Chap 001 auditing
Transcript of Chap 001 auditing
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 1/37
Chapter 01
The Role of thePublic Accountantin theAmerican Economy
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies Inc! "ll rights reser#e$!
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 2/37
Assurance services Assurance services
The broad range of information
enhancement services that are provided
by certified public accountants (CPAs).
Two types: Increase reliability of information
Putting information into a form or contet that
facilitates decision ma!ing.
1-2
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 3/37
Types of "ervicesTypes of "ervices
Assurance "ervices Attestation "ervices
# $ample: Audits of %inancial "tatements&
$aminations of Internal Control 'ther Assurance "ervices
# $ample: CPA $lderCare Prime Plus "ervices
onAssurance "ervices Ta "ervices
anagement Consulting "ervices
'ther 1-3
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 4/37
Attestation "ervices Attestation "ervices
To attest to information means to provide
assurance as to its reliability
Attest engagement: A practitioner is engaged to issue or does
issue an eamination& a review& or an agreed*
upon procedures report on sub+ect matter or
an assertion about sub+ect matter that is theresponsibility of another party (e.g.
management)
1-4
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 5/37
The Attest %unctionThe Attest %unction
anagement
"ub+ectatter
"uitableCriteria
The CPA
,athers$vidence
"ub+ect
atter-The Attest
eport
Issues
eport
*May be management’s assertion about the subject matter
1-5
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 6/37
"uitable criteria"uitable criteria
"tandards established or developed bygroups of eperts.
$ample: Internal control audit / standards
established by a committee of eperts oninternal control
$ample: %inancial statement audit /standards are ,AAP. %or a financialstatement audit suitable criteria are referredto as the 0applicable financial reportingframewor!.1
1-6
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 7/37
%orms of Attestation%orms of Attestation
1-7
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 8/37- Applicable financial reporting framewor!
Audit of %inancial "tatements Audit of %inancial "tatements
anagement
Prepares%inancial
"tatements
Criteria(e.g.& ,AAP)
The
Auditors
,athers$vidence
%inancial
"tatementsThe Auditors2
eport
Issues
eport
1-8
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 9/37
%inancial "tatement Audit%inancial "tatement Audit
Auditors gather evidence and provide a high
level of assurance that the financial statements
follow ,AAP& or some other appropriate basis of
accounting Audit involves searching and verifying
accounting records and eamining other
documents
$vidence necessary to issue an audit report that
states auditors2 opinion
1-9
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 10/37
Audit $vidence Audit $vidence
$vidence focuses on whether financial statements are
presented in accordance with ,AAP3 eamples:
# 4alance sheet contains all liabilities
# Income statement "ales really occurred
"ales have been recorded at appropriate amounts
ecorded costs and epenses are applicable to period
All epenses have been recogni5ed
# %inancial statement amounts Accurate& properly classified and summari5ed
otes are informative and complete
1-10
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 11/37
6hat Creates the 7emand for Audits86hat Creates the 7emand for Audits8
Audits lend credibility to information by reducinginformation ris!& the ris! that information is materiallymisstated
%inancial statement misstatements arise due to** Accidental errors 9ac! of !nowledge of accounting principles nintentional bias 7eliberate falsification
Audits do not directly address business ris!& the ris!that a company will not be able to meet its financialobligations due to economic conditions or poormanagement decisions
