Chapter 21 Assurance, Attestation, and Internal Auditing Services Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Chapter 21
Assurance, Attestation, and Internal Auditing
Services
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Assurance Services
Assurance services
are independent
professional services
that improve the
quality of information,
or its context, for
decision makers.
LO# 1
21-2
LO# 1
Assurance Services
21-3
LO# 1
Decision Model
21-4
Types of Assurance Services
Risk
Assessment
Business
Performance
Measurement
Information
System
Reliability
Electronic
Commerce
Health Care
Performance
Measurement
PrimePlus
LO# 2
21-5
Attest Engagements
Attest services occur when
a practitioner is engaged to
issue, or does issue, an
examination, a review, or an
agreed upon procedures
report on subject matter, or
an assertion about subject
matter, that is the
responsibility of another
party.
LO# 3
21-6
LO# 3
Attest EngagementsFigure 21-3
21-7
Types of Attest Engagements
Attest
Engagements
Examination
Review
Agreed-Upon
Procedures
LO# 4
21-8
Attestation Standards
Attestation
Standards
General Fieldwork Reporting
LO# 5
21-9
General Standards
Adequate Technical
Training &
Proficiency
Adequate
Knowledge of
Subject Matter
IndependenceDue Professional
Care
Subject Matter
Capable of
Evaluation
LO# 5
21-10
Standards of Field Work
Adequate Planning
& Supervised
Assistants
Obtain Sufficient
Evidence
LO# 5
21-11
Standards of Reporting
Identify Subject
Matter or AssertionState Conclusion
State Significant
Reservations
Restricted Use of
Report in Certain
Circumstances
LO# 5
21-12
Reporting on an Entity’s Internal
Control over Financial ReportingThe Federal Deposit Insurance Corporation
Improvement Act of 1991 requires that the
management of large financial institutions issue a
report on the effectiveness of the institution’s
internal control and that they engage accountants to
attest to management’s report.
The Sarbanes-Oxley
Act of 2002 imposed
similar requirements
on all publicly held
companies.
LO# 6
21-13
Conducting an Engagement to
Report on ICFR
Necessary
Conditions
1. Management of the entity accepts responsibility for the
effectiveness of the entity’s internal control.
2. The responsible party evaluates the effectiveness of the
entity’s internal control using suitable criteria (referred to as
control criteria).
3. Sufficient appropriate evidence exists or could be developed
to support the responsible party’s evaluation.
LO# 6
21-14
Financial Forecasts
and Projections
CPAs can be engaged to examine, apply agreed-
upon procedures, or compile the prospective
financial statements if such statements are expected
to be used by a third party.
LO# 7
21-15
LO# 7
Standard Report on a Forecast Exhibit 21-1
21-16
LO# 7
Standard Report on a Projection Exhibit 21-2
21-17
LO# 7
Report on Agreed-Upon
Procedures Exhibit 21-3
21-18
LO# 7
Standard Report on a CompilationExhibit 21-4
21-19
Accounting and Review Services
Compilations Reviews
Many nonpublic businesses do not choose to
contract for an audit of their financial statements.
However, these entities often employ a CPA to
assist with preparing their financial statements, tax
returns, or other financial documents.
LO# 8
21-20
LO# 8
Levels of Assurance
Figure 21-4
21-21
Compilation of Financial
Statements
A compilation is defined as presenting, in the
form of financial statements, information that is
the representation of management or owners
without expressing any assurance on the
statements.
Compilation
with Full
Disclosure
Compilation
that Omits
Disclosures
Compilation
when CPA
is not
Independent
LO# 8
21-22
LO# 8
Report on a Compilation with
Full DisclosureExhibit 21-5
21-23
Review of Financial Statements
A review is defined as the performance of
inquiry and analytical procedures to provide
the accountant with a reasonable basis for
expressing limited assurance that no material modifications should be made to the
statements in order for them to conform to the
applicable financial reporting framework (e.g.
GAAP).
LO# 8
21-24
Review of Financial Statements
1. Obtaining knowledge of the accounting principles and
practices of the industry in which the entity operates.
2. Obtaining a general understanding of the entity’s
organization, its operating characteristics, and the nature of
its assets, liabilities, revenues, and expenses.
3. Obtaining an understanding of the accounting principles
and practices used by the entity in measuring, recognizing,
recording, and disclosing all significant accounts and
disclosures in the financial statements.
4. Asking the entity’s personnel about important matters.
5. Performing analytical procedures.
6. Reading the financial statements to determine if they
conform to the applicable reporting framework.
7. Obtaining reports from other accountants, if any.
8. Obtaining a representation letter from management.
LO# 8
21-25
LO# 8Standard Report on
a Review EngagementExhibit 21-6
21-26
Conditions That May Result in
Modification of a Compilation or
Review Report
Departure
from GAAP
Going-
Concern
Uncertainty
LO# 8
21-27
LO# 8
Modified Review Report with
GAAP DepartureExhibit 21-7
21-28
Internal Auditing
Internal auditing is an independent, objective assurance
and consulting activity designed to add value and
improve an organization’s operations.
It helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management,
control, and governance processes.
LO# 9
21-29
Institute of Internal Auditors (IIA)
Standards
Mandatory guidance
•Definition of internal
auditing
•Code of ethics
•Standards
Strongly recommended
guidance
•Position papers
•Practice advisories
•Practice guides
The IIA oversees and sets standards for
internal auditing internationally.
LO# 9
21-30
IIA Code of Ethics
Principles
Integrity
Objectivit
y
Confident
iality
Compete
ncy
LO# 9
21-31
Internal Auditors’ Roles
Evaluating Risks and
Controls
Reviewing
Compliance
Financial Auditing Operational Auditing
LO# 9
21-32
LO# 9
Internal Audit FunctionFigure 21-5
21-33
Interactions between Internal
and External Auditors
Some of the
work performed
by internal
auditors is
directly
relevant to the
work of the
independent
auditor.
Before relying
on the work of
internal
auditors, the
external auditor
must evaluate
internal
auditors’
objectivity and
competence.
LO# 9
21-34
Trust Services
Security
Availability
Processing
Integrity
Privacy
Confidentiality
Five Principles
of Trust
Services
LO# 10
21-35
Trust Services
SOC 1 – used
by the auditors of
several different
clients
SOC 2 –
restricted use
only
SOC 3 –
general use
report
Service
Organization
Control reports
LO# 10
21-36
WebTrust Services
CPA WebTrust
Assurance Services
relating to Electronic Commerce
LO# 10
21-37
SysTrust Services
LO# 10
SysTrust
Assurance Services
relating to Information Systems
21-38
PrimePlus Services
CPA PrimePlus Services
Consulting/Facilitating Services
Direct Services
Assurance Services
LO# 10
21-39
End of Chapter 21
21-40
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