Auditing March 30, 2015 1 BUS 425 – Auditing Chapter 1 The Demand for Audit Services.

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BUS 425 – Auditing

Chapter 1

The Demand for Audit Services

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The company had recorded billions of dollars of regular fees paid to local telephone companies as capital assets. This accounting trick allowed the company to turn a $662 million loss into a $2.4 billion profit in 2001.

WorldCom – Cynthia Cooper

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Line cost expense 3,062

Cash 3,062

Adjusting JE

PP&E 3,062

Line cost expense 3,062

WorldCom – Cynthia Cooper

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Juancarlos

What is the definition of Auditing?

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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.

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financia

l statem

ents

GAAP

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Peter

What is audit evidence?

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Evidence ----

is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria.

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Evidence ----

electronic data about transactions

documented data about transactions

written communications

observations by the auditor

oral testimony (responses to questions)

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Levi

What is the objective of AU-C 330

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AU-C 330 response to RoMM

The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the assessed risk of material misstatement through designing and implementing appropriate responses to those risks.

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Bart

What is the objective of AU-C 500

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AU-C 500 Audit Evidence

The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.

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Vouch or Trace project

Go to web site http://clubs.cob.calpoly.edu/~cmiller/ACTG%20425%20page.html

look up sales journal - talk about overstatement / occurrence

look at sales journal – talk about overstatement / valuation

look at sales orders – talk about understatement / completeness

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Independent Auditor’s Report

Report on the Financial StatementsWe have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.2 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

[Auditor's signature, city and state, date of report]

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Independent Auditor’s Report

Report on the Financial StatementsWe have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

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Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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The magnitude of an omission or misstatement of accounting information that, in light of the surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement,

Materiality page 118

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John

What is “our” operational definition of independence?

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A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing professional auditing or attestation services.

Independence

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Independence enhances the auditor’s ability to act with integrity, to be objective, and to maintain an attitude of professional skepticism.

Independence includesindependence of mind (fact)Independence of appearance

Independence

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Jeanette

What does FASB stand for ?

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Priya

What is the Sarbanes Oxley Act of 2002?

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Algernon

Which of the following are government agencies ?

FASB

SEC

PCAOB

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Julia

What does GAAS stand for ?

What does GAAP stand for ?

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GAAP

FASB

FAS

ASC 310-10-25-3

ASU

GAAS public private

PCAOB

AICPA

AS

SAS

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Jordan

What is Business Risk? What is Information Risk?

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Business Risk - the risk (probability) that an entity will fail to meet its objectives

Information Risk - the probability that the information upon which the decision was made was inaccurate.

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Joseph

What is the Risk-Free interest rate?

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Mackenzie

You are a bank lending officer

In relation to the risk-free interest rate

What interest rate would you charge to a company with a great deal of business risk?

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Melissa

You are a bank lending officer

In relation to the risk-free interest rate

What interest rate would you charge to a company with a great deal of information risk?

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Garren

What are some conditions that create demand for auditing?

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conditions which create demand for audits

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Remoteness owner separate from management

Motives of the provider

Voluminous data

Complex transactions

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Who?

Talk about the difference between

assurance

attestation

auditing

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Assurance – improves the quality of information

Attestation – report regarding the reliability of specific assertions made by management

Audit – opinion regarding management’s assertions embodied in financial statements

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Important

Specified audit objectives • AU-C 200, 315, 500, 700 & Independence)

Unmodified Audit Report Management’s Assertions p. 59

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Cody

What are the three lines of service typically provided by a public accounting firm ?

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Typical lines of business

Audit (accounting, attestation, audit)

Tax

Consulting (advisory services)

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Jeffrey

What are the various job levels or career levels in a public accounting firm ?

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CPA partnership structure

Partner P

Senior Mngr SM SM

Manager X Y Z

Senior X X X Y Y Y Z ZStaff XXX XXX XXX YYY YYY YYY ZZZ

ZZ

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Education cpa exam

As of Dec. 31, 2013 / Jan. 1, 2014• Bachelors degree

• 225 quarter hours

• 36 business

• 36 + 30 accounting– 20 accounting– 10 ethics

• + 1 year experience

• http://www.dca.ca.gov/

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transactionsAccountbalances

Presentation& disclosure

occurrence existenceoccurrence & rights &

obligations

completeness completeness completeness

accuracyvaluation & allocation

accuracy &

valuation

classificationclassification &

understandability

cutoff

rights & obligations