1 - 1©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Assurance Services and theCPA Profession
Chapter 1
1 - 2©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 1
Describe assurance services
and distinguish audit services
from other assurance and
nonassurance services
provided by CPAs.
1 - 3©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Assurance Services
Assurance services are professionalservices that improve the quality of
information for decision makers.
Assurance services can beperformed by CPAs or by
a variety of other professionals.
1 - 4©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Attestation Services
An attestation service is a type of assuranceservice in which the CPA firm issues a
report about the reliability of an assertionthat is the responsibility of another party.
1 - 5©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Other Assurance Services
Most other assurance services do not meet theformal definition of attestation services.
The CPA must be independent.
The CPA is not required to provide a written report.
The CPA must provide assurance.
1 - 6©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Assurance Services onInformation Technology
There is an increased demand for assuranceabout computer controls surroundinginformation transacted electronicallyand the security of the information
related to the transactions.
– assurance over Web site controls
– assurance about information system reliability
1 - 7©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Assurance Services onInformation Technology
WebTrust is an attestation service, and theWebTrust seal is a symbolic representation
of the CPA’s report on management’sassertions about its disclosure ofelectronic commerce practices.
1 - 8©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Assurance Services onInformation Technology
SysTrust is an attest-type engagement to evaluate and test system reliability inareas such as security and data integrity.
1 - 9©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Assurance Services onOther Types of Information
CPA Performance View
CPA ElderCare Services
CPA Risk Advisory Services
1 - 10©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Assurance, Attestation, and Nonassurance Services
ASSURANCE SERVICES
Other Attestation Services(e.g., WebTrust, SysTrust)
Other Assurance Services(e.g., CPA Performance View)
CertainManagementConsulting
ATTESTATION SERVICES
Audits Reviews
1 - 11©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Assurance, Attestation, and Nonassurance Services
NONASSURANCE SERVICES
Other ManagementConsulting
TaxServices
CertainManagementConsulting
Accounting andBookkeeping
1 - 12©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 2
Explain the causes of
information risk and the
importance of auditing in
reducing this risk.
1 - 13©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Economic Demandfor Auditing
Information risk reflects the possibility thatthe information upon which the businessrisk decision was made was inaccurate.
Auditing can have a significant effecton information risk.
1 - 14©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Causes of Information Risk
1. Remoteness of information
2. Biases and motives of the provider
3. Voluminous data
1 - 15©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Reducing Information Risk
1. User verifies information
2. User shares information risk with management
3. Audited financial statements are provided
1 - 16©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 3
Describe auditing
and distinguish between
auditing and accounting.
Describe auditing
and distinguish between
auditing and accounting.
1 - 17©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Nature of Auditing
Auditing is the accumulation andevaluation of evidence aboutinformation to determine and
report on the degree ofcorrespondence between the
information and established criteria.
Auditing should be done by a competent, independent person.
1 - 18©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Accumulating andEvaluating Evidence
Evidence is any information used by the auditorto determine whether the information being
audited is stated in accordance with theestablished criteria.
1 - 19©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Competent, Independent Person
The auditor must be qualified to understand thecriteria used and must be competent to know
the types and amount of evidence to accumulateto reach the proper conclusion after the
evidence has been examined.
The competence of the individual performing the audit is of little value if he or she is biased in the
accumulation and evaluation of evidence.
1 - 20©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Reporting
The final stage in the auditing processis preparing the Audit Report which is
the communication of the auditor’sfindings to users.
1 - 21©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Audit of a Tax Return – Example
Internalrevenue
agent
Examines cancelledchecks and other
supporting records
Federal taxreturns filedby taxpayer
Internal RevenueCode and all
interpretations
Report on taxdeficiencies
Competent,independent
person
Information
Established criteria
Determinescorrespondence
Accumulates andevaluates evidence
Report on results
1 - 22©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Distinction BetweenAuditing and Accounting
Accounting is the recording, classifying,and summarizing of economic eventsfor the purpose of providing financialinformation used in decision making.
Auditing is determining whetherrecorded information properly
reflects the economic events thatoccurred during the accounting period.
1 - 23©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 4
Differentiate the three
main types of audits.
Differentiate the three
main types of audits.
1 - 24©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Types of Audits
Financial Statement Audit
Operational Audit
Compliance Audit
Efficiency Effectiveness
1 - 25©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Operational Audit
ExampleEvaluate computerized payroll system
for efficiency and effectiveness
InformationNumber of records processed, cost ofthe department, and number of errors
EstablishedCriteria
Company standards for efficiency andeffectiveness in payroll department
AvailableEvidence
Error reports, payroll records, andpayroll processing costs
1 - 26©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Compliance Audit
ExampleDetermine whether bank requirementsfor loan continuation have been met
Information Company records
EstablishedCriteria
Loan agreement provisions
AvailableEvidence
Financial statements andcalculations by the auditor
1 - 27©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Financial Statement Audit
ExampleAnnual audit of Boeing’s
financial statements
InformationBoeing's financial
statements
EstablishedCriteria
Generally accepted accountingprinciples
AvailableEvidence
Documents, records, and outsidesources of evidence
1 - 28©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 5
Identify the primary
types of auditors.
Identify the primary
types of auditors.
