1 acc 3303: auditing 2 assurance services ?? need for assurance ? illustration using an audit...
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ACC 3303: AUDITING
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Assurance Services ??
Need for Assurance ?
Illustration using an Audit Engagement as an example
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Assurance Services ??
Definition (ISA 100 Assurance Engagements)
An engagement where a professional accountant evaluates or measures a subject matter that is the responsibility of another party against suitable criteria, and expresses an opinion which provides the indented user with a level of assurance about the subject matter.
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Assurance Services ??
Levels of Assurance
1. Absolute Assurance
2. High-level of Assurance
3. Moderate Assurance
4. No Assurance
Examples ?
The graphical illustration
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Audit Engagements
Definition (SLAuS – Glossary of Terms)
The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects , in accordance with an identified financial reporting framework.
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Audit Engagements
Definition of ‘Audit’
A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria and communicating the results to the interested users.
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Audit Engagements
Accounting & Auditing - Difference
Accounting: Generation of financial information which is the responsibility of the management
Auditing: Process that evaluates this information against a criteria
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Audit Engagements
Types of Audits (by objective)
1. Financial Statement Audits
2. Compliance Audits (of laws and regulations)
3. Operational Audits (Operational Efficiency, Effectiveness and Economy of operations)
Type of Audits (by affiliation – relationship)
1. External Auditors
2. Internal Auditors
3. Government Auditors
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Audit Engagements
Theoretical Framework
Postulates (basic ground rules)
- Financial data/ information are verifiable
- No long term conflict between mgt and auditors
- Internal control structures reduce fraud & errors
- SLAS leads to fair presentation
- True in past is true for future
- FS are free of unusual irregularities (e.g. Fraud)
- Auditors are independent in expressing their opinion
- Auditor is professionally obligated
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Audit Engagements
Why FS are Audited ?
- Potential conflict (Mgrs and Users)
- Information is critical in decision making
- Expertise is important in preparing and verifying information
- Users are not allowed directly to access information
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Audit Engagements
Limitations ?
- Sampling technique
- Most of audit evidence is not conclusive but persuasive
- Limitations of acc and internal control systems
- Human weaknesses as fatigue, carelessness
- An exercise of postmortem
- Auditing is judgmental
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Nature of Auditing
AuditingAuditing is the accumulation and evaluation is the accumulation and evaluationof evidence about information to determineof evidence about information to determineand report on the degree of correspondenceand report on the degree of correspondencebetween the information and established criteria.between the information and established criteria.
Auditing should be done by a competent,Auditing should be done by a competent,independent person.independent person.
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Information and Established Criteria
To do anTo do an audit, there must be information in aaudit, there must be information in averifiable formverifiable form and someand some standardsstandards (criteria)(criteria)by which the auditor can evaluate the information.by which the auditor can evaluate the information.
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Accumulating Evidence and Evaluating Evidence
EvidenceEvidence is any information used by the auditor is any information used by the auditorto determine whether the information beingto determine whether the information beingaudited is stated in accordance with theaudited is stated in accordance with theestablished criteria.established criteria.
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Competent, Independent Person
The auditor must be qualified to understand theThe auditor must be qualified to understand thecriteria used and must be criteria used and must be competentcompetent to know to knowthe types and amount of evidence to accumulatethe types and amount of evidence to accumulateto reach the proper conclusion after theto reach the proper conclusion after theevidence has been examined.evidence has been examined.
The competence of the individual performingThe competence of the individual performingthe audit is of little value if he or she is biasedthe audit is of little value if he or she is biasedin the accumulation and evaluation of evidence.in the accumulation and evaluation of evidence.
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Reporting
The final stage in the auditing process is preparingThe final stage in the auditing process is preparingthe the Audit ReportAudit Report,, which is the communication which is the communicationof the auditor’s findings to users.of the auditor’s findings to users.
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Distinguish BetweenAuditing and Accounting
AccountingAccounting is the recording, classifying, is the recording, classifying,and summarizing of economic eventsand summarizing of economic eventsfor the purpose of providing financialfor the purpose of providing financialinformation used in decision making.information used in decision making.
AuditingAuditing is determining whetheris determining whetherrecorded information properlyrecorded information properlyreflects the economic events thatreflects the economic events thatoccurred during the accounting period.occurred during the accounting period.
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Explain the importance of auditing in reducing information risk.
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Economic Demandfor Auditing
Information risk reflects the possibility thatInformation risk reflects the possibility thatthe information upon which the businessthe information upon which the businessrisk decision was made was inaccurate.risk decision was made was inaccurate.
