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Chapter 1 The Demand for an Auditing and Assurance Profession Usually students will not have read Chapter 1 before the material in this chapter is covered. Accordingly we spend more time taking up this material, which usually requires the entire scheduled time of the first day of class. In addition to reviewing the detailed course outline for the course, we attempt to cover the following major topics in the chapter:

Chapter opening vignette Learning objectives Definition of auditing Nature and relevance of auditing Economic demand for auditing Distinction between auditing and accounting Assurance and nonassurance services Audit of historical financial statements Types of audits and auditors Professional accountants and their work

Chapter opening vignette: ”Why Do Auditing?”

This vignette explores the career choices of four students in the field of auditing. It follows their considerations based on their preferences to work and specialize in the public or private sector, for large or small organizations and different types of audits, from auditing government departments, information systems and the internal operations of large and small companies.

Learning objectives 1. Identify the components of an audit and explain why there is a demand for audits.

Explain the strategic differences between accounting and auditing, contrasting professional risks and rewards.

2. Link the nature of assurance services to examples of actual services provided. Distinguish audit engagements from other assurance and non-assurance services. Consider why financial statement auditors rely upon internal auditors.

3. Explore the different types of accountants and what they do. Definition of auditing We start by asking students to tell you what they believe auditing is. One student's definition should be written on the white/blackboard. Other students are asked to discuss auditing until there is a reasonably usable definition. Three concepts that should be a part of the definition are:

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evidence (define the term) quantifiable information determining degree of correspondence

This would now be a good time to discuss with the class the five key components of auditing,flip to PPT slide 1-4 and review with the students.

(See PPT slide 1-4, “Five Key Components of Auditing”)

Students tend to think of auditing as the auditing of financial statements by public accounting firms in accordance with GAAS. It is therefore helpful to use Figure 1-1 (“Audit of a Tax Return”) to discuss the definition.

(See PPT slide 1-5, “Audit of a Tax Return”) As a part of this discussion, students are briefly introduced to the income tax auditors, public accountants, and internal auditors. Be sure to identify this as a tax compliance audit rather than a financial statement audit. After you have gone over this information, refer students to the definition of auditing. Briefly talk about the importance of:

Competence and independence of auditor (Chapter 3) Need for auditor to identify the economic entity (Chapter 3) Need to report on findings (Chapters 20)

At this point we ask the student to identify those individuals or parties who rely on financial statements. It’s important for the student to understand who relies on the audited information and for what purposes (decision-making). We next have a discussion on why an external audit is needed.

Distinction between accounting and auditing A small amount of time may be spent on the distinction between accounting and auditing, although it is at least desirable to point out the differences and relationship between the two. The use of PPT slides 1-6 to 1-8 helps make the distinction clear. Ask the students to identify who is responsible for accounting as well as auditing (client versus the auditor.) Then ask why auditors need to have knowledge of accounting to be effective auditors.

(See PPT slides 1-6 to 1-8, “Distinction between Auditing and Accounting”)

Factors that affect the demand for audits Review the various factors that affect the demand for audits and allow the students an opportunity to discuss the various factors and gain a better understanding of why audits

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are conducted. (See PPT slide 1-9, “Factors that affect the demand for audits”) Economic Demand for Auditing It is good to spend a few minutes discussing the economic role of auditors in society and their impact on the economy by providing confidence in the financial information reported. Refer back to this material again in Chapter 4 (“Legal liability”) and Chapter 7 (“Materiality and risk”). (See PPT slides 1-10 and 1-11, “Economic Demand for Auditing”) Ask the students to identify the goal of an audit. The discussion should encompass the reliability of information to the users of the information and providing more confidence in the reported information.

Point out to the students that the auditor obtains “a high level of assurance” that there are “no material errors.” Ask the students why the auditor can’t provide absolute or 100% assurance that there are no material errors. (Answer: test checking performed, judgement involved, evidence is pervasive but not conclusive). Ask the students why the auditor can’t provide assurance that the financial statements are correct to the nearest dollar. (Answer: cost effectiveness of an audit). Highlight the key components of this objective: opinion, fairly presented, materiality, GAAP, IFRS or appropriate disclosed basis of accounting. Assurance and Non-Assurance Services We start by asking students to describe assurance services. The term will be unfamiliar to most students, but some may recognize the concept. We use Figure 1-2 as a framework for discussing the following services:

Assurance services Attestation services Management consulting and other non-assurance services

Ask the students to identify examples of each type of service listed above. Examples of assurance services include WebTust (providing assurance in electronic commerce), and Eldercare (providing assurance on health care performance measurement). Examples of attestation services include audit of historical financial statements and the attestation of internal control over financial reporting.

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Examples of management consulting include value for money or operational audits and retirement and financial planning. Examples of non-assurance services include compilations and tax services. (See PPT slides 1-12 and 1-13, “Assurance Services”) Relationship Among Users Use PPT slides 1-14 and 1-15 to discuss the unique relationship that exists during the audit between the users, client and auditor. It is not the usual relationship that exists with other professions and/or client and practitioner. Audit/Review of historical financial statements and attestation services Audits of historical financial statements are a major service provided by many public accounting firms. Although audits are the main topic of this book, PAs also provide review engagement services which are a lower level assurance service but also in demand by many organizations (reviews will be discussed in chapter 21).PAs also provide attestation services on the effectiveness of the company’s internal controls and information technology. (See PPT slides 1-16 to1-21, which cover these topics) Types of audits and auditors Most students at our colleges/universities know little of the types of auditors and the nature of public accounting. In a brief lecture, we tell the students:

The nature of financial, compliance, and operational audits The primary difference between independent PAs, government auditors, Canada

Revenue Agency auditors, and internal auditors Table 1-2 should be used as part of this discussion. Review Ongoing Small Business Case 1-21 can be used to help distinguish the types of audits and the auditor most likely to perform the audit. (See PPT slides1-22 and 1-23, “Types of Audits”) We also explain to the students who the internal auditors are in comparison to the other three types. Provide a brief description of each one, stressing the differences. The class should now also be ready to identify the differences between the internal and external auditors. (See PPT slides 1-24 to 1-29, which cover these topics) Professional accountants and their work A discussion of public accounting as a career early on in the course will help set a framework for the students. It is important to keep the discussion as unbiased as

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possible. One approach is to guide the students towards current information available from the three major accounting bodies and indicate the most recent legislative requirements regarding public auditing in the various provinces. In addition to information available from the journals of the three main accounting bodies, students may also wish to read recent articles related to the accounting profession in such publications as the Bottom Line and the National Post. Another source of information for the students is the career day at their college or university. Students usually appreciate any help you may be able to give them regarding career choices and by introducing it in the classroom setting, you can save yourself a lot of time in the office telling them the same thing individually. Talk briefly of the role of the Canadian Institute of Chartered Accountants, with emphasis on its responsibility for the CICA Handbook, the “Bible” for GAAP and GAAS in Canada. It is important to point out to the students that the Canada Business Corporations Act and provincial corporations’ acts cite the Handbook as the authority in Canada. Next, it is useful to introduce generally accepted auditing standards by using Discussion Problem, 1-13. Students should be told that they will be required to know the standards (not word for word) but in general, a great way to begin is to indicate that they are broken into three categories, general, examination, and reporting. The GAAS standards are discussed in Chapter 2.

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