ch1-auditing & assurance service

8/22/2019 Ch1-Auditing & Assurance Service

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Chapter 1Auditing and Assurance Services

"If you want to be successful, it's just this simple:

Know what you're doing. Love what you're doing.

And believe in what you're doing."

-- Will Rogers


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Financial

Statements

Shareholders

Government

EmployeesCustomers & Consumers

SuppliersManagement

Lenders of money

Community

USERS OF FINANCIAL STATEMENTS

Stakeholders


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User Demand for Reliable information

Financial analysts and investors depend onfinancial reports for making stock purchaseand sale decisions.

Suppliers and creditors use financial reports to

decide whether to give trade credit and bankloans.

Labor organizations use financial reports tohelp determine a companys ability to pay

wages. Govt. agencies and Congress use financial

information in preparing analyses of economyand in making laws concerning taxes.


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Definition of Auditing

Auditing is a systematic process of

objectively obtaining and

evaluating evidence regarding

assertions about economic actions

and events to ascertain the degreeof correspondence between the

assertions and established criteria

and communicating the results to

interested users.

Financial Statements

(including footnotes)

GAAP

Auditor's Report/Other ReportsPersons who rely on

the financial reports

Creditors

Investors


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1-5Types of Audits

Financial Statement Audits

An audit of financial statementis conducted todetermine whether the overallfinancial statements are

stated in accordance with specified criteria.

The specified criteria are principles set out in the

accounting standards and the financial statement

prepared by using the cash basis or accrual basis orsome other basis of accounting appropriate for the

organization.

The financial statements commonly are included as

follows:- The statement of balance sheet

- The statement of profit and loss

- The statement of cash flows

- Notes to the accounts


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Overview of Financial Statement Auditing


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Performance Audits

The study of business operations for thepurpose of making recommendations about the

efficient use of resources , effective achievement

of business objectives, and compliance with

company policies.

The goal of operational audit is also to

help managers discharge their managementresponsibilities and improve profitability.


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The purpose of a compliance audit is to

determine whether the auditee is followingspecific procedures, rules, or regulation or

policies set down by some higher authority

or the company.

Compliance Audits


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Type of auditors

External Auditor

Internal Auditor

Government Auditor


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Many public accounting firms have as

their primary responsibility theperformance of audits of the historical

financial statements of companies

registered under the companies act.

External Auditor


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Internal Auditor

Internal auditors are employed by

individual companies to audit for management.

Internal auditing is an independent appraisalfunction established within an organization

who examine and evaluate its activities or

operations.


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Government Auditor

In some countries, the constitution of

the federation provides for the appointment

of the Auditor General who is responsible forauditing all the federal and state accounts as

well as those of the public authorities and

statutory bodies.


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Public Accounting Firms or Audit Firms

Many public accounting firms have their primary

responsibility for the performance of audits of the

historical financial statements of companies

registered under the companies act.

- KPMG Peat Marwick

- Coopers & Lybrand

- Deloitte & Touche- Ernst & Young

- Price Waterhouse


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Professional Service Firm Organization

Executive Committee

Managing Partner

Practice Offices

Partners-in-Charge

Consulting

Services

Audit, Assurance and

Business Advisory

Services

Tax Consulting

Services

Partner

ManagerManager Manager

Senior (In-charge) Accountants

Staff Accountants (or Associates)

Partner

ManagerManager Manager

Senior (In-charge) Accountants

Staff Accountants (or Associates)


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1-15Exhibit 1-2

The Relationships Among Auditing,

Attestation, and Assurance Services

Assurance Services

Any Information

Attestation Services

Primarily Financial Information

AuditingFinancial

Statements


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Assurance Services

Assurance servicesare independent

professional services that improve the quality of

information, or its context, for decision makers.

Examples

Internet website certification (WebTrust)

Business risk assessment ( Risk Advisory) Information system security reviews (Systrust)


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Attestation Engagements

An attestation engagementis one in which a

practitioner is engaged to issue or does issue a reporton subject matter or an assertion about the subjectmatter that is the responsibility of another party.

Some financial attestation engagements (other than

audits) Financial statistics

Pro forma financial information

Financial forecasts and projections

Some non-financial attestation engagements Compliance with contractual requirements

Effectiveness of internal control systems

Inventory quantities and locations ( Agree Upon Procedures)


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Financial Statements Audit

Financial statements audits determine

whether financial statements of an audited

entity present fairly the financial position,results of operations, and cash flows in

conformity with general accepted

accounting principles.


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Financial Statements Assertions byManagement

Key assert ions can be catego r ized as fo l lows:

Presentation and disclosure (all items disclosed)

Existence (assets) or occurrence (transactions)

Rights and obligations ownership Completeness - all accounts recorded

Valuation or allocation (all account balances are correct)

Financial Statements are asserted that the

individual items described correctly and figures are

mathematically corrected or fairly estimated.

E l A i d h i R l i hi


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1-21Example Assertions and their Relationships to

the Financial Statements


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The Public Accounting Profession

Assurance services Audit engagements

Assurance engagements

Attestation engagements

Compilations

Reviews

Tax consulting services

Consulting services Litigation support

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Engagement Overview

OBTAIN

(OR RETAIN)

CLIENT

INTERNAL

CONTROL

EVALUATION

SUBSTANTIVE

PROCEDURES

ISSUE

REPORT

ENGAGEMENT

PLANNING

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Professional Ethics

The auditor should comply with the 'Code

of ethics for professional accountants'

issued by the International Federation of

Accountants. Ethical principles governing

the auditor's professional responsibilities

are:

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Professional Ethics

Independence

Integrity

Objectivity

Professional competence and due care

Confidentiality

Professional behavior, and Technical standards (the International

Auditing Standards)

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End of Chapter 1

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