Chapter 1

An Introduction to Auditing

Auditing and Assurance Services: Understanding the Integrated Audit

First EditionKaren L. Hooks

Prepared by Richard J. Campbell

Copyright 2011, Wiley and Sons

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Chapter 1

An Introduction to Auditing

Prepared by Richard J. Campbell

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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 standard-setting bodies and other entities that affect auditing.

5. Understand the link between independent auditors and accountants who provide other professional services.

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Important Basics of Auditing

Financial statement auditAudit of ICFR Integrated auditWhat it means when an auditor issues an “unqualified” or “clean” audit report on ICFR and the financial statements

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An Integrated Audit

Exhibit 1-15

A 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)

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Difference in Accountants and Auditors 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

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Roles of Auditors and Management

By giving an opinion on financial statement fairness and ICFR effectiveness the auditor is indirectly reporting on management’s assertions.

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The Auditing Process Management produces financial statements and

ICFR report Auditor gathers and evaluates evidence

Many forms of evidence; anything the auditor uses

Auditor uses established standards to compare evidence to the financial statements and ICFR report Looks for correspondence between what is

presented and the underlying evidence Uses processes described/required in auditing

standards. Auditor issues report

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Beneficiaries of AuditsExhibit 1-310

Value of an Audit

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

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Value of an Audit

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.

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Standard Setters, Governing Authorities Standard setters and governing authorities

involved with U.S. audits Congress States Securities and Exchange Commissions (SEC) Public Companies Accounting Oversight Board

(PCAOB) American Institute of CPAs (AICPA) FASB/GASB International Accounting Standards Board (IASB) International Auditing and Assurance Board

(IAASB)

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Sarbanes Oxley Act of 2002

SOX required: The SEC to set up an auditing governance

organization (PCAOB) Management of public companies to

provide an audited ICFR report An ICFR audit of public companies

Dodd-Frank (2010) permanently exempts “non-accelerated” filers from an ICFR audit

Financial statement and ICFR audits to be one engagement

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PCAOB Responsibility and Authority Registration of firms

The SEC will not accept a company’s filings unless they have been audited by a registered firm

Lots of information required in registration process

Firm must agree to assist in any investigations Inspections

Required by SOX SOX required the SEC to have the PCAOB

perform inspections Sets auditing standards and other rules

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PCAOB Auditing Standards

AS 1: References in Auditors’ Reports to the Standards of the Public Company Accounting Oversight Board

AS 2: An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements (superseded)

AS 3: Audit Documentation AS 4: Reporting on Whether a Previously

Reported Material Weakness Continues to Exist

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PCAOB Auditing Standards continued

AS 5: An Audit of Internal Control Over Financial Reporting That is Integrated with an Audit of Financial Statements

AS 6: Evaluating Consistency of Financial Statements

AS 7: Engagement Quality Review

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Newest, PCAOB Risk Assessment Standards AS No. 8, Audit Risk AS No. 9, Audit Planning AS No. 10, Supervision of the Audit Engagement AS No. 11, Consideration of Materiality in

Planning and Performing an Audit AS No. 12, Identifying and Assessing Risks of

Material Misstatement AS No. 13, The Auditor’s Responses to the Risks

of Material Misstatements AS No. 14, Evaluating Audit Results AS No. 15, Audit Evidence

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AICPA

Voluntary membership Non-public company audit

standards Standards for many other types of

engagements Code of conduct, applies to

members Writes CPA and grades exam

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State Governments

License to practice Requirements to sit for CPA exam Requirements to be licensed Continuing education requirements Conduct requirements Regulations on doing business

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Other AICPA Standards

Code of Professional Conduct Statements on Standards for Attestation

Engagements (SSAE) Statements on Standards for Accounting and

Review Services (SSAR) Statements on Quality Control Standards Statements on Standards for Tax Services (SSTS) Statements on Standards for Valuation Services

(SSV) Statements on Standards for Consulting Services

(SSCS)

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IAASB

International code of conduct is covered on the CPA Exam

AICPA audit standards (SAS) and IAASB audit standards (ISA) are being aligned through the AICPA’s “Clarification Project”

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Other Audit Related Services

Internal Auditing

Operational Auditing

Forensic Accounting

General Accountability Office

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Value of Audit Knowledge for Non-AuditorsIn other words, why is this course

required at most universities for all accounting majors?

Understand purpose of auditor’s activities Increase efficiency of interface with

auditor Enhanced communication Implementation of ICFR

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Appendix A- Working in a CPA FirmTypes of Audit Services:

Integrated audits for larger public companies

Financial statement audits for non-accelerated filer public and non-public companies

Reviews of interim financial statements for public companies

Reviews and compilations for non-public companies

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Other Types of CPA-Provided Services

Attest engagementsAssurance engagementsTax engagementsAccounting and bookkeepingBusiness advising/management consulting

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CPA Services, “Assurance” and “Nonassurance”

Exhibit A-1 – CPA Services

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Common Firm Structures Sole proprietorship

Professional corporation

General partnership

Limited liability company

Limited liability partnership

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Firm Sizes

Big Four

International networks; national

Regional; large local

Small local

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Common Auditor Position Titles

Partner/Owner

Manager

In Charge Accountant

Staff Accountant

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Copyright

“Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”

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