1. 1 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 1 An Overview of Auditing and Assurance Services

2. 1 - 2 Copyright  2003 Pearson Education Canada Inc. What does an auditor do? do?

3. 1 - 3 Copyright  2003 Pearson Education Canada Inc. evidence auditor accumulates and evaluates What does an auditor do?

4. 1 - 4 Copyright  2003 Pearson Education Canada Inc. auditor evidence What are some types of evidence auditors find helpful? What does an auditor do? accumulates and evaluates

5. 1 - 5 Copyright  2003 Pearson Education Canada Inc. to determine correspondence between auditor evidence management assertions established criteria What does an auditor do? accumulates and evaluates

6. 1 - 6 Copyright  2003 Pearson Education Canada Inc. then communicates results to established criteria auditor management assertions interested users evidence What does an auditor do? accumulates and evaluates to determine correspondence between

7. 1 - 7 Copyright  2003 Pearson Education Canada Inc. What is AUDITING?

8. 1 - 8 Copyright  2003 Pearson Education Canada Inc. What is AUDITING? 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.

9. 1 - 9 Copyright  2003 Pearson Education Canada Inc. What is the distinction between auditing and accounting? accountant? auditor?

10. 1 - 10 Copyright  2003 Pearson Education Canada Inc. One of the auditor’s responsibilities is to determine whether accounting rules have been applied correctly. What is the distinction between auditing and accounting?

11. 1 - 11 Copyright  2003 Pearson Education Canada Inc. Could one be a proficient accountant without an extensive knowledge of auditing?

12. 1 - 12 Copyright  2003 Pearson Education Canada Inc. Could one be a proficient auditor without an extensive knowledge of accounting?

13. 1 - 13 Copyright  2003 Pearson Education Canada Inc. Types of audits and auditors 1. audit of financial statements - are state- ments fairly presented? Conducted by independent (external) auditors, e.g., a public accounting firm. Ace Company 2004 Financial Statements

14. 1 - 14 Copyright  2003 Pearson Education Canada Inc. 1. audit of financial statements - are state- ments fairly presented? Conducted by independent (external) auditors, e.g., a public accounting firm. 2. operational audit - is the organization efficient and effective? Usually conducted by internal auditors. Types of audits and auditors

15. 1 - 15 Copyright  2003 Pearson Education Canada Inc. 2. operational audit - is the organization efficient and effective? Usually conducted by internal auditors. Types of audits and auditors 3. compliance audit - is the organization complying with a set of rules? May be conducted by government auditors, e.g., Canada Customs Revenue Agency, Auditor General of Canada.

16. 1 - 16 Copyright  2003 Pearson Education Canada Inc. What is internal auditing?

17. 1 - 17 Copyright  2003 Pearson Education Canada Inc. Many organiza- tions employ in- ternal auditors to help the organ- ization achieve greater efficiency and effectiveness. What is internal auditing?

18. 1 - 18 Copyright  2003 Pearson Education Canada Inc. How do internal and external auditing differ?

19. 1 - 19 Copyright  2003 Pearson Education Canada Inc. How do internal and external auditing differ? Internal auditors usually focus on im- proving the efficiency and effectiveness of their employer.

20. 1 - 20 Copyright  2003 Pearson Education Canada Inc. How do internal and external auditing differ? Internal auditors usually focus on im- proving the efficiency and effectiveness of their employer. External auditors (public accounting firms) usually focus on the fairness of the financial statements of their clients.

21. 1 - 21 Copyright  2003 Pearson Education Canada Inc. There may be very little overlap between the responsibilities of internal and external auditors. internal auditors external auditors

22. 1 - 22 Copyright  2003 Pearson Education Canada Inc. What is the primary economic reason for an audit? An audit will cost our company hundreds of dollars!! What’s the point?

23. 1 - 23 Copyright  2003 Pearson Education Canada Inc. What is the primary economic reason for an audit? An audit will cost our company hundreds of dollars!! What’s the point? An audit can help reduce information risk - the risk that information upon which a business decision is made is inaccurate.

