Ch1-Auditing & Assurance Service
Transcript of Ch1-Auditing & Assurance Service
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Chapter 1Auditing and Assurance Services
"If you want to be successful, it's just this simple:
Know what you're doing. Love what you're doing.
And believe in what you're doing."
-- Will Rogers
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Financial
Statements
Shareholders
Government
EmployeesCustomers & Consumers
SuppliersManagement
Lenders of money
Community
USERS OF FINANCIAL STATEMENTS
Stakeholders
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User Demand for Reliable information
Financial analysts and investors depend onfinancial reports for making stock purchaseand sale decisions.
Suppliers and creditors use financial reports to
decide whether to give trade credit and bankloans.
Labor organizations use financial reports tohelp determine a companys ability to pay
wages. Govt. agencies and Congress use financial
information in preparing analyses of economyand in making laws concerning taxes.
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Definition of Auditing
Auditing is a systematic process of
objectively obtaining and
evaluating evidence regarding
assertions about economic actions
and events to ascertain the degreeof correspondence between the
assertions and established criteria
and communicating the results to
interested users.
Financial Statements
(including footnotes)
GAAP
Auditor's Report/Other ReportsPersons who rely on
the financial reports
Creditors
Investors
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1-5Types of Audits
Financial Statement Audits
An audit of financial statementis conducted todetermine whether the overallfinancial statements are
stated in accordance with specified criteria.
The specified criteria are principles set out in the
accounting standards and the financial statement
prepared by using the cash basis or accrual basis orsome other basis of accounting appropriate for the
organization.
The financial statements commonly are included as
follows:- The statement of balance sheet
- The statement of profit and loss
- The statement of cash flows
- Notes to the accounts
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Overview of Financial Statement Auditing
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Performance Audits
The study of business operations for thepurpose of making recommendations about the
efficient use of resources , effective achievement
of business objectives, and compliance with
company policies.
The goal of operational audit is also to
help managers discharge their managementresponsibilities and improve profitability.
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The purpose of a compliance audit is to
determine whether the auditee is followingspecific procedures, rules, or regulation or
policies set down by some higher authority
or the company.
Compliance Audits
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Type of auditors
External Auditor
Internal Auditor
Government Auditor
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Many public accounting firms have as
their primary responsibility theperformance of audits of the historical
financial statements of companies
registered under the companies act.
External Auditor
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Internal Auditor
Internal auditors are employed by
individual companies to audit for management.
Internal auditing is an independent appraisalfunction established within an organization
who examine and evaluate its activities or
operations.
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Government Auditor
In some countries, the constitution of
the federation provides for the appointment
of the Auditor General who is responsible forauditing all the federal and state accounts as
well as those of the public authorities and
statutory bodies.
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Public Accounting Firms or Audit Firms
Many public accounting firms have their primary
responsibility for the performance of audits of the
historical financial statements of companies
registered under the companies act.
- KPMG Peat Marwick
- Coopers & Lybrand
- Deloitte & Touche- Ernst & Young
- Price Waterhouse
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Professional Service Firm Organization
Executive Committee
Managing Partner
Practice Offices
Partners-in-Charge
Consulting
Services
Audit, Assurance and
Business Advisory
Services
Tax Consulting
Services
Partner
ManagerManager Manager
Senior (In-charge) Accountants
Staff Accountants (or Associates)
Partner
ManagerManager Manager
Senior (In-charge) Accountants
Staff Accountants (or Associates)
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1-15Exhibit 1-2
The Relationships Among Auditing,
Attestation, and Assurance Services
Assurance Services
Any Information
Attestation Services
Primarily Financial Information
AuditingFinancial
Statements
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Assurance Services
Assurance servicesare independent
professional services that improve the quality of
information, or its context, for decision makers.
Examples
Internet website certification (WebTrust)
Business risk assessment ( Risk Advisory) Information system security reviews (Systrust)
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Attestation Engagements
An attestation engagementis one in which a
practitioner is engaged to issue or does issue a reporton subject matter or an assertion about the subjectmatter that is the responsibility of another party.
Some financial attestation engagements (other than
audits) Financial statistics
Pro forma financial information
Financial forecasts and projections
Some non-financial attestation engagements Compliance with contractual requirements
Effectiveness of internal control systems
Inventory quantities and locations ( Agree Upon Procedures)
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Financial Statements Audit
Financial statements audits determine
whether financial statements of an audited
entity present fairly the financial position,results of operations, and cash flows in
conformity with general accepted
accounting principles.
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Financial Statements Assertions byManagement
Key assert ions can be catego r ized as fo l lows:
Presentation and disclosure (all items disclosed)
Existence (assets) or occurrence (transactions)
Rights and obligations ownership Completeness - all accounts recorded
Valuation or allocation (all account balances are correct)
Financial Statements are asserted that the
individual items described correctly and figures are
mathematically corrected or fairly estimated.
E l A i d h i R l i hi
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1-21Example Assertions and their Relationships to
the Financial Statements
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The Public Accounting Profession
Assurance services Audit engagements
Assurance engagements
Attestation engagements
Compilations
Reviews
Tax consulting services
Consulting services Litigation support
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Engagement Overview
OBTAIN
(OR RETAIN)
CLIENT
INTERNAL
CONTROL
EVALUATION
SUBSTANTIVE
PROCEDURES
ISSUE
REPORT
ENGAGEMENT
PLANNING
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Professional Ethics
The auditor should comply with the 'Code
of ethics for professional accountants'
issued by the International Federation of
Accountants. Ethical principles governing
the auditor's professional responsibilities
are:
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Professional Ethics
Independence
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behavior, and Technical standards (the International
Auditing Standards)
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End of Chapter 1