OrganizationPart1 The auditing profession (ch1-5) Part II The
audit process (ch6-13) Part 3 Application of the audit process to
the sales and collection cycle (ch14-17) Part 4 Application of the
audit process to other cycles (ch 18-23) Part 5 Completing the
audit (ch24) Part 6 Other assurance and Non-assurance services (ch
25-26)2005 Prentice Hall Business Publishing, Auditing and
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Chapter 1
The Demand for Audit and Other Assurance Services
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Sarbanes-Oxley ActIn the aftermath of WorldCom and other
major
financial reporting frauds, In July 2002, Congress passed the
Sarbanes-Oxley Act. The provision of ;the Act apply to publicly
held companies and their audit firms. A key provision of the
Sarbanes-Oxley Act is the creation of the Public Company Accounting
Oversight Board (PCAOB) to provide oversight for auditors of public
companies.2005 Prentice Hall Business Publishing, Auditing and
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Sarbanes-Oxley Act
Perhaps the most significant provision of the Act is the
requirement in Section 404 that management assess and report on the
effectiveness of internal control over financial reporting. The
companys auditor must also report on the effectiveness of the
companys internal companys financial statements, in addition to
reporting on the results of their audit of the companys financial
statement.1-4
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Learning Objective 1
Describe auditing.
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Nature of Auditing
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 should
be done by a competent, independent person. 2005 Prentice Hall
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Information and Established CriteriaTo do an audit, there must
be information in a verifiable form and some standards (criteria)
by which the auditor can evaluate the information.
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Accumulating and Evaluating EvidenceEvidence 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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Accumulating and Evaluating EvidenceEvidence is any information
used by the auditor to determine whether the information being
audited is stated in accordance with the established criteria.
----Evidence takes many different forms, including oral testimony
of the auditee (client), written communication with outsiders,
observations by the auditor, and electronic data about
transactions.2005 Prentice Hall Business Publishing, Auditing and
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Accumulating and Evaluating Evidence----It is important to
obtain a sufficient quality and volume of evidence to satisfy the
purpose of the audit. ----Determining the types and amount of
evidence necessary and evaluating whether the information
corresponds to the established criteria is a critical part of every
audit.2005 Prentice Hall Business Publishing, Auditing and
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Competent, Independent PersonThe auditor must be qualified to
understand the criteria used and must be competent to know the
types and amount of evidence to accumulate to reach the proper
conclusion after the evidence has been examined. The competence of
the individual performing the audit is of little value if he or she
is biased in the accumulation and evaluation of evidence.2005
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Competent, Independent Person---The auditor must be qualified to
understand the criteria used and must be competent to know the
types and amount of evidence to accumulate to reach the proper
conclusion after the evidence has been examined. ----The auditor
must also have an independent mental attitude.2005 Prentice Hall
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Competent, Independent Person---The competence of the individual
performing the audit is of little value if he or she is biased in
the accumulation and evaluation of evidence. ---Although absolute
independence is impossible, auditor strive to maintain a high level
of independence to keep to donfidence of users relying on their
reports. ---Auditors reporting on company financial statements are
often called independent auditors.2005 Prentice Hall Business
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Reporting
The final stage in the auditing process is preparing the Audit
Report,( ) which is the communication of the auditors findings to
users.( )
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Audit of a Tax Return Example Information Competent, independent
personInternal revenue Agent
Federal tax returns filed by taxpayer( )
Report on results Determines correspondence Established criteria
Internal Revenue Code and all interpretations1 - 15
Accumulates and evaluates evidence Examines cancelled checks and
other supporting records
Report on tax Deficiencies
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Learning Objective 2
Distinguish between auditing and accounting. 2005 Prentice Hall
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Distinguish Between Auditing and AccountingAccounting is the
recording, classifying, and
summarizing of economic events for the purpose of providing
financial information used in decision making. Auditing is
determining whether recorded information properly reflects the
economic events that occurred during the accounting period.2005
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Learning Objective 3
Explain the importance of auditing in reducing information risk.
