supervised.
Board of Directors
Audit Committee
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13. A Model of Business Objectives Strategies Processes
(5 broad categories)
Controls
Transactions
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14. A Model of Business Processes: Five Components
Financing Process
Purchasing Process
Human Resource Management Process
Inventory Management Process
Revenue Process
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15. An Overview of Business Figure 2-1 An Overview of Business
LO# 7, 8
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16. Organizations That Affect the Public Accounting Profession
LO# 9
Organizations That Affect the Public Accounting Profession
Securities and Exchange Commission (SEC)
Public Company Accounting Oversight Board (PCAOB)
Financial Accounting Standards Board (FASB)
American Institute of Certified Public Accountants (AICPA)
International Auditing and Assurance Standards Board (IAASB)
International Accounting Standards Board (IASB)
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17. Auditing Standards Board
LO# 10,11
Auditing Standards
Auditing standards serve as guidelines for and measures of the quality of the auditor’s performance.
Public Companies
PCAOB
Nonpublic Companies
Auditing Standards Board
126 Countries
IAASB
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18. The 10 Generally Accepted Auditing Standards (PCAOB)
LO# 10,11
The 10 Generally Accepted Auditing Standards (PCAOB)
GAAS
General
Fieldwork
Reporting
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19. Adequate Technical Training & Proficiency
LO# 10,11
General Standards
Adequate Technical Training & Proficiency
Independence
Due Professional Care
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20. Standards of Fieldwork
LO# 10,11
Standards of Fieldwork
Adequate Planning & Supervised Assistants
Obtain Sufficient Understanding of Internal Controls
Obtain Sufficient Appropriate Evidential Matter
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21. Standards of Reporting
LO# 10,11
Standards of Reporting
GAAP
Consistency
Disclosures
Opinion
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22. LO# 10,11
GAAS - PCAOB
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23. Principles Underlying an Audit – ASB and IAASB
LO# 10,11
Principles Underlying an Audit – ASB and IAASB
Purpose:
Responsibilities:
Performance:
Reporting:
To provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework (AU-C )
Have competence and capability; comply with ethical requirements; maintain professional skepticism; exercise professional judgment
Sufficient appropriate audit evidence supporting reasonable (not absolute) assurance that the financial statements are free of material misstatement
Express an opinion, in the form of a written report, based on an evaluation of the audit evidence obtained; or state that an opinion cannot be expressed
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24. Statements on Auditing Standards (SAS)—Interpretations of GAAS
LO# 12
Statements on Auditing Standards (SAS)—Interpretations of GAAS
GAAS and SAS are considered to be minimum standards of performance for auditors.
PCAOB adopted, on an interim basis, GAAS and SAS existing in Standards issued by PCAOB are called Auditing Standards (AS).
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25. Statements on Auditing Standards (SAS)—Interpretations of GAAS
LO# 12
Statements on Auditing Standards (SAS)—Interpretations of GAAS
SAS are classified by two numbering categories: SAS and AU numbers. The SAS number applies to the order in which the standards are issued and are thus chronological. The AU codification organizes the SAS according to topical content.
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26. Statements on Auditing Standards (SAS)—Interpretations of GAAS
LO# 12
Statements on Auditing Standards (SAS)—Interpretations of GAAS
For example, SAS No. 39, “Audit Sampling,” is found under AU 530 because the AU 500s relate to the standards of Evidence.
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27. Ethics, Independence, and the Code of Professional Conduct
LO# 13
Ethics, Independence, and the Code of Professional Conduct
Ethics refers to a system or code of conduct based on moral duties and obligations that indicate how we should behave.
Professionalism refers to the conduct, aims, or qualities that characterize a profession or professional person. All professions operate under some type of code of ethics or code of conduct.
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28. Ethics, Independence, and the Code of Professional Conduct
LO# 13
Ethics, Independence, and the Code of Professional Conduct
Code of Professional Conduct
Principles
Rules of Conduct
Interpretations of the Rules
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29. End of Chapter 2
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