6/21/2013
Lesson 1
1 2
Learning Objectives
1. Recognize an integrated audit and a financial statement audit report. 2. Describe the overall purpose and value of an audit, and identify the differences among an integrated audit, and audit of internal control, an audit of internal control over financial reporting, and a financial statement audit. 3. Define and contrast the responsibilities and expectations of different parties affected by the audit. 4. Learn the roles and interaction of the governing and standardsetting bodies and other entities that affect auditing. 5. Understand the link between independent auditors and accountants who provide other professional services.
An Introduction to Auditing
Prepared by Richard J. Campbell
Important Basics of Auditing
3 4
An Integrated Audit
Exhibit 1-1
Financial statement audit Integrated audit What it means when an auditor issues an unqualified or clean audit report on the financial statements
6/21/2013
PSA 200 Definition of Auditing
5 6
AAA 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 these assertions and established criteria and communicating the results to interested users.
American Accounting Association, Committee on Basic Auditing Concepts, A Statement of Basic Auditing Concepts (Sarasota, FL: American Accounting Association, 1973)
To enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework
Illustrative definition of auditing
7 8
Independent auditor
1. Auditing is a systematic process 2. An audit involves obtaining and evaluating evidence about assertions regarding economic actions & events 3. An audit is conducted objectively 4. Auditors ascertain the degree of correspondence between assertions & established criteria 5. Auditors communicate the audit results to various interested parties
Follows systematic process
Objective obtains & evaluates evidence
Establish degree of correspondence between assertions and established criteria
Communicates results to interested users
6/21/2013
Difference in Accountants and Auditors
9
Roles of Auditors and Management
10
To be an accountant, it is necessary to have accounting knowledge. Understand business transactions Know what information to capture Know controls needed for activity and information Be able to report it for various purposes Be able to record it according to accounting standards To be an auditor, it is also it is necessary to know audit processes and audit reporting
Management
Authors financial statements
Auditor
Authors audit report
Assertions: financial statements are fair
Opinions: financial statements are fair
By giving an opinion on financial statement fairness, the auditor is indirectly reporting on managements assertions.
The Auditing Process
11
Beneficiaries of Audits
12
Management produces financial statements Auditor gathers and evaluates evidence Many forms of evidence; anything the auditor uses Auditor uses established standards to compare evidence to the financial statements Looks for correspondence between what is presented and the underlying evidence Uses processes described/required in auditing standards. Auditor issues report
6/21/2013
Value of an Audit
13
Value of an Audit
14
To society: capital markets benefit To owners and prospective owners: remote ownership, complex transactions, investment decisions To corporate governance, the Board of Directors and audit committee: representing shareholders interests To management running the company with good information cost of and access to capital operating efficiency and effectiveness credibility of performance indicators properly accounting for complex transactions
Constituents: society, owners and prospective owners, corporate governance, management All of these constituents need good information. Even nonpublic companies elect to have audits, although they are not required to do so by any law or regulation.
Types of Audit
15 16
Types of auditors
1. External auditor
1. Financial statement audit
conducted by an independent CPA to determine whether FS of an entity are fairly presented in accordance with GAAP Involves a review of an organizations procedures to determine whether it has adhered to specific procedures, rules or regulations A study of a specific unit of an organization for the purpose of measuring its performance. Objective is to assess performance, identify areas for improvements & make recommendations to improve performance
Independent CPAs who offer their professional services to different clients on a contractual basis An entitys own employee who investigate & appraise the effectiveness & efficiency of operations and internal controls Government employees whose main concern is to determine wheter persons or entities comply with government rules & procedures
2. Compliance audit
2. Internal auditor
3. Operational audit
3. Government auditors
6/21/2013
Comparison among different types of audits
Financial audit 17 Compliance audit Operational audit The organizations activities are conducted effectively & efficiently Objectives set by the board of directors Recommendations or suggestions on how to improve operations 18 Financial statements The organization are presented has complied with fairly laws, regulations or contracts Financial reporting standards or other financial reporting framework An opinion about whether the FS are presented fairly in conformity with an identified financial reporting framework External auditors Laws , regulations or contracts
Standard Setters, Governing Authorities
Standard setters and governing authorities International Accounting Standards Board (IASB) International Auditing and Assurance Board (IAASB) Auditing and Assurance Standards Council (AASC) Auditing Standards and Practices Council (ASPC) Board of Accountancy (BOA) Philippine Institute of CPAs (PICPA) Bureau of Internal Revenue (BIR) Securities and Exchange Commissions (SEC)
Degree of compliance with applicable laws, regulations or contracts
Government auditors
Internal auditors
The Accounting Professions Credibility Crisis
2000The Panel on Audit Effectiveness made a variety of suggestions to improve audits. 2001Enron Bankruptcy 2002WorldCom Fraud 2002Sarbanes-Oxley Act
Sarbanes Oxley Act of 2002
20
SOX required: The SEC to set up an auditing governance organization Management of public companies to provide an audited report
6/21/2013
Other Audit Related Services
21 22
Value of Audit Knowledge for Non-Auditors
In other words, why is this course required at most universities for all accounting majors?
Understand purpose of auditors activities Increase efficiency of interface with auditor Enhanced communication
Internal Auditing Operational Auditing Forensic Accounting
1-24
Working in a CPA Firm
23
Types of Audit Services: Integrated audits for larger public companies Financial statement audits for nonaccelerated filer public and non-public companies Reviews of interim financial statements for public companies Reviews and compilations for non-public companies
Typical Structure of a CPA Firm
Partners Managers
Seniors
Staff Assistant
6/21/2013
Responsibilities on an Engagement
26
Other Types of CPA-Provided Services
Attest engagements Assurance engagements Tax engagements Accounting and bookkeeping Business advising/management
PartnerOverall responsibility is to assure that that audit is performed in accordance with professional standards. ManagerSupervise overall engagement. SeniorsIn charge auditor on a daily basis Staff assistantsWork under the immediate supervision of the senior
consulting
CPA Services, Assurance and Nonassurance
27
CPA Services