Chap 001 auditing

8/20/2019 Chap 001 auditing

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Chapter 01

The Role of thePublic Accountantin theAmerican Economy

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies Inc! "ll rights reser#e$!



Assurance services Assurance services

The broad range of information

enhancement services that are provided

by certified public accountants (CPAs).

Two types: Increase reliability of information

Putting information into a form or contet that

facilitates decision ma!ing.

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Types of "ervicesTypes of "ervices

Assurance "ervices Attestation "ervices

# $ample: Audits of %inancial "tatements&

$aminations of Internal Control 'ther Assurance "ervices

# $ample: CPA $lderCare Prime Plus "ervices

onAssurance "ervices Ta "ervices

anagement Consulting "ervices

'ther 1-3



Attestation "ervices Attestation "ervices

To attest to information means to provide

assurance as to its reliability

Attest engagement: A practitioner is engaged to issue or does

issue an eamination& a review& or an agreed*

upon procedures report on sub+ect matter or

an assertion about sub+ect matter that is theresponsibility of another party (e.g.

management)

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The Attest %unctionThe Attest %unction

anagement

"ub+ectatter

"uitableCriteria

The CPA

,athers$vidence

"ub+ect

atter-The Attest

eport

Issues

eport

*May be management’s assertion about the subject matter

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"uitable criteria"uitable criteria

"tandards established or developed bygroups of eperts.

$ample: Internal control audit / standards

established by a committee of eperts oninternal control

$ample: %inancial statement audit /standards are ,AAP. %or a financialstatement audit suitable criteria are referredto as the 0applicable financial reportingframewor!.1

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%orms of Attestation%orms of Attestation

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http://slidepdf.com/reader/full/chap-001-auditing 8/37- Applicable financial reporting framewor!

Audit of %inancial "tatements Audit of %inancial "tatements

anagement

Prepares%inancial

"tatements

Criteria(e.g.& ,AAP)

The

Auditors

,athers$vidence

%inancial

"tatementsThe Auditors2

eport

Issues

eport

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%inancial "tatement Audit%inancial "tatement Audit

Auditors gather evidence and provide a high

level of assurance that the financial statements

follow ,AAP& or some other appropriate basis of

accounting Audit involves searching and verifying

accounting records and eamining other

documents

$vidence necessary to issue an audit report that

states auditors2 opinion

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Audit $vidence Audit $vidence

$vidence focuses on whether financial statements are

presented in accordance with ,AAP3 eamples:

# 4alance sheet contains all liabilities

# Income statement "ales really occurred

"ales have been recorded at appropriate amounts

ecorded costs and epenses are applicable to period

All epenses have been recogni5ed

# %inancial statement amounts Accurate& properly classified and summari5ed

otes are informative and complete

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6hat Creates the 7emand for Audits86hat Creates the 7emand for Audits8

Audits lend credibility to information by reducinginformation ris!& the ris! that information is materiallymisstated

%inancial statement misstatements arise due to** Accidental errors 9ac! of !nowledge of accounting principles nintentional bias 7eliberate falsification

Audits do not directly address business ris!& the ris!that a company will not be able to meet its financialobligations due to economic conditions or poormanagement decisions

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History of the Attest Function

Period Developments Audit Objective Nature of Audit

Ancient - 18! Audits of city states"individuals # ventures

Detection of fraud Detailed$ No reliance oncontrols

18!-1%! &ndustrial revolutionresulted in the need forcorporate audits

Detection of fraud #clerical errors

'ome testin($ Noreliance on controls

1%!-1%)! Development of stoc*

mar*ets - increasedemphasis on earnin(s

Determination of

fairness$ detection offraud # errors

&ncreased emphasis on

testin($ 'li(ht reliance oncontrols

1%)!-1%+ Development of auditin(standards

Determination offairness

'ubstantial reliance oncontrols

1%+-1%8 ,riticism by ,on(ress$&ncreased self-re(ulation


&nternal controldetermines scope ofaudit

1%8-1%% &ncreased demands forreportin( on compliance #internal control


is* assessmentdetermines audit scope$must assess ris* of fraud

1%%-Present Panel on Audit.ffectiveness$ 'arbanes-O/ley Act of 0!!0


usiness ris* approachto audits

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The Accounting Profession2s CredibilityThe Accounting Profession2s CredibilityCrisisCrisis

;<<<=The Panel on Audit$ffectiveness made a variety of

suggestions to improve audits. ;<<>=$nron 4an!ruptcy ;<<;=6orldCom %raud

;<<;="arbanes*'ley Act ;<<?=Public Company Accounting

'versight 4oard began operations

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%inancial Audits%inancial Audits

Audit of the financial statements of an

entity Covers the balance sheet and related statements of

income& retained earnings and cash flows ,oal is to determine if prepared in conformity with

,AAP

Performed by CPAs

sers include management& investors& ban!ers&

creditors& financial analysts& government agencies

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'ther Types of Audits'ther Types of Audits

Compliance Audits $ample: I" audit of income ta return

'perational Audits $ample: $ffectiveness of operations of

receiving department of a manufacturing

company

Integrated Audits $ample: Assurance on both the financial

statements and effectiveness of internal

control over financial reporting1-15



'ther Types of Auditors'ther Types of Auditors

Internal Auditors

,overnment Accountability 'ffice Auditors

Ta Auditors

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Internal AuditorsInternal Auditors

$mployed by a company as an employee They often

perform operational and compliance audits

address internal control report to the audit committee of the board of

directors and to the president

The Institute of Internal Auditors is theinternational organi5ation of internalauditors.

