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BUS 425 – Auditing. Chapter 1 The Demand for Audit Services. WorldCom – Cynthia Cooper.

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Bus 425 auditing

BUS 425 – Auditing

Chapter 1

The Demand for Audit Services

Worldcom cynthia cooper
WorldCom – Cynthia Cooper

The company had recorded billions of dollars of regular fees paid to local telephone companies as capital assets. This accounting trick allowed the company to turn a $662 million loss into a $2.4 billion profit in 2001.

Worldcom cynthia cooper1
WorldCom – Cynthia Cooper

Line cost expense 3,062

Cash 3,062

Adjusting JE

PP&E 3,062

Line cost expense 3,062


What is the definition of Auditing?

financial statements

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.

Page 2


Brian c
Brian C

What is audit evidence?

Evidence ----

is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria.

page 2

Evidence ----

electronic data about transactions

documented data about transactions

written communications

observations by the auditor

oral testimony (responses to questions)


What is the objective of AU-C 330

Au c 330 response to romm
AU-C 330 response to RoMM

The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the assessed risk of material misstatement through designing and implementing appropriate responses to those risks.


What is the objective of AU-C 500

Au c 500 audit evidence
AU-C 500 Audit Evidence

The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor’s opinion.

Page 59

Vouch or trace project
Vouch or Trace project

Go to web site http://clubs.cob.calpoly.edu/~cmiller/ACTG%20425%20page.html

look up sales journal - talk about overstatement / occurrence

look at sales journal – talk about overstatement / valuation

look at sales orders – talk about understatement / completeness

Materiality page 118
Materiality page 118

  • The magnitude of an omission or misstatement of accounting information that, in light of the surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement,

Christopher m
Christopher (m)

What is “our” operational definition of independence?


A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing professional auditing or attestation services.


Independence enhances the auditor’s ability to act with integrity, to be objective, and to maintain an attitude of professional skepticism.

Independence includes

independence of mind (fact)

Independence of appearance


  • What is Business Risk?

  • What is Information Risk?

Business Risk - the risk (probability) that an entity will fail to meet its objectives

Information Risk - the probability that the information upon which the decision was made was inaccurate.


  • What is the Risk-Free interest rate?


You are a bank lending officer

In relation to the risk-free interest rate

What interest rate would you charge to a company with a great deal of business risk?

Kaitlyn with a y
Kaitlyn (with a Y)

You are a bank lending officer

In relation to the risk-free interest rate

What interest rate would you charge to a company with a great deal of information risk?

Katherine k
Katherine K

  • What are some causes of information risk?

What are some causes of information risk

What are some causes of Information Risk

Page 5

Remoteness owner separate from management

Motives of the provider

Voluminous data

Complex transactions

Talk about the difference between




Assurance – improves the quality of information

Attestation – report regarding the reliability of specific assertions made by management

Audit– opinion regarding management’s assertions embodied in financial statements


  • Specified audit objectives

    • AU-C 200, 315, 500, 700 & Independence)

  • Unmodified Audit Report

  • Management’s Assertions p. 59


What are the three lines of service typically provided by a public accounting firm ?

Typical lines of business
Typical lines of business

Audit (accounting, attestation, audit)


Consulting (advisory services)


What are the various job levels or career levels in a public accounting firm ?

Cpa partnership structure
CPA partnership structure

Partner P

Senior Mngr SM SM

Manager X Y Z

Senior X X X Y Y Y Z Z


Education cpa exam

As of Dec. 31, 2013 / Jan. 1, 2014

Bachelors degree

225 quarter hours

36 business

36 + 30 accounting

20 accounting

10 ethics

+ 1 year experience


Education cpa exam