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Economic demand for auditingIf the bank makes the loan, it will
charge a rate of interest determined primarily by three factors:
Risk-free interest rate Business risk for the customer information
risk.
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Economic Demand for Auditing Information risk reflects the
possibility that the information upon which the business risk
decision was made was inaccurate. Auditing has no effect on either
the risk-free interest rate or business risk, Auditing can have a
significant effecton information risk. 2005 Prentice Hall Business
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Learning Objective 4
List the causes of information risk, and explain how this risk
may be reduced. 2005 Prentice Hall Business Publishing, Auditing
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Causes of Information RiskRemoteness of information Biases and
motives of the provider
Voluminous data Complex exchange transactions 2005 Prentice Hall
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Remoteness of InformationIt is impossible for a decision maker
to have much firsthand knowledge about the 0organization with which
he or she does business. when information is obtained from others,
the likelihood of it being intentionally or unintentionally
misstated increases.2005 Prentice Hall Business Publishing,
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Biases and Motives of the Providerif information is provided by
someone
whose goals are inconsistent with those of the decision maker,
the information may be biased in favor of the provider.
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Voluminous Data
As organizations become larger, so
does the volume of their exchange transactions.
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Complex exchange transactions
exchange transactions between
organizations have become increasingly complex and therefore
more difficult to record properly.
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Reducing Information RiskUser verifies information. User shares
information risk with management. Audited financial statements are
provided. 2005 Prentice Hall Business Publishing, Auditing and
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Capital Costs to Shrink Elliotts ExampleAssuming a cost of
capital of 13%, Elliott estimates this rate is composed of the
following: 5.5% risk-free interest rate 3.5% economic risk premium
(business risk) 4.0% information cost (information risk)2005
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Learning Objective 5Describe assurance services and distinguish
audit services from other assurance and non-assurance services
provided by CPAs. 2005 Prentice Hall Business Publishing, Auditing
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Assurance Services Assurance services are professional services
that improve the quality of information for decision makers. 2005
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Assurance services can be performed by CPAs or by a variety of
other professionals.
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Individuals who are responsible for making business decisions
seek assurance services to help improve the reliability and
relevance of the information used as the basis for their
decisions.2005 Prentice Hall Business Publishing, Auditing and
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Assurance services are valued because the assurance provider is
independent and perceived as being unbiased with respect to the
information examined.
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Attestation Services An attestation service is a type of
assurance service in which the CPA firm issues a report about the
reliability of an assertion that is the responsibility of another
party. 2005 Prentice Hall Business Publishing, Auditing and
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An attestation service is a type of assurance service in which
the CPA firm issues a written communication that expresses a
conclusion about the reliability of a written assertion of another
party.
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Attestation ServicesAudit of historical financial statements
Review of historical financial statements
Attestation on internal control over financial reporting
Other attestation services 2005 Prentice Hall Business
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Audit of historical financial statementsIs a form of attestation
service in which the auditor issues a written report expressing an
opinion about whether the financial statements are in material
conformity with generally accepted accounting principles. 2005
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Audit of historical financial statements--the value the auditors
assurance because of the auditors independence from the client and
knowledge of financial statement reporting matters. --publicly
traded companies in the United States are required to have. Audits
under the federal securities acts
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Review of historical financial statements--many nonpublic
companies want to provide assurance on their financial statements,
without incurring the cost of an audit. --An audit provides a high
level of assurance, a review service provides a moderate amount of
assurance on the financial statement, and less evidence is
necessary to support this level of assurance. --another type of
attestation service performed by CPAs.2005 Prentice Hall Business
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Review of historical financial statementsThis type of review is
often adequate to meet users needs and can be provided by the CPA
firm at a much lower fee than an audit.
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Review of historical financial statementsA review of historical
financial statements is another type of attestation service
performed by CPAs.
