The Demand for Audit and Other Assurance Services. Chapter 1. Why are we here????????.
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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 (?).
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.
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.
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???
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
auditing 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!
List the causes of information
risk, and explain how this
risk can be reduced.
1. Remoteness of information (?)
2. Biases and motives of the provider (?)
3. Voluminous data (?)
4. Complex exchange transactions (?)
1. User verifies information
2. User shares information risk with management
3. Audited financial statements are provided
Describe assurance services
and distinguish audit services
from other assurance and
provided by CPAs.
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????
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.
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
Differentiate the three
main types of audits.
Financial Statement Audit
Compliance Audit- Ex. IRS,
state grant, debt covenant
Annual audit of Boeing’s
Statements and internal controls
Generally accepted accounting
Principles and COSO framework
Documents, records, and outside
sources of evidence
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
Determine whether bank requirements
for loan continuation have been met
Loan agreement provisions
Financial statements and
calculations by the auditor
Identify the primary
types of auditors.
Certified Public Accounting Firms
Govt. Accountability Office Auditors
Internal Revenue Agents
Describe the requirements
for becoming a CPA.
Uniform CPA Examination Requirement
Auditing and Attestation
Financial Accounting and Reporting
Business Environment and Concepts