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

2. Types of Auditors External Auditors Internal Auditors
Assurance
Attestations / Audits
Internal Auditors
Effectiveness
Efficiency
Government Auditors
Any of the above
Forensic Auditors
Fraud
Investigations

3. Types of Audit, Attest, and Assurance Services
Audit Services (Independence required):
Attest Services (Independence required):
Assurance Services (Independence required):
Nonaudit Services (Independence NOT required):
F/S Audits, Internal Control Audits, Compliance Audits, Operational Audits, Forensic Audits
Reporting on the quantity of inventory in a company’s warehouse (to obtain a bank loan), Reporting on specific compliance with a bank loan’s debt covenant, Reviews
Awards, Lotteries, Improving the quality of given information
Tax Preparation and Planning Services, Management Advisory Services, Compilation and Bookkeeping Services

4. 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
E&Y
Deloitte
KPMG
Mid-Tier 3
Grant Thornton
BDO Seidman
RSM McGladrey
Regionals
Locals
Right click on firms for hyperlinks

5. Typical Audit Teams
And Interns!

6. A Time of Challenge and Change
During the economic boom of the late 1990s and the early 2000s, accounting firms aggressively sought opportunities to market a variety of high-margin (very profitable) nonaudit services to their auditees. Sadly there was also an explosion of scandals.
Public Accounting Firms
Stock Exchanges
Mutual Fund Managers
Brokerage Firms
Corporate Giants

7. Government Regulation
In 2002, Congress passed the Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act (a.k.a. SOX). Partners must rotate off every 5 years and auditees must have an integrated audit (an audit on the effectiveness of their internal controls over financial reporting as well as the F/S).
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. It amended SOX by exempting firms with under $75 Million from having audits on their internal controls as well as giving the PCAOB authority to inspect foreign audit firms that practice in the U.S or have U.S. auditees.

8. Context of F/S Auditing
The context provided by the entity’s industry or business impacts the auditor and the audit, and is thus a primary component of the environment in which F/S auditing is conducted.
Thought Question:
How would your concerns about the inventory account differ for a Computer Hardware Manufacturer versus a Jewelry Store or a Christmas Tree farm or a Gas & Oil firm?

9. 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
Objectives
Strategies
Audit Committee

10. Human Resource Management Process Inventory Management Process
Business Processes (Cycles): 5 Components to Implement the Objectives and Strategies
Revenue Process
Purchasing Process
Human Resource Management Process
Inventory Management Process
Financing Process 10

11. 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, ASB)
International Accounting Standards Board (IASB)
International Auditing and Assurance Standards Board (IAASB)
Right click on acronyms for hyperlinks

12. Auditing Standards Board
Auditing standards serve as guidelines for performing the audit, defining the minimum standards of performance, and measures of the quality of the auditor’s performance.
Public Companies
PCAOB
Nonpublic Companies
Auditing Standards Board
> 100 Countries
IAASB

13. The PCAOB’s 10 Generally Accepted Auditing Standards
10 GAAS
3 General
3 Field Work
4 Reporting
Think “Tip Sie Acdo”

14. Adequate Technical Training & Proficiency
3 General Standards
Adequate Technical Training & Proficiency
Independence
Due Professional Care
Think “Tip Sie Acdo”

15. 3 Field Work Standards Think “Tip Sie Acdo”
Adequate Planning & Supervise Assistants
Obtain Sufficient Understanding of Internal Controls
Obtain Sufficient Appropriate Evidential Matter
Think “Tip Sie Acdo”

16. 4 Reporting Standards Think “Tip Sie Acdo” GAAP Consistency
Disclosures
Opinion
Think “Tip Sie Acdo”

17. PCAOB’s GAAS Summary General Standards Standards of Field Work
The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.
In all matters relating to the assignment an independence in mental attitude is to be maintained by the auditor or auditors
Due professional care is to be exercised in the performance of the audit and the preparation of the report.
Standards of Field Work
The work is to be adequately planned and assistants, if any, are to be properly supervised.
A sufficient understanding or internal control is to be obtained to plan the audit and to determine the nature, timing and extent of tests to be performed.
Sufficient appropriate evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.
Standards of Reporting
The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles (GAAP).
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 either an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.

18. Principles Underlying Audits - ASB
Purpose:
Responsibilities:
Performance:
Reporting:
To express an opinion on the F/S prepared by management. It’s management’s responsibility to prepare the F/S and to provide the auditor with information necessary to conduct the audit.
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 F/S 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.

19. Statements on Auditing Standards (SAS) - Interpretations of GAAS
GAAS and SAS are considered to be the minimum standards of auditor performance.
PCAOB adopted, on an interim basis, GAAS and SAS existing in Standards issued by PCAOB are called Auditing Standards (AS).
The AICPA’s SAS
The PCAOB’s AS
Right click for hyperlinks

20. 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 standards according to topical content. Right-click on the link below and open the hyperlink:
The AICPA’s SAS
The PCAOB’s AS
Right click for hyperlinks

21. 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. Go back one slide and open the hyperlink to the AICPA. In the search engine type in Code of Conduct. You can also see estimates for accounting salaries in different areas of the country. Obviously, bigger offices will provide higher salaries (larger clients, cost of living, etc.)

22. Interpretations of the Rules
Ethics, Independence, and the Code of Professional Conduct Discussed in Depth in Ch. 19!
Principles
Rules of Conduct
Interpretations of the Rules