Auditing and Assurance Services

Seventeenth Edition, Global Edition

Chapter 1
The Demand for Audit and
Other Assurance Services

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Learning Objectives (1 of 2)
1.1 Describe auditing
1.2 Distinguish between auditing and accounting
1.3 Explain the importance of auditing in reducing
information risk
1.4 List the causes of information risk, and explain how this
risk can be reduced

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Learning Objectives (2 of 2)
1.5 Describe assurance services and distinguish audit
services from other assurance and nonassurance
services provided by CPAs
1.6 Differentiate the three main types of audits
1.7 Identify the primary types of auditors
1.8 Describe the requirements for becoming a CPA

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Learning Objective 1.1
Describe auditing

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Nature of Auditing (1 of 2)
• 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
– Performed by a competent, independent person

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Nature of Auditing (2 of 2)
• The definition of auditing includes the following key
words and phrases:
– Information and established criteria
– Accumulating and evaluating evidence
– Competent, independent person
– Reporting

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Figure 1.1 Audit of a Tax Return

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Learning Objective 1.2
Distinguish between auditing and accounting

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Distinguish Between Auditing and
Accounting
• Accounting is the recording, classifying, and summarizing
of economic events in a logical manner for the purpose of
providing financial information for decision making
• Auditors focus on determining whether recorded
information properly reflects the economic events that
occurred during the accounting period

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Let’s Discuss (1 of 5)
• What are the information and established criteria for the
audit of Jones Company’s tax return by an internal
revenue agent? What are they for the audit of Jones
Company’s financial statements by a CPA firm?
• In the conduct of audits of financial statements, it would be
a serious breach of responsibility if the auditor did not
thoroughly understand accounting. However, many
competent accountants do not have an understanding of
the auditing process. What causes this difference?

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Learning Objective 1.3
Explain the importance of auditing in reducing information
risk

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Economic Demand for Auditing
• Information risk reflects the possibility that the information
upon which the business risk decision was made was
inaccurate
– A likely cause of the information risk is the possibility of
inaccurate financial statements
• Auditing can have a significant effect on information risk

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Learning Objective 1.4
List the causes of information risk, and explain how this risk
can be reduced

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Causes of Information Risk
• Reasons that increase the likelihood of decision
makers receiving unreliable information:
– Remoteness of information
– Biases and motives of the provider
– Voluminous data
– Complex exchange transactions

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Reducing Information Risk
• There are three main ways to reduce information risk:
– User verifies information
– User shares information risk with management
– Audited financial statements are provided

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Figure 1.2 Relationships Among
Auditors, Client, and External Users

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Let’s Discuss (2 of 5)
• What is meant by determining the degree of
correspondence between information and established
criteria?
– What are the criteria for an audit of a company’s
financial statements?

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Let’s Discuss (3 of 5)
• Distinguish among the following three factors impacting a
loan interest rate: risk-free interest rate, business risk, and
information risk. Which one or ones does the auditor
reduce by performing an audit?
• Identify the three main ways information risk can be
reduced. What are the advantages and disadvantages of
each?

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Learning Objective 1.5
Describe assurance services and distinguish audit services
from other assurance and nonassurance services provided
by CPAs

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Assurance Services
• Assurance service is an independent professional
service that improves the quality of information for
decision makers
– It can be done by CPAs or by a variety of other
professionals
– Provisions in Section 404 of the Sarbanes–Oxley Act
require CPA firms to provide assurance on internal
control over financial reporting for larger public
companies

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Attestation Services
• Attestation service is a type of assurance service in
which the CPA firm issues a report about a subject
matter or assertion that is made by another party,
including:
– Audit of historical financial statements
– Audit of internal control over financial reporting
– Review of historical financial statements
– Other attestation services that may be applied to a
broad range of subject matter

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Other Assurance and Nonassurance
Services
• Other assurance services are services that do not
meet the definition of attestation services
– CPA is not required to issue a written report
• Nonassurance services are services rendered by CPA
firms that generally fall outside the scope of
assurance services such as:
– Accounting and bookkeeping services
– Tax services
– Management consulting services

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Table 1.1 Other Assurance Service
Examples (1 of 4)
Other Assurance Services Service Activities
Controls over and risks related Assess the processes in a
to investments, including company’s investment practices to
policies related to derivatives identify risks and to determine the
effectiveness of those processes
Mystery shopping Perform anonymous shopping to
assess sales personnel dealings
with customers and procedures
they follow

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Table 1.1 Other Assurance Service
Examples (2 of 4)
Other Assurance Services Service Activities
Assess risks of accumulation, Assess security risks and related
distribution, and storage of controls over electronic data,
digital information including the adequacy of backup
and off-site storage
Fraud and illegal acts risk Develop fraud risk profiles and
assessment assess the adequacy of company
systems and policies in preventing
and detecting fraud and illegal acts

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Table 1.1 Other Assurance Service
Examples (3 of 4)
Other Assurance Services Service Activities
Organic ingredients Provide assurance on the amount of
organic ingredients included in a
company’s products
Compliance with entertainment Assess whether royalties paid to
royalty agreements artists, authors, and others comply
with royalty agreements

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Table 1.1 Other Assurance Service
Examples (4 of 4)
Other Assurance Services Service Activities
ISO 9000 certifications Certify a company’s compliance with
ISO 9000 quality control standards,
which help ensure company
products are of high quality
Corporate responsibility and Report on whether the information in
sustainability a company’s corporate
responsibility report is consistent
with company information and
established reporting criteria

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Learning Objective 1.6
Differentiate the three main types of audits

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Types of Audits
• CPAs perform three primary types of audits:
– Operational audit
– Compliance audit
– Financial statement audit

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Table 1.2 Examples of the Three
Types of Audit (1 of 2)
Type of Audit Example Information Established Available
Criteria Evidence
Operational Evaluate whether Number of Company Error reports,
audit the payroll standards for payroll
computerized records efficiency and records, and
payroll processed in effectiveness payroll
processing for a month, in payroll processing
a Chinese costs of the department costs
subsidiary is department,
operating and number
efficiently and of errors
effectively made

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Table 1.2 Examples of the Three
Types of Audit (2 of 2)
Type of Audit Example Information Established Available
Criteria Evidence
Compliance Determine Company Loan Financial
audit whether bank records agreement statements and
requirements provisions calculations by
for loan the auditor
continuation
have been met
Financial Annual audit of Apple’s Generally Documents,
statement Apple’s financial accepted records, and
audit financial statements accounting outside
statements principles sources of
evidence

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Learning Objective 1.7
Identify the primary types of auditors

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Types of Auditors
• There are several types of auditors in practice today:
– Certified Public Accounting Firms
– Government Accountability Office Auditors
– Internal Revenue Agents
– Internal auditors

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Let’s Discuss (4 of 5)
• Indicate the three main types of audits.
– What are the similarities and differences among each
type of audit?
• What are the major differences in the scope of the audit
responsibilities for CPAs, GAO auditors, IRS agents, and
internal auditors?

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Let’s Discuss (5 of 5)
• List five examples of specific operational audits that can
be conducted by an internal auditor in a manufacturing
company.
• What knowledge does the auditor need about the client’s
business in an audit of historical financial statements?
Explain how this knowledge may be useful in performing
other assurance or consulting services for the client.

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Learning Objective 1.8
Describe the requirements for becoming a CPA

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Certified Public Accountant
• CPA is regulated by state law through the licensing
departments of each state
• There are three requirements for becoming a CPA:
– Education
– Uniform CPA examination
– Experience

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Figure 1.3 Three Requirements for
Becoming a CPA

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