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Other Assurance Services
The Elliott Committee was charged with researching and
developing new assurance services opportunities( ) for CPAs to
provide to business and individual clients who need relevant and
reliable information for critical decision making.2005 Prentice
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Assurance Services on Information TechnologyWebTrust is an
attestation service, and the WebTrust seal is a symbolic
representation of the CPAs report on managements assertions about
its disclosure of electronic commerce practices. 2005 Prentice Hall
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Other Assurance Services
For example: banks often require debtors to engage CPAs to
provide assurance about the debtors compliance with certain
financial covenant provisions stated in the loan agreement.2005
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Assurance Services on Information TechnologyThere is an
increased demand for assurance about computer controls surrounding
information transacted electronically and the security of the
information related to the transactions.
assurance over Web site controls( ) assurance about information
system reliability ( )
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Assurance Services on Information TechnologySysTrust is an
attest-type engagement to evaluate and test system reliability in
areas such as security and data integrity.
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Assurance Services on Other Types of Information
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Nonassurance Services provided by CPAsaccounting and bookkeeping
services, tax services, management consulting services.
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Assurance, Attestation, and Nonassurance ServicesASSURANCE
SERVICESATTESTATION SERVICES Audits Reviews Certain Management
Consulting Other Attestation Services (e.g., WebTrust,
SysTrust)
Other Assurance Services (e.g., CPA Performance View)2005
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Assurance, Attestation, and Nonassurance ServicesNONASSURANCE
SERVICES Other Management Consulting Certain Management Consulting
Accounting and Bookkeeping
Tax Services 2005 Prentice Hall Business Publishing, Auditing
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Learning Objective 6
Differentiate the three main types of audits. 2005 Prentice Hall
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Types of Audits
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1. : 2. : , 3. : -the first two services are often called audit
activities, even though they are most similar to assurance and
attestation services.2005 Prentice Hall Business Publishing,
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--Normally, the criteria are generally accepted
accounting principles (GAAP), although it is also common to
conduct audits of financial statements prepared using the cash
basis or some other basis of accounting appropriate for the
organization. --The financial statements most often included are
the statement of financial position, income statement, and
statement of cash flows including accompanying footnotes.2005
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--In determining whether financial statements are fairly stated
in accordance with GAAP, the auditor performs appropriate tests to
determine whether the statements contain material errors or other
misstatements.
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--at the completion of an operational audit, management normally
expects recommendations for improving operations. --In operational
auditing, the reviews are not limited to accounting. They can
include the evaluation of organization structure, computer
operations, production methods, marketing and any other area in
which the auditor is qualified.2005 Prentice Hall Business
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to determine whether the auditee is following specific
procedures, rules, or regulations set by some higher authority.
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Operational Audit Example Information Established Criteria
Available Evidence Evaluate computerized payroll system for
efficiency and effectiveness Number of records processed, cost of
the department, and number of errors Company standards for
efficiency and effectiveness in payroll department Error reports,
payroll records, and payroll processing costs1 - 62
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Compliance AuditExample Information Established Criteria
Available Evidence Determine whether bank requirements for loan
continuation have been met Company records Loan agreement
provisions Financial statements and calculations by the auditor1 -
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Financial Statement AuditExample Information Established
Criteria Available Evidence Annual audit of Boeings financial
statements Boeing's financial statements Generally accepted
accounting principles Documents, records, and outside sources of
evidence1 - 64
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Learning Objective 7
Identify the primary types of auditors. 2005 Prentice Hall
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Types of AuditorsCertified public accounting firms General
accounting office auditors Internal revenue agents
Internal auditors 2005 Prentice Hall Business Publishing,
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Learning Objective 8
Describe the requirements for becoming a CPA.
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Three Requirements for Becoming a CPAEducational requirement
Uniform CPA examination requirement Experience requirement2005
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CPA Examination SectionsAuditing and attestation Financial
accounting and reporting Regulation Business environments and
concepts2005 Prentice Hall Business Publishing, Auditing and
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