Acc 323 Chapter 1-The Demand for Audit and Other Assurance Services

Term
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Auditing
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Terms in this set (40)
Auditing
the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria
Evidence for an Audit
any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria, must obtain sufficient quality and quantity
Traits of Auditors
1. Competent
2. Independent
Competent
having the ability to do what is needed (Know what type and amount of evidence to obtain in order to reach proper conclusion
Independent Auditor
Licensed certified public accountant engaged to audit a company's financial statements; not an employee of the audited company.
Audit report
communicates the auditor's findings to users
Accounting
the recording, classifying and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making
Types of risk
-Business Risk
-Information Risk
Business Risk
reflects the possibility that the business will not be able to repay its loan because of economic or business conditions(Recession, poor management, new competition)
Information Risk
the possibility that the information upon which the business risk decision was made was inaccurate (inaccurate financial statements)
Causes of Information Risk1. Remoteness of Information 2. Biases and Motives of the Provider 3. Voluminous Data 4. Complex Exchange TransactionsRemoteness of InformationDecision makers do not have firsthand knowledge and must rely on information provided by others.Biases and Motives of ProviderInformation is provided by someone whose goals are inconsistent with those of the decision maker and may be biased.Voluminous DataHigher volumes of transactions increase the likelihood of undetected errors.Complex exchange transactionsTransactions are increasingly complex and more difficult to record properly. Complex accounting standards are difficult to interpret and apply.ways to reduce information risk1. User Verifies Information 2. User Shares Information Risk with Management 3.Audited Financial Statements are ProvidedUser Verifies InformationThe user may go to the business to verify the information. This is often costly and impractical.User shares information risk with managementManagement is responsible for providing reliable information, and may be held responsible in a lawsuit if inaccurate information is provided.Audited financial statements are providedExternal auditors are engaged to provide assurance that the financial statements are reliable.Relationship Between Audit Services, Attestation Services, Assurance Services and Non-Assurance ServicesAudit is most in depth, the attestation, then assurance, then non-assuranceAssurance Servicesan independent professional service that improves the quality of information for decision makers (Ex: Nielsen TV Ratings, corporate social responsibility reports, sustainability reports)Attestation ServicesA type of assurance service in which the CPA firm issues a report about a subject matter or assertion made by another party (Ex: Audit of financial statements, audit of internal control over financial reporting, review of historical financial statements)Audit of historical financial statementsmanagement asserts that the financial statements are fairly stated in accordance to applicable accounting standards, designed to provide reasonable assurance that financial statements are free of material misstatementsAudit of internal control over financial reportingmanagement asserts that internal controls have been developed and implemented following well established criteriaReview of historical financial statementsmanagement asserts that the statements are fairly stated in accordance with accounting standards, the same as for audits, auditors provide lower level of assurance for these compared to auditsNonassurance Services Provided by CPAs1. Accounting and Bookkeeping Services 2. Tax Services 3. Management Consulting ServicesTypes of Audits1. Operational Audit 2. Compliance Audit 3. Financial Statement AuditOperational Auditevaluates the efficiency and effectiveness of any part of an organization's operating procedures and methods, reviews are not limited to accounting-can include evaluation of organizational structures, computer operations, production methods etc.Compliance Auditconducted to determine whether the auditee is following specific procedures, rules or regulations set by some higher authority; results typically reported to management, not users (ex: determine whether accounting department is adhering to procedures set by company controller)Financial Statement Auditconducted to determine whether the financial statements are stated in accordance with specified criteria; must gather evidence to determine whether the statements contain material errors or other misstatementsTypes of Auditors-CPA firms -Government accountability office auditors -Internal revenue agents -Internal auditorsCPA FirmsResponsible for auditing financial statements of all publicly traded companies, most other large companies, smaller companies, and noncommercial organizationsGovernment accountability office auditoran auditor working for the US Government Accountability Office, a nonpartisian agency in the legislative branch; primary responsibility is to perform the audit function for CongressInternal Revenue Agentsauditors who work for the IRS and conduct examinations of taxpayers' returnsInternal Auditorsauditors employed by all types of organizations to audit for management with oversight by the board of directors; responsibilities vary from company to companyCertified Public AccountantAn individual who has met certain criteria and is thus allowed to perform audits of corporations.Requirements to become a CPA-Educational Requirement -Uniform CPA Exam -Experience RequirementEducational Requirement of CPA-an undergraduate/graduate degree with a major in accounting, including a minimum number of accounting credits -Most states require 150 credit hoursUniform CPA ExamComputer-based exam offered at test centers, consists of 4 sections: -Auditing and attestation -Financial Accounting and Reporting -Regulation -Business Environment and Concepts *Possible ethics section depending on stateExperience Requirement-Varies widely (Anywhere from no experience to 2 years including auditing) -Some states include working for Govt. or Industry