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

The Demand for Audit

and Assurance Services
Chapter 1
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 2
Learning Objective 1
Describe assurance services
and distinguish audit services
from other assurance and
nonassurance services
provided by CPAs.
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Assurance Services
Assurance services are independent
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.
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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.
Audit of Historical Financial Statements
Review of Historical Financial Statements
Other Attestation Services
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Other Assurance Services
Most other assurance services do not meet the
formal definition of attestation services.
The CPA must be independent.
The CPA is not required to provide a written report.
The CPA must provide assurance.
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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.
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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
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Assurance Services on
Information Technology
WebTrust is an attestation service, and the
WebTrust seal is a symbolic representation
of the CPAs report on managements
assertions about its disclosure of
electronic commerce practices.
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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.
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Other Assurance
Services Examples
Controls over and risks related to investments,
including policies related to derivatives
assessing the processes in a companys
investment practices to identify risks and to
determine the effectiveness of those processes.
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Other Assurance
Services Examples
Mystery shopping
performing anonymous shopping to
assess sales personnel dealings with
customers and procedures they follow.
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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.
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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.
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Assurance, Attestation, and
Nonassurance Services
ASSURANCE SERVICES
Other Attestation Services
(e.g., WebTrust, SysTrust)
Other Assurance Services
(e.g., CPA Performance View)
Certain
Management
Consulting
ATTESTATI ON SERVI CES
Audits Reviews
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Assurance, Attestation, and
Nonassurance Services
NONASSURANCE SERVICES
Other Management
Consulting
Tax
Services
Certain
Management
Consulting
Accounting and
Bookkeeping
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Learning Objective 2
Explain the importance
of auditing in reducing
information risk.
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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.
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Learning Objective 3
List the causes of information
risk, and explain how this
risk may be reduced.
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Causes of Information Risk
1. Remoteness of information
2. Biases and motives of the provider
3. Voluminous data
4. Complex Exchange Transactions
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Reducing Information Risk
1. User verifies information
2. User shares information risk with management
3. Audited financial statements are provided
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Capital Costs to Shrink
Elliotts 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)
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Capital Costs to Shrink
Elliotts 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
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Learning Objective 4
Describe auditing.
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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.
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Information and Established
Criteria
To do an audit, there must be
information in a verifiable form and
some standards (criteria) by which
the auditor can evaluate the
information.
Information can and does take
many forms.
The criteria vary depending the
information being audited.
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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.
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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.
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Reporting
The final stage in the auditing process
is preparing the Audit Report, which
is the communication of the
auditors findings to users.
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Audit of a Tax Return
Example
Internal
revenue
agent
Examines cancelled
checks and other
supporting records
Federal tax
returns filed
by taxpayer
Internal Revenue
Code and all
interpretations
Report on tax
deficiencies
Competent,
independent
person
Information
Established criteria
Determines
correspondence
Accumulates and
evaluates evidence
Report on results
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Learning Objective 5
Distinguish between
auditing and accounting.
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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.
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Learning Objective 6
Differentiate the three
main types of audits.
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Types of Audits
Financial Statement Audit
Operational Audit
Efficiency Effectiveness
Compliance Audit
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Financial Statement Audit
Example
Information
Established
Criteria
Available
Evidence
Annual audit of Boeings
financial statements
Boeing's financial
statements
Generally accepted accounting
principles
Documents, records, and outside
sources of evidence
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Operational Audit
Example
Information
Established
Criteria
Available
Evidence
Evaluate computerized payroll system
for efficiency and effectiveness
Number of records processed, cost of
the department, and number of errors
Company standards for efficiency and
effectiveness in payroll department
Error reports, payroll records, and
payroll processing costs
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Compliance Audit
Example
Information
Established
Criteria
Available
Evidence
Determine whether bank requirements
for loan continuation have been met
Company records
Loan agreement provisions
Financial statements and
calculations by the auditor
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Learning Objective 7
Explain the strategic systems
approach to auditing.
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Strategic Systems Audit
The auditor must have a thorough understanding
of the entity and its environment.
Clients industry
Regulations
Operations
Relationships
Business strategies
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Learning Objective 8
Identify the primary
types of auditors.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 40
Types of Auditors
Internal Auditors
Certified Public Accounting Firms
Internal Revenue Agents
General Accounting Office Auditors
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Learning Objective 9
Describe the requirements
for becoming a CPA.
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Three Requirements for
Becoming a CPA
Educational Requirement
Uniform CPA Examination Requirement
Experience Requirement
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CPA Examination Sections
Audit and Attestation
Accounting and Reporting
Regulations
Business Environments and Concepts
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Learning Objective 10
Describe the impact of
e-commerce on CPAs.
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Impact of E-commerce
CPAs need to understand how key
technologies are transforming all
aspects of business.
Information Technology
Hardware
Software Communications
Internet
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End of Chapter 1