Assurance Assurance Services and Services and

Auditing Auditing ResearchResearch

Chapter 8Chapter 8

Learning ObjectivesLearning Objectives

The types of assurance and The types of assurance and consulting services, and applicable consulting services, and applicable standardsstandards

The environment for the assurance The environment for the assurance services standard setting processservices standard setting process

Authoritative auditing supportAuthoritative auditing support How to utilize the AICPA’s How to utilize the AICPA’s

professional standardsprofessional standards

LearningLearning Objectives Objectives (contd.)(contd.)

Role of auditing in the public Role of auditing in the public sectorsector

Hierarchy of the AICPA’s Code of Hierarchy of the AICPA’s Code of Professional ConductProfessional Conduct

Role of professional judgment in Role of professional judgment in the research processthe research process

International dimensions of International dimensions of auditingauditing

Assurance servicesAssurance services

““Independent professional services Independent professional services that improve the quality of that improve the quality of information, or its context, for information, or its context, for decision makers”decision makers”

Adds value to the user, not just the Adds value to the user, not just the reportreport

Three party contracts – the client, the Three party contracts – the client, the assurer, and the third party to whom assurer, and the third party to whom the accountant is providing assurancethe accountant is providing assurance

Consulting services Consulting services and standardsand standards

Attestation and audit services are special Attestation and audit services are special types of assurance servicestypes of assurance services

In an attest engagement, the CPA reports In an attest engagement, the CPA reports on the reliability of a written assertion on the reliability of a written assertion that is managements responsibilitythat is managements responsibility

Consulting is not part of assurance Consulting is not part of assurance servicesservices Two party contact: client, consultant, Two party contact: client, consultant,

accountantaccountant CPA develops findings, conclusions, CPA develops findings, conclusions,

and recommendationsand recommendations

Auditing standard-Auditing standard-setting environmentsetting environment

Audits add credibility to financial Audits add credibility to financial informationinformation

Auditor conducts audit in conformity Auditor conducts audit in conformity with GAAP and in conjunction with with GAAP and in conjunction with auditing standardsauditing standards

Attestation services and standardsAttestation services and standards In the past, only audit opinionsIn the past, only audit opinions Now expanded to include opinions Now expanded to include opinions

on internal controlson internal controls

Attest engagements Attest engagements and guidelinesand guidelines

Audit and attest services – Generally Audit and attest services – Generally Accepted Audit Standards (GAAS), Accepted Audit Standards (GAAS), Statements on Auditing Standards Statements on Auditing Standards (SAS) – Auditing standard boards (ASB)(SAS) – Auditing standard boards (ASB)

Accounting and review services – Accounting and review services – Statements on Standards for Statements on Standards for Accounting and Review – Accounting Accounting and Review – Accounting and Review Services Committee (ARSC)and Review Services Committee (ARSC)

Accountant’s services on prospective Accountant’s services on prospective financial information – Statements on financial information – Statements on Standards for Accountant’s Services on Standards for Accountant’s Services on Prospective Financial Information – Prospective Financial Information – Auditing Standards BoardAuditing Standards Board

Attest engagements Attest engagements and guidelinesand guidelines

Other attest services – Statements Other attest services – Statements on Standards for Attest on Standards for Attest Engagement – ASB, ARSC, and the Engagement – ASB, ARSC, and the management consulting services management consulting services executive committeeexecutive committee

Audit and attest services for public Audit and attest services for public companies – Auditing and Related companies – Auditing and Related Professional Practice Standards – Professional Practice Standards – Public Company Accounting Public Company Accounting Oversight Board (PCAOB)Oversight Board (PCAOB)

Attestation standardsAttestation standards

General StandardsGeneral Standards Adequate technical training and Adequate technical training and

proficiency proficiency Adequate knowledgeAdequate knowledge Services shall be performed only if the Services shall be performed only if the

subject matter is capable of being subject matter is capable of being evaluatedevaluated

Independence in mental attitudeIndependence in mental attitude Due professional careDue professional care

Attestation standards Attestation standards (contd.)(contd.)

