copyright © 2007 pearson education canada 1 chapter 1: the demand for auditing and assurance...

Copyright © 2007 Pearson Education Canada1

Chapter 1: The Demand for Auditing and Assurance Services

Copyright © 2007 Pearson Education Canada

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Chapter 1 objectives

Learn about the different types of accountants and what they do

Explain the difference between accounting, auditing, assurance and non-assurance services

Describe how public accounting firms are organized

List the market forces that help ensure high quality audit and assurance engagements

Explain how standards are developed and quality assurance monitored


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1.1 Professional accountants and their work

Professional accounting/auditing organizations represented in Canada (p. 3):– Canadian Institute of Chartered Accountants– Certified General Accountants Association of

Canada– Society of Management Accountants of Canada– Institute of Internal Auditors– Information Systems Audit and Control

Association


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What is an audit? (text, p. 4) 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.

Auditing is done by a competent, independent person.


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Five key components of auditing

1.Quantifiable information (related to entity)

2.Criteria: normally generally accepted accounting principles (GAAP)

3.Evidence gathering and evaluation

4. Competent, independent person

5.Report


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Figure 1-1 Audit of a tax return illustrates these principles


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Practice question 1-19 (p. 29)

Review the components of an audit

A PA (public accountant) can even audit trucks – let’s discuss how this is done!


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Factors that affect demand for audits

Remoteness of information Bias and motives of provider Voluminous data Complex exchange transactions Perceived cost/benefit


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Economic demand for auditing: illustrates why auditing is necessary

Auditing can reduce information risk associated with financial statements (the risk that the financial statements are inaccurate)

The independent audit provides assurance to users with respect to the reliability of the financial statements


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Compare an unusual service to the work done by PAs

Discuss the nature of information risk Compare the risks of using financial

statements to the risks of buying a vehicle


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Distinction between accounting and auditing

What is accounting? What is auditing? Who is responsible for accounting or

auditing? Can an auditor do both for the same

company?


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Types of audits Financial statement audit: Conducted to

determine whether the overall financial statements are stated in accordance with specified criteria.

Compliance audit: To determine whether the auditee is following specific procedures or rules set down by a higher authority.

Operational audit: A review of any part of an organization’s operating procedures and methods for the purpose of evaluating economy, efficiency and effectiveness.


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Assurance services, attestation services, and nonassurance services


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Types of auditors

What type of auditor would you like to be?– Public accountant– Government auditor– Canada Revenue Agency auditor– Internal auditor


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Practice problem 1-20 (p. 29)

Let’s familiarize ourselves with the different activities completed by auditors

This question provides a list of activities for us to examine

Which type of auditor does what kind of work?


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What type of public accounting firms are present in your city or town?

Go through the local business pages of your telephone directory and see how many of the following types of firms you can identify:– International firms– National firms– Large local and regional firms– Small local firms or sole proprietorships


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Encouraging professional conduct among PAs


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Generally Accepted Auditing Standards (GAAS) (p. 18)

These are broad guidelines that help auditors in fulfilling their professional responsibilities.

General: qualifications and conductExamination: performance of the

auditReporting: describing the results


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Structure of GAAS


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General: qualifications and conduct

Adequate technical training and proficiency in auditing

Due care Objective state of mind


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Examination: performance of the audit

Adequate planning Proper execution Proper supervision Sufficient understanding of environment

and internal control Sufficient appropriate audit evidence


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Reporting: results

Prepare a standardized report Identify the financial statements State responsibilities of management and

the auditor Explain the scope of the engagement Provide the appropriate type of opinion (or

state why you could not do so)


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Practice problem 1-26 (p. 31)

This practice problem shows you what can go wrong when GAAS is not followed.

Take a look at this problem and identify what Holmes did wrong (or simply did not do!) in the context of GAAS.


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Sources of auditing standards

Canadian CICA Assurance Handbook: Recommendations and Guidelines

U.S. have both the AICPA (American Institute of Certified Public Accountants) and the PCAOB (Public Company Accounting Oversight Board)

IFAC (International Federation of Accountants)


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Quality control

Why is it important for the public accounting firm to have quality control procedures?

What could go wrong without them?


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Quality control

Consists of the methods used to make sure that the firm meets its professional responsibilities

Includes the organizational structure of the PA firm and its procedures

Helps to ensure that GAAS is follows on every audit


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Elements of quality control

1. Leadership and responsibilities within the firm. E.g. An organizational culture that promotes audit quality; quality control procedures that are developed, documented, implemented, and communicated.

2. General ethical requirements. E.g. Address at the policy level general ethical principles of integrity, objectivity, professional competence and due, confidentiality


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Elements of quality control (cont’d)

3. Independence. E.g. develop, communicate and monitor policies and procedures to ensure that the firm complies with the independence guidelines.

4. Client acceptance or continuance. E.g. Document annual risk assessment processes, including evaluation of a client’s management integrity and auditor competence and independence.


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5. General human resource policies. E.g. Have adequate hiring policies that ensure competence and integrity of personnel.

6. Extent of professional development. E.g. Employees adequately trained in the skills needed to conduct audits.

7. Engagement performance. E.g. Have adequate processes and procedures to ensure that the audit is conducted in accordance with GAAS.


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8. Engagement quality control review. E.g. Ensure that quality control review takes place during the engagement and that monitoring occurs after the engagement is completed.

9. Documentation. E.g. Have policies that address the extent of documentation (hard copy or electronic) including retention, storage, security and back-up.


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Enforcement of quality control

Quality control is enforced by means of practice inspection

A practice inspection can occur by any one of:– One owns’ firm quality control staff– By the provincial institute or ordre– By the CPAB (Canadian Public

Accountability Board)


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Let’s look at the differences between conducting an audit for a private company and for a public company

How are the audit standards involved? How are quality control procedures and

quality control enforcement different for the audit of a public company?

copyright © 2007 pearson education canada 1 chapter 1: the demand for auditing and assurance...

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