AUDITING

CHAPTER 1
Introduction to Audit &
Other Assurance Services
By
David N. Ricchiute
TOPICS
Nature audit & attestation services
Demand for financial statement audits
Audit standard-setting process
Influences on accounting & auditing
Other audits & nonattest services
Other attestation services
Consulting & other assurance services

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INTRODUCTION
Audits reduce
Information risk
Cost of capital
Professional challenges
Rebuild confidence in auditor
credibility
Incorporate changes stemming from
Sarbanes-Oxley Act
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ASSURANCE SERVICES
Three-party contracts
Common attestation
services
Agreed-upon procedures
engagements
Review engagements
Financial statement audit

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ATTESTATION SERVICES
Agreed-upon procedures
engagements
Uses procedures agreed by
contracting parties
Review engagements
Limited assurance whether financial
statements conform to GAAP

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PROFESSIONAL
SERVICE FIRMS
Attestation & audit offered by
public accounting firms
Professional staff are certified
public accountants
Organized as limited liability
partnerships (LLP)

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FINANCIAL STATEMENT
AUDIT
Performed by certified public
accountants
Auditor offers assurances about
managements financial statement
assertions

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INFORMATION RISK
MODEL
Definition: risk that information is
materially misstated
Interested parties rely on
information in decision making
Audit provides assurance about
quality of financial statement
information
Assurance offsets information risk

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DEMAND FOR AUDITS

Minimize information risk

Unbiased monitor reduces
information risk
Reports on quality of financial
statement information

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VALUE OF AUDIT
Reduces information risk to
interested parties
Investors, creditors, employees,
suppliers, regulatory agencies, tax
agencies, etc.
Reduces cost of capital to company

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FINANCIAL
STATEMENTS

Representations of
management
Responsible for assertions
embodied in financial
statements
Examined by auditor

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WHO IS AUDIT CLIENT?
Board of directors
Auditor is engaged by board of
directors
Board of directors
Elected by shareholders
Represents shareholder interests

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DEFINING THE AUDIT
PROCESS
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
those assertions and established criteria
and communicating the results to
interested users.

Committee on Basic Auditing Concepts, A Statement of Basic Auditing

concepts, The Accounting Review, supplement to v. 47, 1972, p. 18

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UNDERSTANDING THE
AUDIT PROCESS
Investigation
Gathering, investigating evidence
Using scientific method of inquiry
Report
Issue opinion whether managements
financial statement assertions
correspond in all material respects to
GAAP

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SCIENTIFIC METHOD OF
INQUIRY
Scientific Method
Auditing
Observe problem Opinion on fair
presentation of
financials
Formulate hypothesis Financial statements
are fairly presented
Gather evidence Assess risk; design
procedures
Evaluate evidence & Evaluate evidence to
conclude support or refute
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hypothesis
AUDIT STANDARD
SETTING:
AICPA
Trade association for CPAs
Audit Standards Board (ASB)
Senior technical body that issues authoritative
pronouncements for non-public company audits and
attestation services
Accounting & Review Services Committee:
Senior technical body that issues pronouncements for
non-public company accounting & review services

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AUDIT STANDARD
SETTING
Securities & Exchange
Commission
Created 1934 to protect investors
Oversight authority for accounting
and auditing
Regulates registration & exchange of
securities
Issues Staff Accounting Bulletins (SAB)
Unofficial interpretations to guide
practitioners

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AUDIT STANDARD
SETTING: PCAOB
Created 2003 by Congress in
Sarbanes-Oxley Act
Private sector non-profit organization
Issues audit, attestation standards for
public companies
Oversees auditors of public companies
to
Protect investors
May adopt AICPA auditing standards or
establish new standards

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AUDITING DESCRIBED
Auditing is analytic, not constructive; it is critical,
investigative, concerned with the basis for
accounting measurements and assertions.
Auditing emphasizes proof, the support for
financial statements and data. Thus auditing
has its principal roots, not in accounting which
it reviews, but in logic on which it leans heavily
for ideas and methods.

R.K. Mautz & H.A. Sharaf. The Philosophy of Auditing. Sarasota:

AAA, 1961, p. 14

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ACCOUNTING
STANDARD SETTERS
Financial Accounting Standards Board
(FASB) & Governmental Accounting
Standards Board (GASB)
Independent standard-setting bodies
issuing authoritative standards (GAAP)
for non-governmental and
governmental entities
Auditor must express opinion on
financial statements in conformity with
GAAP
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RELATIONSHIP OF
ACCOUNTING &
AUDITING
Hypothesis: financial statements
are fairly presented in accordance
with GAAP
FASB writes accounting standards
that become part of GAAP
GASB writes accounting standards for
governmental accounting
GAAP standards are criteria for fair
presentation
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OTHER AUDIT & ATTEST
SERVICES
Operational audits
Assess effectiveness & efficiency of
operations
Compliance audits
Assess whether entity has complied with
applicable laws & regulations
Mostly for Not-for-Profit organizations
Agreed-upon procedures
Attest service with contractual procedures

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CONSULTING & OTHER
ASSURANCE SERVICES
Business valuation
Financial planning
Litigation support
Information system design &
processing
Forecasts & projections
Sarbanes-Oxley prohibits many
services to public companies
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AICPA VISION STATEMENT

CPAs are trusted professional who enable

people and organizations to shape their
future. Combining insight with integrity,
CPAs deliver value by communicating the
total picture with clarity and objectivity,
translating complex information into critical
knowledge, anticipating and creating
opportunities and designing pathways that
transform vision into reality

Source: AICPA Vision Project (http://www.aicpa.org)

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