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,overnment Accountability 'ffice,overnment Accountability 'ffice

Auditors (,A' Auditors) Auditors (,A' Auditors)

@eaded by the comptroller general

esponsibility of supporting Congress

Perform Compliance& operational and financial audits

of government agencies

$aminations of corporations holding

government contracts to verify contract

payments have been proper

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Ta AuditorsTa Auditors

esponsible for enforcement of ta laws of

various sorts (e.g.& state and federal

income taes& property taes& sales taes)

Internal revenue agents generally perform

compliance audits of income ta returns

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AICPA2s Traditional ole AICPA2s Traditional ole

$stablish "tandards esearch and Publication Continuing Professional $ducation

"elf*egulation

ote: uch of the standards setting and regulation rolesrelating to public companies (referred to as 0issuers1)has been ta!en over by the "$C and the PCA'4.

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$stablishes "tandards**$amples$stablishes "tandards**$amples

AICPA Auditing "tandards 4oard Issues official pronouncements on auditing matters for

nonpublic companies (0nonissuers1)

"tatements on Auditing "tandards ("A"s)

"tatements on "tandards for Attestation $ngagements

(""A$s)# ,uidance for attesting to information other than

financial statements such as financial forecasts

Accounting and eview "ervices Committee

"tatements on "tandards for Accounting and eview"ervices (""A")

"tandards for compilations or reviews not audits of

financial statements

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esearch and Publicationesearch and Publication

Publications

ournal of Accountancy (monthly)

The Ta Advisor

Audit publications Industry Audit and Accounting ,uides

Audit is! Alerts

Auditing Practice eleases

'ther publications Accounting esearch "tudies

"tatements of Position

Accounting Trends B Techniues

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Continuing Professional $ducationContinuing Professional $ducation

7evelopment of continuing professional

education programs

ecessary for continuing education

reuirement for CPA certificate

'ffered by AICPA

"tate societies

'ther professional organi5ations

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Professional egulationProfessional egulation

egulations of Individual CPAs Code of Professional Conduct / ethical rules

for CPAs

euirements for regular membership in

AICPA

egulation of Public Accounting %irms 7ivision for Public Accounting %irms

# Center for Public Company Audit %irms

# Private Companies Practice "ection (PCP")

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The CPA $aminationThe CPA $amination

niform national eamination prepared

and graded by the AICPA

Computeri5ed eam includes multiple

choice and simulations in four parts# Auditing and Attestation

# %inancial Accounting B eporting

# egulation# 4usiness $nvironment B Concepts

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"tate 4oards of Accountancy"tate 4oards of Accountancy

Issue CPA certificates

All boards reuire successful completion

of CPA eamination

$ducation and eperience reuirements

vary

ational Association of "tate 4oards of Accounting (A"4A)

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'ther Parties'ther Parties

%A"4 "ets ,AAP for entities other than federal&

state and local governments

,A"4 "tandards of financial accounting for state

and local government entities

%A"A4 Accounting standards for the " government

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PCA'4 olePCA'4 ole

Adopt auditing& attestation& uality control& ethics

and independence standards relating to the

preparation of audit reports for "$C registrants

'versee and discipline CPAs and CPA firms thataudit public companies& including egister firms

Perform inspections of firms

Conduct investigations and disciplinary proceedings of firms "anction registered firms

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"ecurities and $change"ecurities and $change

Commission ("$C)Commission ("$C) Agency of the " government

'versight responsibility for the PCA'4

'b+ectives Protect investors and public by reuiring full

disclosure of financial information by

companies offering securities for sale to the

public Prevent misrepresentation& deceit& or other

fraud in the sale of securities

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"ecurities and $change"ecurities and $change

Commission ("$C )Commission ("$C )

egistration statements Dualify securities for sales

Contains audited financial statements

a!es "$C ma+or user of financial

statements

Protects investors

egulation "*E 4asic accounting regulation

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'rgani5ation of the Public'rgani5ation of the Public

Accounting Profession Accounting Profession

"ole proprietorship

Partnerships

Professional Corporation 9imited 9iability Partnership (99P)

9imited 9iability Company (99C)

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Categories of Public Accounting %irmsCategories of Public Accounting %irms

9ocal

egional

ational4ig F

Alternative Practice "tructures

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Industry "peciali5ationIndustry "peciali5ation

%irms with detailed !nowledge and

understanding of a client2s industry

@elps firms 4e more effective at collecting and evaluating

audit evidence

a!e valuable suggestions to improve client2s

operations Provide the client consulting services

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Typical "tructure of a ationalTypical "tructure of a ational

CPA %irmCPA %irm

Partners

anagers

"eniors

"taff Assistant

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esponsibilities on an $ngagementesponsibilities on an $ngagement

Partner ='verall responsibility is to

assure that that audit is performed in

accordance with professional standards.

2ana(er ="upervise overall engagement.

'eniors=1In charge1 auditor on a daily

basis.

'taff assistants=6or! under the

immediate supervision of the senior.

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$lements of Public Accounting$lements of Public Accounting

6or!6or!

Professional 7evelopments "tay current on developments within the

profession

"easonal fluctuations 4usy season from 7ecember through April

elationships with clients eed to maintain independence

Chap 001 auditing

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