FieldworkFieldworkAdequately planned, and Adequately planned, and assistants properly assistants properly supervisedsupervised

Sufficient evidence to Sufficient evidence to provide a reasonable basis provide a reasonable basis for conclusionfor conclusion

Attestation standards Attestation standards (contd.)(contd.)

Standards of ReportingStandards of ReportingReport shall identify subject Report shall identify subject

mattermatterConclusion shall be reportedConclusion shall be reportedReservations shall be reportedReservations shall be reportedReport shall state the use of Report shall state the use of

the report is restricted to the report is restricted to specified partiesspecified parties

Auditing standardsAuditing standards

Auditing standards provided measures of the Auditing standards provided measures of the quality of performance quality of performance

Audit procedures refer to the specific acts or Audit procedures refer to the specific acts or steps to perform in an auditsteps to perform in an audit Procedures change, standards remain Procedures change, standards remain

constantconstant 10 broad requirements referred to as GAAS10 broad requirements referred to as GAAS

In addition, to GAAS, there are Statements In addition, to GAAS, there are Statements of Auditing Standards (SAS) of Auditing Standards (SAS) Interpret Interpret GAAS by clarify proceduresGAAS by clarify procedures

Generally accepted Generally accepted auditing Standardsauditing Standards

General standardsGeneral standardsAdequate technical trainingAdequate technical training IndependenceIndependenceDue professional careDue professional care

Generally Accepted Generally Accepted Auditing StandardsAuditing Standards

Field workField work Adequately planned and assistants Adequately planned and assistants

supervisedsupervised Sufficient understanding of the business and Sufficient understanding of the business and

internal controls to plan the audit and internal controls to plan the audit and determine the nature, timing and extent of determine the nature, timing and extent of proceduresprocedures

Sufficient competent evident matter to form Sufficient competent evident matter to form an opinionan opinion

GAAS (contd.)GAAS (contd.)

Standards of reportingStandards of reportingReport shall state if in Report shall state if in

accordance with GAAPaccordance with GAAPShall report if not consistentShall report if not consistent Informative financial Informative financial

statement disclosuresstatement disclosuresWritten expressionWritten expression

Auditing standard-Auditing standard-setting processsetting process

Previously, set by ASBPreviously, set by ASB SOX transferred standard SOX transferred standard

setting responsibility to PCAOB setting responsibility to PCAOB for public company auditfor public company audit

Auditing standard-Auditing standard-setting processsetting process

There is a standards hierarchyThere is a standards hierarchy Primary supportPrimary support

General applicationGeneral applicationSpecial application to certain Special application to certain entitiesentities

Secondary authoritative supportSecondary authoritative support

Public Company Public Company Accounting Oversight Accounting Oversight

Board (PCAOB)Board (PCAOB) Legal responsibility to establish GAAS, Legal responsibility to establish GAAS,

attestation, ethics, and quality control standards attestation, ethics, and quality control standards for accounting firms who audit public companiesfor accounting firms who audit public companies

Non-public companies still follow the AICPA’s Non-public companies still follow the AICPA’s mission:mission: Develop auditing, attestation and quality Develop auditing, attestation and quality

control standards for non-issuer engagementscontrol standards for non-issuer engagements Contribute to the development and issuance Contribute to the development and issuance

of high-quality national and international of high-quality national and international auditing and assurance standardsauditing and assurance standards

Respond to the needs for practical guidance Respond to the needs for practical guidance in implementing professional standardsin implementing professional standards

AICPA reSource AICPA reSource databasedatabase

Professional standards, accounting Professional standards, accounting trends and techniques, technical trends and techniques, technical practice aids, auditing and practice aids, auditing and accounting guides, and audit alertsaccounting guides, and audit alerts

Home tab – lists the literature Home tab – lists the literature available in the databaseavailable in the database

Once select a certain literature, can Once select a certain literature, can queryquery

Results tab – click on the link to find Results tab – click on the link to find the resultthe result

Code of professional Code of professional conductconduct

Minimum level of conductMinimum level of conduct Principles, rules, interpretations, Principles, rules, interpretations,

and ethics rulingsand ethics rulings Rule 202- compliance with Rule 202- compliance with

standardsstandards Rule 203 – accounting principlesRule 203 – accounting principles AICPA issues a newsletter that lists AICPA issues a newsletter that lists

violators of professional conduct.violators of professional conduct.