1-11
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 12/37
History of the Attest Function
Period Developments Audit Objective Nature of Audit
Ancient - 18! Audits of city states"individuals # ventures
Detection of fraud Detailed$ No reliance oncontrols
18!-1%! &ndustrial revolutionresulted in the need forcorporate audits
Detection of fraud #clerical errors
'ome testin($ Noreliance on controls
1%!-1%)! Development of stoc*
mar*ets - increasedemphasis on earnin(s
Determination of
fairness$ detection offraud # errors
&ncreased emphasis on
testin($ 'li(ht reliance oncontrols
1%)!-1%+ Development of auditin(standards
Determination offairness
'ubstantial reliance oncontrols
1%+-1%8 ,riticism by ,on(ress$&ncreased self-re(ulation
Determination offairness
&nternal controldetermines scope ofaudit
1%8-1%% &ncreased demands forreportin( on compliance #internal control
Determination offairness
is* assessmentdetermines audit scope$must assess ris* of fraud
1%%-Present Panel on Audit.ffectiveness$ 'arbanes-O/ley Act of 0!!0
Determination offairness
usiness ris* approachto audits
1-12
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 13/37
The Accounting Profession2s CredibilityThe Accounting Profession2s CredibilityCrisisCrisis
;<<<=The Panel on Audit$ffectiveness made a variety of
suggestions to improve audits. ;<<>=$nron 4an!ruptcy ;<<;=6orldCom %raud
;<<;="arbanes*'ley Act ;<<?=Public Company Accounting
'versight 4oard began operations
1-13
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 14/37
%inancial Audits%inancial Audits
Audit of the financial statements of an
entity Covers the balance sheet and related statements of
income& retained earnings and cash flows ,oal is to determine if prepared in conformity with
,AAP
Performed by CPAs
sers include management& investors& ban!ers&
creditors& financial analysts& government agencies
1-14
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 15/37
'ther Types of Audits'ther Types of Audits
Compliance Audits $ample: I" audit of income ta return
'perational Audits $ample: $ffectiveness of operations of
receiving department of a manufacturing
company
Integrated Audits $ample: Assurance on both the financial
statements and effectiveness of internal
control over financial reporting1-15
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 16/37
'ther Types of Auditors'ther Types of Auditors
Internal Auditors
,overnment Accountability 'ffice Auditors
Ta Auditors
1-16
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 17/37
Internal AuditorsInternal Auditors
$mployed by a company as an employee They often
perform operational and compliance audits
address internal control report to the audit committee of the board of
directors and to the president
The Institute of Internal Auditors is theinternational organi5ation of internalauditors.
1-17
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 18/37
,overnment Accountability 'ffice,overnment Accountability 'ffice
Auditors (,A' Auditors) Auditors (,A' Auditors)
@eaded by the comptroller general
esponsibility of supporting Congress
Perform Compliance& operational and financial audits
of government agencies
$aminations of corporations holding
government contracts to verify contract
payments have been proper
1-18
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 19/37
Ta AuditorsTa Auditors
esponsible for enforcement of ta laws of
various sorts (e.g.& state and federal
income taes& property taes& sales taes)
Internal revenue agents generally perform
compliance audits of income ta returns
1-19
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 20/37
AICPA2s Traditional ole AICPA2s Traditional ole
$stablish "tandards esearch and Publication Continuing Professional $ducation
"elf*egulation
ote: uch of the standards setting and regulation rolesrelating to public companies (referred to as 0issuers1)has been ta!en over by the "$C and the PCA'4.