1 - 29©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Types of Auditors
Internal Auditors
Certified Public Accounting Firms
Internal Revenue Agents
General Accounting Office Auditors
1 - 30©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 6
Discuss how e-commerce
and the Internet affect
CPA firm operations.
Discuss how e-commerce
and the Internet affect
CPA firm operations.
1 - 31©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
E-Commerce and CPA Firm Operations
CPA firms are using the Internetto market their services.
They also use the Internet to connecttheir global professional staff.
Sender’smail
server
Receiver’smail
server
1 - 32©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 7
Describe the requirements
for becoming a CPA.
Describe the requirements
for becoming a CPA.
1 - 33©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Three Requirementsfor Becoming a CPA
Educational
Passing the CPA Exam
Experience
1 - 34©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 8
Describe the AICPA and
its role in setting standards.
Describe the AICPA and
its role in setting standards.
1 - 35©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
The AICPA sets professional requirementsfor CPAs, conducts research, and publishesmaterials on many different subjects related
to accounting, auditing, attestation andassurance services, managementconsulting services, and taxes.
AICPA
1 - 36©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Vision for the Future
The AICPA has established the CPA Vision Projectto provide a core purpose and a vision for the CPA
profession in the year 2011 and beyond.
The core purpose of the CPA Vision Project is“CPAs…making sense of a changing
and complex world.”
1 - 37©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Vision for the Future
The future success of the CPA professionrelies a great deal on public perceptions
of CPAs’ abilities and roles.
CPAs must become market driven andnot dependent on regulations to keep
them in business.
The market demands less audit andaccounting and more value-adding
consulting services.
1 - 38©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Vision for the Future
Specialization is critical for the future of the CPA profession.
The market demands that CPAs be conversant in global business
practices and strategies.
1 - 39©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
The AICPA is empowered to set standards(guidelines) and rules that all members and
other practicing CPAs must follow.
The requirements are set bycommittees made up of AICPA members.
Establishing Standardsand Rules
1 - 40©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Establishing Standardsand Rules
1. Auditing Standards
2. Compilation and Review Standards
3. Other Attestation Standards
4. Code of Professional Conduct
1 - 41©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 9
Use generally accepted
auditing standards as a
basis for further study.
Use generally accepted
auditing standards as a
basis for further study.
1 - 42©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
1. The audit is to be performed by a person orpersons having adequate technical trainingand proficiency as an auditor.
2. In all matters relating to the assignment,an independence in mental attitude is tobe maintained by the auditor or auditors.
General Standards
3. Due professional care is to be exercised inthe planning and performance of the auditand the preparation of the report.
1 - 43©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
1. The work is to be adequately planned andassistants, if any, are to be properlysupervised.
2. A sufficient understanding of internalcontrol is to be obtained to plan the auditand to determine the nature, timing, andextent of tests to be performed.
Standards of Field Work
1 - 44©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Standards of Field Work
3. Sufficient competent evidential matter is tobe obtained through inspection, observation,inquiries, and confirmations to afford areasonable basis for an opinion regardingthe financial statements under audit.
1 - 45©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
1. The report shall state whether the financialstatements are presented in accordance withgenerally accepted accounting principles.
2. The report shall identify those circumstancesin which such principles have not beenconsistently observed in the current periodin relation to the preceding period.
Standards of Reporting
1 - 46©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
3. Informative disclosures in the financialstatements are to be regarded as reasonablyadequate unless otherwise stated in the report.
4. The report shall contain an expression ofopinion regarding the financial statements,taken as a whole.
Standards of Reporting
1 - 47©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Summary ofGeneral Standards
Generally Accepted Auditing Standards
General
1. Adequate training and proficiency2. Independence in mental attitude3. Due professional care
Field Work
1. Proper planning and supervision2. Internal control understanding3. Sufficient competent evidence
Reporting
1. Statements prepared in accordance with GAAP2. Circumstances when GAAP not followed3. Adequacy of disclosures4. Expression of opinion on financial statements
1 - 48©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 10
Identify quality control
standards and practices
within the accounting
profession.
Identify quality control
standards and practices
within the accounting
profession.
1 - 49©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Elements of Quality Control
Independence, integrity, and objectivity
Personnel management
Acceptance and continuation of clientsand engagements
Engagement performance
Monitoring
1 - 50©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Relationships
Quality controlstandards
Generally acceptedauditing standards
Division ofCPA firms
Peerreview
1 - 51©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 11
Summarize the role of the
Securities and Exchange
Commission in accounting
and auditing.
Summarize the role of the
Securities and Exchange
Commission in accounting
and auditing.
1 - 52©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
The overall purpose of theSecurities and Exchange Commission (SEC)
is to assist in providing investorswith reliable information upon
which to make investment decisions.
Securities and Exchange Commission
1 - 53©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
CPAs Encouraged to ConductThemselves at a High Level
CPAexamination
GAAS andinterpretations
Conduct of CPA firm personnel
Continuing educationrequirements
1 - 54©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
CPAs Encouraged to ConductThemselves at a High Level
Conduct of CPA firm personnel
SECPeer
review
Quality control
1 - 55©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
CPAs Encouraged to ConductThemselves at a High Level
Conduct of CPA firm personnel
Legalliability
Division ofCPA firms
Code of ProfessionalConduct
1 - 56©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
End of Chapter 1