Chapter 1

Assurance ServicesAssurance Services

Need for AssuranceWhy do you need assurance?

•Potential bias in providing information.

•Remoteness between a user and the organization or trading partner.

•Complexity of the transactions, information or processing systems.

Potential Bias in Providing Information

•Sellers

•Management

•Inside information

•Compensation of management

•Stock options held by management

Remoteness of Users•Global society

•Lack of personal interaction

•Can’t physically inspect goods

•Can’t interview management

•Can’t inspect facility

•Can’t review books and records

Complexity

•Economic transactions are more complex

•Information systems are more complex

•Processing of transactions is more complex

•Users of financial statements must rely on CPA’s

Need for Assurance Regarding Information and

OperationsWhat is assurance?

Independent professional services that improve the quality of information, or its context, for decision makers.

Assurance is a broad concept.

Assurance services depict:

•A wider spectrum of services.

•A more diverse group of users.

•Greater potential users.

Attestation ServicesSubset of a broader spectrum of assurance services.

Attest services always involve evaluation of an assertion by one party to a third party.

Assurance services do not need to involve a report.

Evolving Assurance Services

•Assisting organizations in identifying, measuring, assessing, and managing risks.

•Providing assurance on information systems integrity.

•Identifying and communicating improved methods of measuring and communicating organizational performance.

•Improving the quality of financial services provided to the elderly population. (ElderCare Services)

•Developing criteria and communicating assurance regarding e-business.

•Identifying better measurements of quality of health care.

Internal Audit Assurance Services

•The effectiveness of a company’s process for identifying risk.

•The quality of an organization’s governance processes.

•The effectiveness and efficiency of an organization’s control processes.

Characteristics of Assurance Services

•Information or a process on which the assurance service is provided.

•A user or a group of users who derive value from the assurance services provided.

•An assurance service provider.

Value of AssuranceThe assurance function gives investors and creditors confidence in the accuracy of data.

The value of assurance, then, is in the confidence it generates in users of the information.

Attributes Needed to Perform Assurance

•Subject matter knowledge

•Independence from parties requesting the assurance

•Established criteria

Levels of Assurance Provided

Three Levels:

2 Limited or negative assurance (such as on interim financial statements)

1 Positive assurance (such as an audit opinion)

3 No assurance (such as a compilation of financial statements)

The Special Role of Financial Statement Audits

Reliability of financial information.

CPA’s provide independent evaluations and reports.

CPA career is one of the most important and most highly regarded public functions.

New challenges.

Auditing DefinedAuditing is both more and less than public Auditing is both more and less than public

accounting.!!accounting.!!

Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.

Requirements to Enter the Public Accounting Profession Accounting and Auditing Expertise

Knowledge of Business and its Risks

Understanding Accounting System Complexity

The Providers of Assurance Services

The Public Accounting Profession

The Internal Audit Profession

The Governmental Audit Profession

The Internal Audit Profession

DefinitionDefinition

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.

Major Types of Internal Audits

Risk Management and ControlEvaluations

Operational Audits

Compliance Audits

Governmental Auditing Profession

Employed by various federal, state, and local agencies.

GAO places a great deal of emphasis on performance audits.

IRS

Defense Contract Audit Agency

Other Professional and Regulatory Organizations

American Institute of Certified Public Accountants (AICPA)

State Boards of Accountancy

Securities and Exchange Commission (SEC)

The Institute of Internal Auditors (IIA)

The U.S. General Accounting Office (GAO)

The Court System