1 - 1 Prentice Hall Business Publishing, Prentice Hall Business Publishing, Auditing 11/e, Auditing 11/e, Arens/Beasley/Elder Arens/Beasley/Elder The Demand for The Demand for Audit and Other Audit and Other Assurance Assurance Services Services Chapter 1 Chapter 1
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AuditingAuditing is the accumulation and evaluation is the accumulation and evaluationof evidence about information to determineof evidence about information to determineand report on the degree of correspondenceand report on the degree of correspondencebetween the information and established criteria.between the information and established criteria.
Auditing should be done by a competent,Auditing should be done by a competent,independent person.independent person.
Information and Established Information and Established CriteriaCriteria
To do anTo do an audit, there must be information in aaudit, there must be information in averifiable formverifiable form and someand some standardsstandards (criteria)(criteria)by which the auditor can evaluate the information.by which the auditor can evaluate the information.
Accumulating Evidence and Accumulating Evidence and Evaluating EvidenceEvaluating Evidence
EvidenceEvidence is any information used by the auditor is any information used by the auditorto determine whether the information beingto determine whether the information beingaudited is stated in accordance with theaudited is stated in accordance with theestablished criteria.established criteria.
Competent, Independent PersonCompetent, Independent Person
The auditor must be qualified to understand theThe auditor must be qualified to understand thecriteria used and must be criteria used and must be competentcompetent to know to knowthe types and amount of evidence to accumulatethe types and amount of evidence to accumulateto reach the proper conclusion after theto reach the proper conclusion after theevidence has been examined.evidence has been examined.
The competence of the individual performingThe competence of the individual performingthe audit is of little value if he or she is biasedthe audit is of little value if he or she is biasedin the accumulation and evaluation of evidence.in the accumulation and evaluation of evidence.
The final stage in the auditing process is preparingThe final stage in the auditing process is preparingthe the Audit ReportAudit Report,, which is the communication which is the communicationof the auditor’s findings to users.of the auditor’s findings to users.
Distinguish BetweenDistinguish BetweenAuditing and AccountingAuditing and Accounting
AccountingAccounting is the recording, classifying, is the recording, classifying,and summarizing of economic eventsand summarizing of economic eventsfor the purpose of providing financialfor the purpose of providing financialinformation used in decision making.information used in decision making.
AuditingAuditing is determining whetheris determining whetherrecorded information properlyrecorded information properlyreflects the economic events thatreflects the economic events thatoccurred during the accounting period.occurred during the accounting period.
Information risk reflects the possibility thatInformation risk reflects the possibility thatthe information upon which the businessthe information upon which the businessrisk decision was made was inaccurate.risk decision was made was inaccurate.
Auditing can have a significant effectAuditing can have a significant effecton information risk.on information risk.
Capital Costs to Shrink: Elliott’s Capital Costs to Shrink: Elliott’s ExampleExample
Assuming a cost of capital of 13%, ElliottAssuming a cost of capital of 13%, Elliottestimates this rate is composed of the following:estimates this rate is composed of the following:
Capital Costs to Shrink: Elliott’s Capital Costs to Shrink: Elliott’s ExampleExample
Elliott believes the following factors willElliott believes the following factors willdrastically reduce information risk:drastically reduce information risk:
Advanced technologyAdvanced technology
New accounting and auditing standardsNew accounting and auditing standards
Auditors finding more efficient ways to auditAuditors finding more efficient ways to audit
Assurance services are professionalAssurance services are professionalservices that improve the quality ofservices that improve the quality ofinformation for decision makers.information for decision makers.
Assurance services can beAssurance services can beperformed by CPAs or byperformed by CPAs or bya variety of other professionals.a variety of other professionals.
An An attestation serviceattestation service is a type of assurance is a type of assuranceservice in which the CPA firm issues aservice in which the CPA firm issues areport about the reliability of an assertionreport about the reliability of an assertionthat is the responsibility of another party.that is the responsibility of another party.
Most of the other assurance services that CPAsMost of the other assurance services that CPAsprovide do not meet the formal definitionprovide do not meet the formal definitionof attestation services.of attestation services.
The CPA is not required to issue a written report.The CPA is not required to issue a written report.
The assurance does not have to be about theThe assurance does not have to be about thereliability of another party’s assertion aboutreliability of another party’s assertion aboutcompliance with specified criteria.compliance with specified criteria.
Assurance Services on Assurance Services on Information TechnologyInformation Technology
The growth of the Internet and new waysThe growth of the Internet and new waysof conducting business electronicallyof conducting business electronically((e-commercee-commerce) is driving the demand) is driving the demandfor other assurance services.for other assurance services.
Assurance Services on Assurance Services on Information TechnologyInformation Technology
WebTrustWebTrust is an attestation service, and theis an attestation service, and theWebTrustWebTrust seal is a symbolic representationseal is a symbolic representationof the CPA’s report on management’sof the CPA’s report on management’sassertions about its disclosure ofassertions about its disclosure ofelectronic commerce practices.electronic commerce practices.
Assurance Services on Assurance Services on Information TechnologyInformation Technology
SysTrustSysTrust is an attest-type engagement is an attest-type engagementto evaluate and test system reliability into evaluate and test system reliability inareas such as security and data integrity.areas such as security and data integrity.
Other AssuranceOther AssuranceServices ExamplesServices Examples
Controls over and risks related to investments,Controls over and risks related to investments,including policies related to derivatives…including policies related to derivatives…
assessing the processes in a company’sassessing the processes in a company’sinvestment practices to identify risks and toinvestment practices to identify risks and todetermine the effectiveness of those processes.determine the effectiveness of those processes.
Other AssuranceOther AssuranceServices ExamplesServices Examples
Assess risks of accumulation, distribution,Assess risks of accumulation, distribution,and storage of digital information…and storage of digital information…
assessing security risks and relatedassessing security risks and relatedcontrols over data and other informationcontrols over data and other informationstored electronically, including thestored electronically, including theadequacy of backup and off-site storage.adequacy of backup and off-site storage.
Other AssuranceOther AssuranceServices ExamplesServices Examples
Fraud and illegal acts risk assessment…Fraud and illegal acts risk assessment…
developing fraud risk profiles and assessing thedeveloping fraud risk profiles and assessing theadequacy of company systems and policies inadequacy of company systems and policies inpreventing and detecting fraud and illegal acts.preventing and detecting fraud and illegal acts.
ExampleExample Evaluate computerized payroll systemEvaluate computerized payroll systemfor efficiency and effectivenessfor efficiency and effectiveness
InformationInformation Number of records processed, costs ofNumber of records processed, costs ofthe department, and number of errorsthe department, and number of errors
EstablishedEstablishedCriteriaCriteria
Company standards for efficiency andCompany standards for efficiency andeffectiveness in payroll departmenteffectiveness in payroll department
ExampleExample Determine whether bank requirementsDetermine whether bank requirementsfor loan continuation have been metfor loan continuation have been met
InformationInformation Company recordsCompany records