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The Demand for Audit and Other Assurance Services. Chapter 1. Why are we here????????.

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why are we here
Why are we here????????

1. SP = PV of all future dividends. Current earnings→ Future earnings (?) → Future dividends (?). Same applies for loan from bank (private company), ability to pay back loan = Current earnings→ Future earnings (?).

  • 2. SEC Act of 1933 – F/S, SOX Section 404 – I/C (2002) (Integrated audit)
  • 3. Common source for 2 Acts?????
  • 4. Assurance, audit – what comes to mind??
  • In the Cases and S-E for exams, you will be asked to “think” and I will grade you on your ability to provide original, interesting thoughts.
  • Critical thinking is the purposeful and reflective judgment about what to believe or what to do in response to observations, experience, verbal or written expressions, or arguments.
  • Analytical thinking is the ability to scrutinize and break down facts and thoughts into their strengths and weaknesses. Developing the capacity to think in a thoughtful, discerning way, to solve problems, analyze data, and recall and use information.
  • Some questions may request direct responses – but where possible – THINK!

Examples: (1) SOX→Independence→PartnerRotation→Unintended Consequences?

(2) Brainstorming: where help and not help (WHY?), how would you implement best practices? What best practices are perhaps not cost / beneficial (why?)? What are the hurdles?

(3) NASs – good or bad? Both? Where do you fall (why)? Empirical Question? If yes, how would you test???

(4) Tell me something I don’t know – outside, relevant research to further your understanding. A/Ps and current industry average.

2. Please obtain feedback, but consistent with the real world – no dry runs / reviews of initial drafts.

3. No cell phones, texting, etc. Laptops / calculators allowed for lectures.

learning objective 1
Learning Objective 1

Describe auditing

nature of auditing
Nature of Auditing

Auditing is the accumulation and

evaluation of evidence (per GAAS) about

information (F/S) to determine and

report on the degree of

correspondence between the

information (F/S) and established criteria (GAAP).

Auditing should be done by a competent (?), independent (?) person.

accumulating and evaluating evidence
Accumulating andEvaluating Evidence

Evidence is any information used by the auditor

to determine whether the information being

audited is stated in accordance with the

established criteria (GAAP).

Think of economic events and examples of evidence? Examples???

competent independent person
Competent, Independent Person

The auditor must be qualified to understand the

criteria (GAAP, COSO) used and must be competent to

know the types and amount of evidence to accumulate

to reach the proper conclusion after the

evidence has been examined (GAAS). How?

The competence of the individual performing the audit is of little value if he or she is biased in the accumulation and evaluation of evidence.

Audit Quality = Detect and Report Misstatement

Enron, Andersen, and SPEs


The final stage in the auditing process is preparing the

Audit Report, which is the communication of the

auditor’s findings to users. See page 8 of annual report

in your book. See page 9 for mgt responsibilities for

preparing F/S and reporting on I/Cs

Examples of users? Research Results: Use of F/Ss and audit report = 5.13, where 1 = “very unimportant” and 7 = “very important.” SP info = 5.46, Advice from professionals = 5.06

learning objective 2
Learning Objective 2

Distinguish between

auditing and accounting.

distinction between auditing and accounting
Distinction BetweenAuditing and Accounting

Accounting is the recording, classifying,

and summarizing of economic

events (debits and credits) for the purpose of providing

financial information used in decision making.

Language of business

Auditingis determining whether

recorded information properly

reflects the economic events that

occurred during the accounting period.

Spell check on steroids!

learning objectives 4
Learning Objectives 4

List the causes of information

risk, and explain how this

risk can be reduced.

causes of information risk
Causes of Information Risk

1. Remoteness of information (?)

2. Biases and motives of the provider (?)

3. Voluminous data (?)

4. Complex exchange transactions (?)

reducing information risk
Reducing Information Risk

1. User verifies information

2. User shares information risk with management

3. Audited financial statements are provided

learning objective 5
Learning Objective 5

Describe assurance services

and distinguish audit services

from other assurance and

nonassurance services

provided by CPAs.

assurance services
Assurance Services

Assurance services are professional

services that improve the quality of

information for decision makers.

Assurance services can be

performed by CPAs or by

a variety of other professionals.

Not INSURANCE – why????

attestation services
Attestation Services

An attestation service is a type of assurance

service in which the CPA firm issues a

REPORT about the reliability of an assertion

that is the responsibility of another party.

attestation services18
Attestation Services

Audits of historical financial statements

and internal controls over financial reporting

Review of historical financial statements

Attestation on information technology:

WebTrust and SysTrust

Other attestation services – debt covenant

compliance, agreed upon procedures

assurance attestation and nonassurance services
Assurance, Attestation, and Nonassurance Services


Accounting and






learning objective 6
Learning Objective 6

Differentiate the three

main types of audits.

types of audits
Types of Audits

Financial Statement Audit

Operational Audit



Compliance Audit- Ex. IRS,

state grant, debt covenant

financial statement audit
Financial Statement Audit


Annual audit of Boeing’s

financial statements


Boeing's financial

Statements and internal controls



Generally accepted accounting

Principles and COSO framework



Documents, records, and outside

sources of evidence

operational audit
Operational Audit


Evaluate computerized payroll system

for efficiency and effectiveness


Number of records processed, costs of

the department, and number of errors



Company standards for efficiency and

effectiveness in payroll department



Error reports, payroll records, and

payroll processing costs

compliance audit
Compliance Audit


Determine whether bank requirements

for loan continuation have been met


Company records



Loan agreement provisions



Financial statements and

calculations by the auditor

learning objective 7
Learning Objective 7

Identify the primary

types of auditors.

types of auditors
Types of Auditors

Certified Public Accounting Firms

Govt. Accountability Office Auditors

Internal Revenue Agents

Internal Auditors

learning objective 8
Learning Objective 8

Describe the requirements

for becoming a CPA.

three requirements for becoming a cpa
Three Requirements for Becoming a CPA

Educational Requirement

Uniform CPA Examination Requirement

Experience Requirement

cpa examination sections
CPA Examination Sections

Auditing and Attestation

Financial Accounting and Reporting


Business Environment and Concepts