Hierarchy of the AICPA’s Hierarchy of the AICPA’s Code of Professional ConductCode of Professional Conduct Level 1 – Principles Level 1 – Principles

provided framework for developmentprovided framework for development Level 2 – RulesLevel 2 – Rules

Serve as the enforceable part of the CodeServe as the enforceable part of the Code Level 3 – Interpretations of the Rules of ConductLevel 3 – Interpretations of the Rules of Conduct

Have been adopted by the professional ethics Have been adopted by the professional ethics division’s ethics committeedivision’s ethics committee

Provide guidelines as to the scope and application Provide guidelines as to the scope and application of rulesof rules

Level 4 – Ethics RulingsLevel 4 – Ethics Rulings Formal rulings made by the professional ethics Formal rulings made by the professional ethics

division’s executive committee.division’s executive committee. Summarize the application of the rulesSummarize the application of the rules and and

interpretations to particular factual circumstancesinterpretations to particular factual circumstances

Auditing in the public Auditing in the public sectorsector

GAO – Government Auditing Standards – GAO – Government Auditing Standards – “Yellow book“Yellow book”” Applicable to all governmental organizationsApplicable to all governmental organizations Measure effectiveness of the expenditures, not Measure effectiveness of the expenditures, not

just identify the amounts spentjust identify the amounts spent Include compliance auditingInclude compliance auditing Three levels of auditingThree levels of auditing

GAASGAAS Government Auditing Standards (aka generally Government Auditing Standards (aka generally

accepted government auditing standards)accepted government auditing standards) Federal audit requirements – OMB Circular A-133 Federal audit requirements – OMB Circular A-133

Audits of States, Local Governments, and Non-Audits of States, Local Governments, and Non-Profit OrganizationsProfit Organizations

Accounting ServicesAccounting Services

Compilation – a service presenting, in Compilation – a service presenting, in the form of financial statements, the form of financial statements, information that is the representation information that is the representation of management without expressing any of management without expressing any assurance on the statements.assurance on the statements.

Review – a service performing inquiry Review – a service performing inquiry and analytical procedures that provide and analytical procedures that provide the accountant with a reasonable basis the accountant with a reasonable basis for expressing limited assurance on the for expressing limited assurance on the statementsstatements

International AuditingInternational Auditing

International Federation of Accountants International Federation of Accountants (IFAC)(IFAC)

International Auditing Practices International Auditing Practices Committee (IAPC)Committee (IAPC)

International Standards on Auditing International Standards on Auditing (ISAs)(ISAs)

International Practice Statements (IAPs)International Practice Statements (IAPs) International Auditing and Assurance International Auditing and Assurance

Standards Board (IAASB)Standards Board (IAASB)

Role of judgment in Role of judgment in accounting and auditing accounting and auditing

researchresearch

Judgment in: substance of transaction, Judgment in: substance of transaction, adequacy of disclosure, materiality adequacy of disclosure, materiality thresholdsthresholds

Auditor gathers information, evaluates and Auditor gathers information, evaluates and judges, then expresses an opinionjudges, then expresses an opinion

Many pronouncements provide only Many pronouncements provide only guidelines or alternatives, requiring guidelines or alternatives, requiring judgment.judgment. Critical thinking skills are crucialCritical thinking skills are crucial

SAS No. 5 – discusses auditor’s judgmentSAS No. 5 – discusses auditor’s judgment