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The Demand for Audit and Other Assurance Services
Chapter 1
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Sarbanes-Oxley Act
The Act established the Public CompanyAccounting Oversight Board.
It also requires auditors to attest tomanagement reports on the effectivenessof internal control over financial reporting.
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Learning Objective 1Learning Objective 1
Describe auditing.
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Nature of Auditing
Auditing is the accumulation and evaluationof evidence about information to determineand report on the degree of correspondencebetween the information and established criteria.
Auditing should be done by a competent,independent person.
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Information and Established Criteria
To do an audit, there must be information in averifiable form and some standards (criteria)by which the auditor can evaluate the information.
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Accumulating Evidence and Evaluating Evidence
Evidence is any information used by the auditorto determine whether the information beingaudited is stated in accordance with theestablished criteria.
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Competent, Independent Person
The auditor must be qualified to understand thecriteria used and must be competent to knowthe types and amount of evidence to accumulateto reach the proper conclusion after theevidence has been examined.
The competence of the individual performingthe audit is of little value if he or she is biasedin the accumulation and evaluation of evidence.
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Audit Report
The final stage in the auditing process ispreparing the Audit Report, which is thecommunication of the auditor’s findings to users.
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Audit of a Tax Return Example
InternalInternalRevenueRevenue
agentagent
Competent,independent
person
Examines cancelledchecks and other
supporting records
Accumulates andevaluates evidence
Determinescorrespondence
Federal taxFederal taxreturns filedreturns filedby taxpayerby taxpayer
Information
Internal RevenueCode and all
interpretations
Established criteria
Report on taxdeficiencies
Report on results
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Learning Objective 2
Distinguish between auditingand accounting.
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Distinguish BetweenAuditing and Accounting
Accounting is the recording, classifying,and summarizing of economic eventsfor the purpose of providing financialinformation used in decision making.
Auditing is determining whetherrecorded information properlyreflects the economic events thatoccurred during the accounting period.
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Learning Objective 3
Explain the importance of auditingin reducing information risk.
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Economic Demandfor Auditing
Information risk reflects the possibility thatthe information upon which the businessrisk decision was made was inaccurate.
Auditing can have a significant effecton information risk.
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Learning Objective 4Learning Objective 4
List the causes of informationrisk, and explain how this riskmay be reduced.
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Causes of Information RiskCauses of Information Risk
Remoteness of information
Biases and motives of the provider
Voluminous data
Complex exchange transactions
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Reducing Information Risk
User verifies information
User shares information risk with management
Audited financial statements are provided
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Learning Objective 5
Describe assurance servicesand distinguish audit servicesfrom other assurance andnonassurance servicesprovided by CPAs.
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Assurance Services
An assurance service is an independentprofessional service that improves thequality of information for decision makers.
Assurance services can be performed byCPAs or by a variety of other professionals.
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Attestation Services
An attestation service is a type of assuranceservice in which the CPA firm issues areport about the reliability of an assertionthat is the responsibility of another party.
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Attestation Services
1. Audit of historical financial statements
2. Attestation of internal control over financial reporting
3. Review of historical financial statements
4. Attestation services on information technology
5. Other attestation services
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Relationships Among Auditors, Client, and External Users
Client
AuditorAuditorClient or auditcommittee hiresauditor
ExternalExternalUsersUsers
Auditor issuesreport reliedupon by users
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Other Assurance Services
Most of the other assurance services that CPAsprovide do not meet the formal definitionof attestation services.
The CPA is not required to issue a written report.
The assurance does not have to be about thereliability of another party’s assertion aboutcompliance with specified criteria.
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AICPA Assurance Services
The AICPA formed the Special Committeeon Assurance Services (SCAS).
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Attestation Services on Information Technology
WebTrust is an attestation service, and theWebTrust seal is a symbolic representationof the CPA’s report on management’sassertions about its disclosure ofelectronic commerce practices.
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Attestation Services on Information Technology
SysTrust is an attest-type engagementto evaluate and test system reliability inareas such as security and data integrity.
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Principles for WebTrust and SysTrust Services
1. Online privacy2. Security3. Processing integrity4. Availability5. Confidentiality6. Certification authorities (WebTrust only)
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Nonassurance Services Provided by CPAs
1. Accounting and bookkeeping services2. Tax services3. Management consulting services
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Other Assurance Services Examples
Controls over and risks related to investments,including policies related to derivatives…
assessing the processes in a company’sinvestment practices to identify risks and todetermine the effectiveness of those processes.
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Other Assurance Services Examples
Mystery shopping…
performing anonymous shopping to assesssales personnel dealing with customers andprocedures they follow.
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Other Assurance Services Examples
Assess risks of accumulation, distribution,and storage of digital information…
assessing security risks and relatedcontrols over data and other informationstored electronically, including theadequacy of backup and off-site storage.
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Other Assurance Services Examples
Fraud and illegal acts risk assessment…
developing fraud risk profiles and assessing theadequacy of company systems and policies inpreventing and detecting fraud and illegal acts.
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Other Assurance Services Examples
Compliance with trading policies and procedures
Compliance with entertainment royalty agreements
ISO 900 certification
Environmental audit
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Assurance, Attestation, and Nonassurance Services
Other Assurance Services
CertainManagementConsulting
Other Attestation Services(e.g., WebTrust, SysTrust)
ATTESTATION SERVICES
Audits Reviews
Internal Controlover Financial Reporting
ASSURANCE SERVICES
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Assurance, Attestation, and Nonassurance Services
CertainManagementConsulting
NONASSURANCE SERVICESNONASSURANCE SERVICES
Other ManagementConsulting
TaxServices
Accounting andBookkeeping
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Learning Objective 6
Differentiate the three maintypes of audits.
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Types of Audits
Operational
Compliance
Financial Statement
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Operational Audit
Example Evaluate computerized payroll systemfor efficiency and effectiveness
Information Number of records processed, costs ofthe department, and number of errors
EstablishedCriteria
Company standards for efficiency andeffectiveness in payroll department
AvailableEvidence
Error reports, payroll records, andpayroll processing costs
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Compliance Audit
Example Determine whether bank requirementsfor loan continuation have been met
Information Company records
EstablishedCriteria Loan agreement provisions
AvailableEvidence
Financial statements andcalculations by the auditor
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Audit of Historical Financial Statements
Example Annual audit of Boeing’s financialstatements
Information Boeing's financial statements
EstablishedCriteria
Generally accepted accountingprinciples
AvailableEvidence
Documents, records, and outsidesources of evidence
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Learning Objective 7
Identify the primary typesof auditors.
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Types of Auditors
Internal auditors
Independent certified public accounting firms
Internal Revenue agents
Governmental general accounting office auditors
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Learning Objective 8
Describe the requirementsfor becoming a CPA.
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Three Requirements forBecoming a CPA Educational requirement
Uniform CPA examination requirement
Experience requirement
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CPA Examination Sections
Auditing and Attestation
Financial Accounting and Reporting
Regulation
Business Environments and Concepts
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End of Chapter 1