1-20
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 21/37
$stablishes "tandards**$amples$stablishes "tandards**$amples
AICPA Auditing "tandards 4oard Issues official pronouncements on auditing matters for
nonpublic companies (0nonissuers1)
"tatements on Auditing "tandards ("A"s)
"tatements on "tandards for Attestation $ngagements
(""A$s)# ,uidance for attesting to information other than
financial statements such as financial forecasts
Accounting and eview "ervices Committee
"tatements on "tandards for Accounting and eview"ervices (""A")
"tandards for compilations or reviews not audits of
financial statements
1-21
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 22/37
esearch and Publicationesearch and Publication
Publications
ournal of Accountancy (monthly)
The Ta Advisor
Audit publications Industry Audit and Accounting ,uides
Audit is! Alerts
Auditing Practice eleases
'ther publications Accounting esearch "tudies
"tatements of Position
Accounting Trends B Techniues
1-22
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 23/37
Continuing Professional $ducationContinuing Professional $ducation
7evelopment of continuing professional
education programs
ecessary for continuing education
reuirement for CPA certificate
'ffered by AICPA
"tate societies
'ther professional organi5ations
1-23
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 24/37
Professional egulationProfessional egulation
egulations of Individual CPAs Code of Professional Conduct / ethical rules
for CPAs
euirements for regular membership in
AICPA
egulation of Public Accounting %irms 7ivision for Public Accounting %irms
# Center for Public Company Audit %irms
# Private Companies Practice "ection (PCP")
1-24
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 25/37
The CPA $aminationThe CPA $amination
niform national eamination prepared
and graded by the AICPA
Computeri5ed eam includes multiple
choice and simulations in four parts# Auditing and Attestation
# %inancial Accounting B eporting
# egulation# 4usiness $nvironment B Concepts
1-25
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 26/37
"tate 4oards of Accountancy"tate 4oards of Accountancy
Issue CPA certificates
All boards reuire successful completion
of CPA eamination
$ducation and eperience reuirements
vary
ational Association of "tate 4oards of Accounting (A"4A)
1-26
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 27/37
'ther Parties'ther Parties
%A"4 "ets ,AAP for entities other than federal&
state and local governments
,A"4 "tandards of financial accounting for state
and local government entities
%A"A4 Accounting standards for the " government
1-27
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 28/37
PCA'4 olePCA'4 ole
Adopt auditing& attestation& uality control& ethics
and independence standards relating to the
preparation of audit reports for "$C registrants
'versee and discipline CPAs and CPA firms thataudit public companies& including egister firms
Perform inspections of firms
Conduct investigations and disciplinary proceedings of firms "anction registered firms
1-28
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 29/37
"ecurities and $change"ecurities and $change
Commission ("$C)Commission ("$C) Agency of the " government
'versight responsibility for the PCA'4
'b+ectives Protect investors and public by reuiring full
disclosure of financial information by
companies offering securities for sale to the
public Prevent misrepresentation& deceit& or other
fraud in the sale of securities
1-29
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 30/37
"ecurities and $change"ecurities and $change
Commission ("$C )Commission ("$C )
egistration statements Dualify securities for sales
Contains audited financial statements
a!es "$C ma+or user of financial
statements
Protects investors
egulation "*E 4asic accounting regulation
1-30
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 31/37
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 32/37
'rgani5ation of the Public'rgani5ation of the Public
Accounting Profession Accounting Profession
"ole proprietorship
Partnerships
Professional Corporation 9imited 9iability Partnership (99P)
9imited 9iability Company (99C)
1-32
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 33/37
Categories of Public Accounting %irmsCategories of Public Accounting %irms
9ocal
egional
ational4ig F
Alternative Practice "tructures
1-33
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 34/37
Industry "peciali5ationIndustry "peciali5ation
%irms with detailed !nowledge and
understanding of a client2s industry
@elps firms 4e more effective at collecting and evaluating
audit evidence
a!e valuable suggestions to improve client2s
operations Provide the client consulting services
1-34
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 35/37
Typical "tructure of a ationalTypical "tructure of a ational
CPA %irmCPA %irm
Partners
anagers
"eniors
"taff Assistant
1-35
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 36/37
esponsibilities on an $ngagementesponsibilities on an $ngagement
Partner ='verall responsibility is to
assure that that audit is performed in
accordance with professional standards.
2ana(er ="upervise overall engagement.
'eniors=1In charge1 auditor on a daily
basis.
'taff assistants=6or! under the
immediate supervision of the senior.
1-36
8/20/2019 Chap 001 auditing
http://slidepdf.com/reader/full/chap-001-auditing 37/37
$lements of Public Accounting$lements of Public Accounting
6or!6or!
Professional 7evelopments "tay current on developments within the
profession
"easonal fluctuations 4usy season from 7ecember through April
elationships with clients eed to maintain independence