24. 1 - 24 Copyright  2003 Pearson Education Canada Inc. Important Characteristics of a Financial Audit

25. 1 - 25 Copyright  2003 Pearson Education Canada Inc. client management external auditors Important Characteristics of a Financial Audit 1. auditors are independent of client management

26. 1 - 26 Copyright  2003 Pearson Education Canada Inc. 1. auditors are independent of client management 2. auditors base their opinions on the results of selective testing Important Characteristics of a Financial Audit $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $$

27. 1 - 27 Copyright  2003 Pearson Education Canada Inc. 1. auditors are independent of client management 2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause Important Characteristics of a Financial Audit

28. 1 - 28 Copyright  2003 Pearson Education Canada Inc. 1. auditors are independent of client management 2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause 4. auditors form opinions regarding the fairness of financial statements - auditors are never absolutely certain Important Characteristics of a Financial Audit opinion = guarantee

29. 1 - 29 Copyright  2003 Pearson Education Canada Inc. 1. auditors are independent of client management 2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause 4. auditors form opinions regarding the fairness of financial statements - auditors are never absolutely certain 5. auditors report on financial statements as a whole - not on individual items Important Characteristics of a Financial Audit Ace Company 2004 Financial Statements

30. 1 - 30 Copyright  2003 Pearson Education Canada Inc. 1. auditors are independent of client management 2. auditors base their opinions on the results of selective testing 3. an audit is directed toward the discovery of material misstatements regardless of their cause 4. auditors form opinions regarding the fairness of financial statements - auditors are never absolutely certain 5. auditors report on financial statements as a whole - not on individual items 6. auditors are concerned with financial presenta- tion - NOT the client’s financial stability or the wisdom of client management Important Characteristics of a Financial Audit

31. 1 - 31 Copyright  2003 Pearson Education Canada Inc. Rule-making politics: Who makes accountingstandards?

32. 1 - 32 Copyright  2003 Pearson Education Canada Inc. Who makes accounting standards? the Accounting Standards Board of the CICA ASB

33. 1 - 33 Copyright  2003 Pearson Education Canada Inc. What is the nature of the ASB? Standard-making politics:

34. 1 - 34 Copyright  2003 Pearson Education Canada Inc. The ASB is a board with non-CA representation of the interests of many accounting and business groups. What is the nature of the ASB?

35. 1 - 35 Copyright  2003 Pearson Education Canada Inc. Standard-making politics: Who makes auditingstandards?

36. 1 - 36 Copyright  2003 Pearson Education Canada Inc. Who makes auditing standards? the Auditing Standards Board of the CICA AuSB

37. 1 - 37 Copyright  2003 Pearson Education Canada Inc. What is the nature of the AuSB? Standard-making politics:

38. 1 - 38 Copyright  2003 Pearson Education Canada Inc. The AuSB is a board of the CICA which includes representatives of public practice, industry, government, education, commerce and finance, etc. What is the nature of the AuSB?

39. 1 - 39 Copyright  2003 Pearson Education Canada Inc. What is GAAS?

40. 1 - 40 Copyright  2003 Pearson Education Canada Inc. Generally Accepted Auditing Standards (GAAS) - the foundation of all auditing theory and practice

41. 1 - 41 Copyright  2003 Pearson Education Canada Inc. - the foundation of all auditing theory and practice - the basis of all Handbook recommendations issued by the CICA Generally Accepted Auditing Standards (GAAS)

42. 1 - 42 Copyright  2003 Pearson Education Canada Inc. - the foundation of all auditing theory and practice - the basis of all Handbook recommendations issued by the CICA - eight standards categorized into three groups: general, examination, and reporting Generally Accepted Auditing Standards (GAAS)

43. 1 - 43 Copyright  2003 Pearson Education Canada Inc. GENERAL STANDARD -The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.

44. 1 - 44 Copyright  2003 Pearson Education Canada Inc. -formal accounting education, continuing professional education -technical qualifications and experience in client industry GENERAL STANDARD - training and proficiency

45. 1 - 45 Copyright  2003 Pearson Education Canada Inc. GENERAL STANDARD -Due professional care is to be exercised in the performance of the audit and the preparation of the report.

46. 1 - 46 Copyright  2003 Pearson Education Canada Inc. GENERAL STANDARD - objective state of mind

47. 1 - 47 Copyright  2003 Pearson Education Canada Inc. - concerns audit quality: completeness of work- papers, sufficiency & appropriateness of evidence, appropriate report - court precedents form “prudent practitioner;” i.e., what a competent practitioner would do GENERAL STANDARD - Due professional care I’m a prudent practitioner!!

