The Demand for Audit

and Other Assurance

Services
Chapter 1

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-1
 Why are we here????????
1. SP = PV of all future dividends. Current
earnings → Future earnings (?) → Future
dividends (?). Same applies for loan from bank
(private company), ability to pay back loan =
Current earnings → Future earnings (?).
2. SEC Act of 1933 – F/S, SOX Section 404
– I/C (2002) (Integrated audit)
3. Common source for 2 Acts?????
4. Assurance, audit – what comes to mind??
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-2
 Housekeeping
1. In the Cases and S-E for exams, you will be asked to “think” and I
will grade you on your ability to provide original, interesting
thoughts.
Critical thinking is the purposeful and reflective judgment about
what to believe or what to do in response to observations,
experience, verbal or written expressions, or arguments.
Analytical thinking is the ability to scrutinize and break down facts
and thoughts into their strengths and weaknesses. Developing the
capacity to think in a thoughtful, discerning way, to solve
problems, analyze data, and recall and use information.
NOT MEMORIZING AND REGURGITATING A LIST OF ITEMS
Some questions may request direct responses – but where possible –
THINK!
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 Housekeeping
Examples: (1) SOX→Independence→Partner Rotation→Unintended
Consequences?
(2) Brainstorming: where help and not help (WHY?), how
would you implement best practices? What best practices are
perhaps not cost / beneficial (why?)? What are the hurdles?
(3) NASs – good or bad? Both? Where do you fall (why)?
Empirical Question? If yes, how would you test???
(4) Tell me something I don’t know – outside, relevant
research to further your understanding. A/Ps and current industry
average.
2. Please obtain feedback, but consistent with the real world – no dry
runs / reviews of initial drafts.
3. No cell phones, texting, etc. Laptops / calculators allowed for lectures.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-4
 Learning Objective 1

Describe auditing

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 Nature of Auditing

Auditing is the accumulation and

evaluation of evidence (per GAAS) about
information (F/S) to determine and
report on the degree of
correspondence between the
information (F/S) and established criteria (GAAP).
Auditing should be done by a
competent (?), independent (?)
person.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-6
 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 (GAAP).
Think of economic events and
examples of evidence?
Examples???
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-7
 Competent, Independent
Person
The auditor must be qualified to understand the
criteria (GAAP, COSO) 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 (GAAS). How?
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.
Audit Quality = Detect and Report Misstatement
Enron, Andersen, and SPEs
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-8
 Reporting

The final stage in the auditing process is preparing the

Audit Report, which is the communication of the
auditor’s findings to users. See page 8 of annual report
in your book. See page 9 for mgt responsibilities for
preparing F/S and reporting on I/Cs
Examples of users? Research Results: Use of F/Ss and
audit report = 5.13, where 1 = “very unimportant” and
7 = “very important.” SP info = 5.46, Advice from
professionals
©2003 Prentice Hall Business Publishing, = 5.06
Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1-9
 Learning Objective 2

Distinguish between
auditing and accounting.

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 Distinction Between
Auditing and Accounting
Accounting is the recording, classifying,
and summarizing of economic
events (debits and credits) for the purpose of providing
financial information used in decision making.
Language of business
Auditing is determining whether
recorded information properly
reflects the economic events that
occurred during the accounting period.
Spell check on steroids!
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 Learning Objectives 4

List the causes of information

risk, and explain how this
risk can 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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 Learning Objective 5

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 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.
Not INSURANCE – why????

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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.

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 Attestation Services
Audits of historical financial statements
and internal controls over financial reporting
Review of historical financial statements

Attestation on information technology:

WebTrust and SysTrust
Other attestation services – debt covenant
compliance, agreed upon procedures
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 Assurance, Attestation, and
Nonassurance Services
NONASSURANCE SERVICES

Management Accounting and

Consulting Bookkeeping

Tax
Services

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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- Ex. IRS,

state grant, debt covenant
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 Financial Statement Audit

Annual audit of Boeing’s

Example
financial statements
Boeing's financial
Information
Statements and internal controls
Established Generally accepted accounting
Criteria Principles and COSO framework
Available Documents, records, and outside
Evidence sources of evidence
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 Operational Audit
Evaluate computerized payroll system
Example
for efficiency and effectiveness
Number of records processed, costs 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

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 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

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 Learning Objective 7

Identify the primary

types of auditors.

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 Types of Auditors

Certified Public Accounting Firms

Govt. Accountability Office Auditors

Internal Revenue Agents

Internal Auditors

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 Learning Objective 8

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

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 28
 CPA Examination Sections

Auditing and Attestation

Financial Accounting and Reporting

Regulations

Business Environment and Concepts

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 29
 End of Chapter 1

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 30