The Demand for Audit

and Assurance Services

Chapter 1

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-1
 Learning Objective 1

Describe assurance services

and distinguish audit services
from other assurance and
nonassurance services
provided by CPAs.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-2
 Assurance Services

Assurance services are professional

services that improve the quality of
information for decision makers.
Assurance services can be
performed by CPAs or by
a variety of other professionals.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-3
 Attestation Services

An attestation service is a type of assurance

service in which the CPA firm issues a
report about the reliability of an assertion
that is the responsibility of another party.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-4
 Other Assurance Services

Most other assurance services do not meet the

formal definition of attestation services.
The CPA must be independent.
The CPA must provide assurance.
The CPA is not required to provide a written report.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-5
 Other Assurance Services

The Elliott Committee was charged with

researching and developing new assurance
services opportunities for CPAs to provide
to business and individual clients who need
relevant and reliable information for
critical decision making.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-6
 Assurance Services on
Information Technology

There is an increased demand for assurance

about computer controls surrounding
information transacted electronically
and the security of the information
related to the transactions.
– assurance over Web site controls
– assurance about information system reliability

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-7
 Assurance Services on
Information Technology

WebTrust is an attestation service, and the

WebTrust seal is a symbolic representation
of the CPA’s report on management’s
assertions about its disclosure of
electronic commerce practices.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-8
 Assurance Services on
Information Technology

SysTrust is an attest-type engagement

to evaluate and test system reliability in
areas such as security and data integrity.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-9
 Other Assurance
Services Examples

Controls over and risks related to investments,

including policies related to derivatives…

assessing the processes in a company’s

investment practices to identify risks and to
determine the effectiveness of those processes.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 10
 Other Assurance
Services Examples

Mystery shopping…

performing anonymous shopping to

assess sales personnel dealings with
customers and procedures they follow.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 11
 Other Assurance
Services Examples

Assess risks of accumulation, distribution,

and storage of digital information…

assessing security risks and related

controls over data and other information
stored electronically, including the
adequacy of backup and off-site storage.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 12
 Other Assurance
Services Examples

Fraud and illegal acts risk assessment…

developing fraud risk profiles and assessing the

adequacy of company systems and policies in
preventing and detecting fraud and illegal acts.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 13
 Assurance, Attestation, and
Nonassurance Services
ASSURANCE SERVICES

ATTESTATION SERVICES
Audits Reviews
Certain
Other Attestation Services Management
(e.g., WebTrust, SysTrust) Consulting

Other Assurance Services

(e.g., CPA Performance View)

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 14
 Assurance, Attestation, and
Nonassurance Services
NONASSURANCE SERVICES
Other Management
Consulting
Certain
Accounting and
Management
Bookkeeping
Consulting

Tax
Services

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 15
 Learning Objective 2

Explain the importance

of auditing in reducing
information risk.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 16
 Economic Demand
for Auditing

Information risk reflects the possibility that

the information upon which the business
risk decision was made was inaccurate.
Auditing can have a significant effect
on information risk.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 17
 Learning Objective 3

List the causes of information

risk, and explain how this
risk may be reduced.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 18
 Causes of Information Risk

1. Remoteness of information

2. Biases and motives of the provider

3. Voluminous data

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 19
 Reducing Information Risk

1. User verifies information

2. User shares information risk with management

3. Audited financial statements are provided

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 20
 Capital Costs to Shrink
Elliott’s Example

Assuming a cost of capital of 13%, Elliott

estimates this rate is composed of the following:
5.5% risk-free interest rate
3.5% economic risk premium (business risk)
4.0% information cost (information risk)

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 21
 Capital Costs to Shrink
Elliott’s Example

Elliott believes the following factors will

drastically reduce information risk:
Advanced technology
New accounting and auditing standards
Auditors finding more efficient ways to audit

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 22
 Learning Objective 4

Describe auditing.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 23
 Nature of Auditing

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.
Auditing should be done by a
competent, independent person.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 24
 Accumulating and
Evaluating Evidence

Evidence is any information used by the auditor

to determine whether the information being
audited is stated in accordance with the
established criteria.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 25
 Competent, Independent
Person

The auditor must be qualified to understand the

criteria used and must be competent to know
the types and amount of evidence to accumulate
to 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.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 26
 Reporting

The final stage in the auditing process

is preparing the Audit Report, which
is the communication of the
auditor’s findings to users.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 27
 Audit of a Tax Return
Example
Information
Competent,
independent Federal tax
person returns filed
by taxpayer
Internal
Report on results
revenue
agent Determines Report on tax
correspondence deficiencies
Accumulates and
evaluates evidence Established criteria
Examines cancelled Internal Revenue
checks and other Code and all
supporting records interpretations
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 28
 Learning Objective 5

Distinguish between
auditing and accounting.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 29
 Distinction Between
Auditing and Accounting

Accounting is the recording, classifying,

and summarizing of economic events
for the purpose of providing financial
information used in decision making.
Auditing is determining whether
recorded information properly
reflects the economic events that
occurred during the accounting period.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 30
 Learning Objective 6

Differentiate the three

main types of audits.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 31
 Types of Audits

Financial Statement Audit

Operational Audit

Efficiency Effectiveness

Compliance Audit

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 32
 Financial Statement Audit

Annual audit of Boeing’s

Example
financial statements
Boeing's financial
Information
statements
Established Generally accepted accounting
Criteria principles
Available Documents, records, and outside
Evidence sources of evidence
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 33
 Operational Audit

Evaluate computerized payroll system

Example
for efficiency and effectiveness
Number of records processed, cost of
Information
the department, and number of errors
Established Company standards for efficiency and
Criteria effectiveness in payroll department
Available Error reports, payroll records, and
Evidence payroll processing costs
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 34
 Compliance Audit

Determine whether bank requirements

Example
for loan continuation have been met

Information Company records

Established
Loan agreement provisions
Criteria
Available Financial statements and
Evidence calculations by the auditor
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 35
 Learning Objective 7

Explain the strategic systems

approach to auditing.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 36
 Strategic Systems Audit

The auditor must have a thorough understanding

of the entity and its environment.

Client’s industry Operations

Regulations Relationships

Business strategies

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 37
 Learning Objective 8

Identify the primary

types of auditors.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 38
 Types of Auditors

Certified Public Accounting Firms

General Accounting Office Auditors

Internal Revenue Agents

Internal Auditors

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 39
 Learning Objective 9

Describe the requirements

for becoming a CPA.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 40
 Three Requirements for
Becoming a CPA

Educational Requirement

Uniform CPA Examination Requirement

Experience Requirement

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 41
 CPA Examination Sections

Audit and Attestation

Accounting and Reporting

Regulations

Business Environments and Concepts

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 42
 Learning Objective 10

Describe the impact of

e-commerce on CPAs.

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 43
 Impact of E-commerce

CPAs need to understand how key

technologies are transforming all
aspects of business.

Information Technology

Hardware Internet

Software Communications
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 44
 End of Chapter 1

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 45