Chapter 1

Auditing and Assurance Services

"If you want to be successful, it's just this simple:
Know what you're doing. Love what you're doing.
And believe in what you're doing."
-- Will Rogers
McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
User Demand for Reliable Information
Todays information
More complex
Demanded by remote users
Demanded in a more timely manner
Has far reaching consequences
Information risk
the risk (probability) that the information (mainly
financial) disseminated by a company will be materially
false or misleading.
users demand an independent third party assessment of
the information
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Exhibit 1.2
Overview of Financial Statement Auditing
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Definition of Auditing
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 the
assertions and established criteria
and communicating the results to
interested users.
Financial Statements
(including footnotes)
GAAP
Auditor's Report/
Other Reports
Persons who rely on
the financial reports
Creditors
Investors
Source: American Accounting Association Committee on Basic Auditing Concepts.
1973. A Statement of Basic Auditing Concepts, American Accounting Association
(Sarasota, FL).
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The Relationships Among Auditing,
Attestation, and Assurance Engagements
Assurance Services
Any Information
Attestation Services
Primarily Financial Information
Auditing
Financial Statements
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Assurance Services
Assurance services are independent professional services
that improve the quality of information, or its context, for
decision makers.
Examples
Consumer reports
Underwriters laboratories
CPA WebTrust
Performance View
PrimePlus Services
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Attestation Engagements
An attestation engagement - a practitioner is assesses and
reports on subject matter or an assertion about the subject
matter that is the responsibility of another party.
Some financial attestation engagements (other than audits)
Supplementary financial statistics
Pro forma financial information
Financial forecasts and projections
Some non-financial attestation engagements
Compliance with contractual requirements
Effectiveness of internal control systems
Inventory quantities and locations
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Sarbanes-Oxley Act of 2002
In response to several accounting related corporate
scandals Congress passed the Sarbanes-Oxley Act
The Acts major provisions include:
Requirement of CEO/CFO certification of financial statements
Requirement of auditor examination of company internal controls
Creation of the Public Company Accounting Oversight Board
(PCAOB) to serve as an auditing profession watchdog.
Prohibition of certain client services by firms conducting a clients
audit.
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Sarbanes-Oxley:
Managements Responsibility For Financial Reporting

One of its most important provisions (Section 302) states that the key
company officials must certify the financial statements.
The company CEO and CFO must sign a statement indicating:

1. They have read the financial statements.

2. They are not aware of any false or misleading statements (or any key
omitted disclosures).

3. They believe that the financial statements present an accurate picture of the
companys financial condition.

Source: U.S. Congress, Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat/ 745
(2002).

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PCAOB Management Assertions
Existence or occurrence Assets included in accounts exists
and events that give rise to transactions have taken place
Rights and obligations- Entity has a legal claim on all assets
and revenues reported and has a legal responsibility for all
liabilities and expenses
Completeness and cutoff - All transactions have been
recorded
Valuation or allocation Transactions are recorded at the
correct amount in the proper period
Presentation and disclosure All accounts are presented in
the appropriate place and all information required has been
disclosed in the statements and footnotes.
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Exhibit 1.5
Example Assertions and their
Relationships to the Financial Statements
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Professional Skepticism
Professional skepticism - auditors questioning, evaluative,
attitude toward evidence
Managements assertions without sufficient corroboration.
Financial trends need investigation
Documents are checked for authenticity or alteration
Ask questions, get answers, then verify the answers.

A potential conflict of interest always exists between the
auditor and the client.
Management wants to portray the company and its operations in the
best possible light.
Auditors want to portray the company and its operations fairly.

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Professional Service Firm Organization
Executive Committee
Managing Partner
Practice Offices
Partners-in-Charge
Consulting
Services
Audit, Assurance and
Business Advisory
Services
Tax Consulting
Services
Partner
Manager Manager Manager
Senior (In-charge) Accountants
Staff Accountants (or Associates)
Partner
Manager Manager Manager
Senior (In-charge) Accountants
Staff Accountants (or Associates)
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The Public Accounting Profession
Assurance services
Audit engagements
Assurance engagements
Attestation engagements
Compilations
Reviews
Tax consulting services
Consulting services
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Prohibited Services to Audit Clients
Sarbanes-Oxley and the PCAOB prohibit professional service firms
from providing any of the following services to an audit client:
1) bookkeeping and related services
2) design or implementation of financial information systems
3) appraisal or valuation services
4) actuarial services
5) internal audit outsourcing
6) management or human resources services
7) investment or broker/dealer services
8) legal and expert services (unrelated to the audit)
Professional service firms may provide client tax services (with some
restrictions) and other non-prohibited services to audit clients if the
companys audit committee has approved them in advance.
In summary, Sarbanes-Oxley prohibits professional service firms
from performing any client services in which the auditors may find
themselves making management decisions or auditing their own
firms work.
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Types of Audits and Auditors
Financial (External Auditors/CPAs)
Ensure that financial statements are accurate.
Operational (Internal and Governmental
Auditors/CIAs)
Improve operational economy
Improve operational efficiency
Compliance (Internal and Governmental Auditors)
Ensure compliance with company and/or governmental rules
and regulations
Forensic (Fraud Auditors/CFEs)
Most audits are a combination of financial,
operational, and compliance audits.
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Organization of the Profession
Big Four Accounting Firms
D&T, E&Y, KPMG, PwC
National
Grant Thornton, BDO Seidman
Local/Regional
Melton & Melton (Houston)
Plante Moran (Michigan/Illinois/Wisconsin)
Goodman & Company (Virginia)
Sole Proprietor
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Become Certified!
Education
Examination
Experience
State License!
After that CPE


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