Chp01[1] Auditing

8/6/2019 Chp01[1] Auditing

1/15

Chapter 1-

The Role of thePublic Accountant

in the Economy


2/15

McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

The Attest Function

Management

Subject

Matter

SuitableCriteria

The CPA

Gathers

Evidence

Subject

Matter*The Attest

Report

Issues

Report

*May be managements assertion about the subject matter.


3/15


Attestation Engagements

Type of

Engagement

Level of

Assurance

Nature of

Report Procedures

Examination Highest Expresses

opinion

Sufficient to limit

attestation risk tolow level


4/15



Type of

Engagement

Level of

Assurance

Nature

of

Report

Procedures

Examination

Review

Highest

Moderate or

Limited

Expresses

opinion

Expresses

negative

assurance

Sufficient to limit


Generally limited to

inquiry & analytical

procedures


5/15



Type of

Engagement

Level of

Assurance

Nature of

Report Procedures

Examination

Review

Agreed-upon

procedures

Highest

Moderate or

Limited

Varies with

procedures

Expresses

opinion

Expresses

negative

assurance

States

findings

Sufficient to limit


Generally limited to

inquiry & analytical

procedures

Procedures

agreed-

upon with the

specified users


6/15


Audit of Financial Statements

Management

PreparesFinancial

Statements

Criteria(e.g., GAAP)

The

Auditors

Gathers

Evidence

Financial

StatementsThe Auditors

Report

Issues

Report


7/15


What Creates the Demand for Audits?

Audits lend credibility to information by reducinginformation risk, the risk that information is materiallymisstated

Financial statement misstatements arise due to-- Accidental errors

Lack of knowledge of accounting principles

Unintentional bias

Deliberate falsification

Audits do not directly address business risk, the risk that acompany will not be able to meet its financial obligationsdue to economic conditions or poor management decisions


8/15


History of the Attest Function

PeriodPeriod DevelopmentsDevelopments Audit ObjectiveAudit Objective Nature of AuditNature of Audit

AncientAncient --

18501850

Audits of city states,Audits of city states,

individuals & venturesindividuals & ventures

Detection of fraudDetection of fraud Detailed; No reliance onDetailed; No reliance on

controlscontrols

18501850--19051905

Industrial revolutionIndustrial revolution

resulted in the need forresulted in the need for

corporate auditscorporate audits

Detection of fraud &Detection of fraud &

clerical errorsclerical errors

Some testing; No relianceSome testing; No reliance

on controlson controls

19051905--19401940

Development of stockDevelopment of stock

marketsmarkets -- increasedincreased

emphasis on earningsemphasis on earnings

Determination ofDetermination of

fairness; detection offairness; detection of

fraud & errorsfraud & errors

Increased emphasis onIncreased emphasis on

testing; Slight reliance ontesting; Slight reliance on

controlscontrols

19401940--19751975 Development of auditingDevelopment of auditing

standardsstandardsDetermination ofDetermination of

fairnessfairness

Substantial reliance onSubstantial reliance on

controlscontrols

19751975--19851985 Criticism by Congress;Criticism by Congress;

Increased selfIncreased self--regulationregulation


fairnessfairness

Internal control determinesInternal control determines

scope of auditscope of audit

19851985--19951995 Increased demands forIncreased demands for

reporting on compliance &reporting on compliance &

internal controlinternal control


fairnessfairnessRisk assessment determinesRisk assessment determines

audit scope; must assessaudit scope; must assess

risk of fraudrisk of fraud

19951995--PresentPresentPanel on AuditPanel on Audit

Effectiveness; SarbanesEffectiveness; Sarbanes--

Oxley Act of 2002Oxley Act of 2002


fairnessfairness

Business risk approach toBusiness risk approach to

auditsaudits


9/15


The Accounting Professions Credibility

Crisis

2000The Panel on Audit Effectivenessmade a variety of suggestions to improve

audits. 2001Enron Bankruptcy

2002WorldCom Fraud

2002Sarbanes-Oxley Act 2003Public Company Accounting

Oversight Board began operations


10/15


Sarbanes Oxley act

The act creates a new, quasi-public agency,

the Public Company Accounting Oversight

Board, or PCAOB, charged with overseeing,

regulating, inspecting and disciplining

accounting firms in their roles as auditors of

public companies. The act also covers issues

such as auditorindependence, corporategovernance, internal control assessment, and

enhanced financial disclosure.


11/15


Types of Audits

Audits of Financial Statements

Compliance Audits

Operational Audits


12/15


Types of Auditors

External Auditors

Internal Auditors

GAO Auditors

Tax Auditors


13/15


AICPAs Traditional Role

Establishes Standards

Research and Publication

Continuing Professional Education Self-Regulation

CPA Examination

Note: The standards setting and regulation roles havebeen taken over by the SEC and the PCAOBwith respect to auditors of public companies.


14/15


Types of Professional Services

Attestation and Assurance

Tax

Consulting

Accounting

Personal Financial Planning Fraud Investigation


15/15


Typical Structure of a National

CPA Firm

Partners

Managers

Seniors

Staff

Documents

Chp01[1] Auditing