Auditing can have a significant effectAuditing can have a significant effecton information risk.on information risk.
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Causes of Information Risk
Remoteness of informationRemoteness of information
Biases and motives of the providerBiases and motives of the provider
Voluminous dataVoluminous data
Complex exchange transactionsComplex exchange transactions
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Reducing Information Risk
User verifies information.User verifies information.
User shares information risk with management.User shares information risk with management.
Audited financial statements are provided.Audited financial statements are provided.
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AUDITING, ATTEST, AND ASSURANCE SERVICES
DEFINED• AUDITING (broadly defined) is 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 parties.
• AUDITING (narrowly defined) is a written report on the examination of financial statements for an entity.
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AUDITING, ATTEST, AND ASSURANCE SERVICES
DEFINED
• ATTEST services occur when a practitioner is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
• ASSURANCE services are independent professional services that improve the quality of information, or its context, for decision makers.
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THE RELATIONSHIP AMONG AUDITING, ATTEST,
AND ASSURANCE SERVICES
AttestationAuditing Assurance
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Assurance Services
Assurance services are professionalAssurance services are professionalservices that improve the quality ofservices that improve the quality ofinformation for decision makers.information for decision makers.
Assurance services can beAssurance services can beperformed by CPAs or byperformed by CPAs or bya variety of other professionals.a variety of other professionals.
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Attestation Services
An An attestation serviceattestation service is a type of assurance is a type of assuranceservice in which the firm issues aservice in which the firm issues areport about the reliability of an assertionreport about the reliability of an assertionthat is the responsibility of another party.that is the responsibility of another party.
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Attestation Services
1. Audit of historical financial statements1. Audit of historical financial statements
2. Effectiveness of internal control over2. Effectiveness of internal control over financial reportingfinancial reporting
3. Review of historical financial statements3. Review of historical financial statements
4. Other attestation services4. Other attestation services
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Relationships Among Auditors, Client, and External Users
ClientClient
AuditorAuditorClient or auditClient or auditcommittee hirescommittee hiresauditorauditor
ExternalExternalUsersUsers
Auditor issuesAuditor issuesreport reliedreport reliedupon by usersupon by users
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Assurance, Attestation, and Nonassurance Services
Other Assurance ServicesOther Assurance Services
CertainCertainManagementManagementConsultingConsulting
Other Attestation ServicesOther Attestation Services(e.g., (e.g., WebTrust, SysTrustWebTrust, SysTrust))
ATTESTATION SERVICESATTESTATION SERVICES
AuditsAudits ReviewsReviews
Internal ControlInternal Controlover Financial Reportingover Financial Reporting
ASSURANCE SERVICESASSURANCE SERVICES
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Assurance, Attestation, and Nonassurance Services
CertainCertainManagementManagementConsultingConsulting
NONASSURANCE SERVICESNONASSURANCE SERVICES
Other ManagementOther ManagementConsultingConsulting
TaxTaxServicesServices
Accounting andAccounting andBookkeepingBookkeeping
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Types of Audits
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Operational Audit
ExampleExample Evaluate computerized payroll systemEvaluate computerized payroll systemfor efficiency and effectivenessfor efficiency and effectiveness
InformationInformation Number of records processed, costs ofNumber of records processed, costs ofthe department, and number of errorsthe department, and number of errors
EstablishedEstablishedCriteriaCriteria
Company standards for efficiency andCompany standards for efficiency andeffectiveness in payroll departmenteffectiveness in payroll department
AvailableAvailableEvidenceEvidence
Error reports, payroll records, andError reports, payroll records, andpayroll processing costspayroll processing costs
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Compliance Audit
ExampleExample Determine whether bank requirementsDetermine whether bank requirementsfor loan continuation have been metfor loan continuation have been met
InformationInformation Company recordsCompany records
EstablishedEstablishedCriteriaCriteria Loan agreement provisionsLoan agreement provisions
AvailableAvailableEvidenceEvidence
Financial statements andFinancial statements andcalculations by the auditorcalculations by the auditor
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Financial Statement Audit
ExampleExample Annual audit of Boeing’sAnnual audit of Boeing’sfinancial statementsfinancial statements
InformationInformation Boeing's financial statementsBoeing's financial statements
EstablishedEstablishedCriteriaCriteria
Generally accepted accountingGenerally accepted accountingprinciplesprinciples
AvailableAvailableEvidenceEvidence
Documents, records, and outsideDocuments, records, and outsidesources of evidencesources of evidence