48. 1 - 48 Copyright  2003 Pearson Education Canada Inc. EXAMINATION STANDARDS 1. The work is to be adequately planned & executedusing sufficient knowledge of the business. Assistants, if any, are to be properly supervised.

49. 1 - 49 Copyright  2003 Pearson Education Canada Inc. -planning is complex for large clients, consider: scheduling personnel, types of tests and their timing -supervision is critical because of assistants’ lack of experience -sufficient knowledge of the entity’s business needed for planning and supervision EXAMINATION STANDARDS 1.planning and supervision December

50. 1 - 50 Copyright  2003 Pearson Education Canada Inc. EXAMINATION STANDARDS 2.A sufficient understanding of internal control is to be obtained to plan the audit. When control risk is below maximum, sufficient appropriate audit evidence should be obtained to support the assessment.

51. 1 - 51 Copyright  2003 Pearson Education Canada Inc. EXAMINATION STANDARDS 3.Sufficient appropriate audit evidence is to be obtained through inspection, observation, enquiry, confirmation, computation & analysis, to afford a reasonable basis for an opinion regarding the financial statements under audit.

52. 1 - 52 Copyright  2003 Pearson Education Canada Inc. REPORTING STANDARDS 1.The report should identify the financial statements and distinguish between the responsibilities of management and the auditor.

53. 1 - 53 Copyright  2003 Pearson Education Canada Inc. REPORTING STANDARDS 2.The report should describe the scope of the examination.

54. 1 - 54 Copyright  2003 Pearson Education Canada Inc. REPORTING STANDARDS 3.The report should contain either an expression of opinion, or an assertion that an opinion cannot be expressed. Explain reasons in the latter case.

55. 1 - 55 Copyright  2003 Pearson Education Canada Inc. 4.Where an opinion is expressed, it should indicate whether the financial statements present fairly, in all material respects, the financial position, results of operations and changes in financial position in accordance with an appropriate disclosed basis of accounting, which is normally GAAP. Any reservations should be adequately explained. REPORTING STANDARDS

56. 1 - 56 Copyright  2003 Pearson Education Canada Inc. How do audit clients know that they are receiving appropriate audits?

57. 1 - 57 Copyright  2003 Pearson Education Canada Inc. They may not!!! In order to help ensure the highest in audit quality, public accounting firms should establish a quality control system should establish a quality control system How do audit clients know that they are receiving appropriate audits?

58. 1 - 58 Copyright  2003 Pearson Education Canada Inc. Elements of Quality Control Systems Public accounting firms should establish quality control policies and procedures that address five elements of quality control: - independence, integrity, and objectivity - personnel management - acceptance/continuation of clients and engagements - engagement performance - monitoring

59. 1 - 59 Copyright  2003 Pearson Education Canada Inc. What is a Practice Inspection?

60. 1 - 60 Copyright  2003 Pearson Education Canada Inc. What is a Practice Inspection? -a review of a public accounting firm’s compliance with its quality control system and the Handbook

61. 1 - 61 Copyright  2003 Pearson Education Canada Inc. -a review of a public accounting firm’s compliance with its quality control system and the Handbook -normally every four years What is a Practice Inspection?

62. 1 - 62 Copyright  2003 Pearson Education Canada Inc. -a review of a public accounting firm’s compliance with its quality control system and the Handbook -normally every four years -main purpose is educational, but sanctions can be imposed What is a Practice Inspection?

63. 1 - 63 Copyright  2003 Pearson Education Canada Inc. -a review of a public accounting firm’s compliance with its quality control system and the Handbook -normally every four years -main purpose is educational, but sanctions can be imposed -the firm being reviewed pays for the review What is a Practice Inspection?

64. 1 - 64 Copyright  2003 Pearson Education Canada Inc. -a review of a public accounting firm’s compliance with its quality control system and the Handbook -normally every four years -main purpose is educational, but sanctions can be imposed -the firm being reviewed pays for the review -upon review completion, the inspector prepares a report stating conclusions and recommendations What is a Practice Inspection?