Arens14e ch01 ppt

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  • 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.
  • The user may go to the business premises to examine records and obtain information about the reliability of the statements. There is considerable legal precedent that management is responsible for providing reliable information to users.
  • Assurance services are independent professional services that improve the quality of information for decision makers.
  • In the audit of historical financial statements, management asserts that the statements are fairly stated in accordance with applicable US or international accounting standards. For an audit of internal controls over financial reporting, management asserts that internal controls have been developed and implemented following well-established criteria. For a review of historical financial statements, management asserts that the statements are fairly stated in accordance with accounting standards which are the same as for audits. For attestations on information technology, management makes various assertions about the reliability and security of electronic information. CPAs provide numerous other attestation services and many of these are natural extensions of the audit of historical financial statements as users seek independent assurances about other types of information.
  • The operational audit evaluates the efficiency and effectiveness of any part of an organization's operating procedures and methods.
  • A compliance audit is conducted to determine whether the auditee is following specific procedures, rules or regulations set by some higher authority. Some examples may include determining whether accounting personnel are following procedures prescribed by the controller, review wage rates for compliance with minimum wage laws, and examine contractual agreements with bankers and other lenders to be sure the company is complying with legal requirements.
  • Arens14e ch01 ppt

    1. 1. The Demand for Audit and Other Assurance Services Chapter 1©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1-1
    2. 2. Enron story illustrates the importance of the role of auditors and their responsibility to the users of the financial statements. In the aftermath of Enron and other major financial reporting frauds, Congress passed the Sarbanes-Oxley Act©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    3. 3. Sarbanes-Oxley Act Enron WorldCom The Act established the Public Company Accounting Oversight Board. It also requires auditors to report on the effectiveness of internal control over financial reporting. Tyco Adelphia©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1-3
    4. 4. Learning Objective 1 Describe auditing.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1-4
    5. 5. 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. The definition includes several key words and phrases, we’ll now disscuss them©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1-5
    6. 6. 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. Criteria FASB IASB©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1-6
    7. 7. Auditors routinely perform audits of quantifiable information, including companies’ financial statements and individuals’ federal income tax returns. They also audit more subjective information, such as the effectiveness of computer systems and efficiency of manufacturing operations©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    8. 8. Information and Established Criteria  The criteria for evaluating information also vary depending on the information being audited.  In the audit of historical financial statements by CPA firms, the criteria may be GAAP or IFRS  For more subjective information it is more diffucult to establish criteria©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    9. 9. Accumulating Evidence 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. Transaction data Written and electronic Observations Communications with outsiders Client inquiry©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1-9
    10. 10. Accumulating Evidence and Evaluating Evidence  Evidence takes many different forms including; – electronic and documentary data about transactions – written communication with outsiders – observations by the auditor – oral testimony of the auditee (client)©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    11. 11. 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 auditor must also have an independent mental attitude 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.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    12. 12. Competent, Independent Person Judgment and Competence Experience Independence Evaluation of Evidence Proper Conclusion©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 12
    13. 13. Competent, Independent Person  Auditors strive to maintain a high level of independence to keep the confidence of users relying on their reports  Auditors reporting on company financial statements are often called independent auditors  Even though such auditors are paid fees by the company, they are normally sufficiently independent to conduct audits©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    14. 14. Audit Report The final stage in the auditing process is preparing the Audit Report, which is the communication of the auditor’s findings to users. Results differ in nature, but all must inform readers of the degree o correspondence between information and established criteria.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    15. 15. Audit ReportTo the Board of Directors and Stockholders ofABC Corporation and SubsidiariesAnywhere, USAWe have audited the accompanying consolidated balance sheets of ABC Corporation and Subsidiaries (the “Company”) as of December 31, 2010 and December31, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement scheduleare the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedulebased on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of ABC Corporation and Subsidiaries as ofDecember 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period ended December31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule,when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forththerein.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal controlover financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated February 28, 2011, expressed an unqualified opinion on the Company’s internalcontrol over financial reporting.INTERNATIONAL CPA FIRM LLPAnywhere, USAFebruary 28, 2011 The final step communicates the findings to users.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 15
    16. 16. Audit of a Tax Return Example©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 16
    17. 17. Learning Objective 2 Distinguish between auditing and accounting.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 17
    18. 18. Distinguish 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.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 18
    19. 19. Learning Objective 3 Explain the importance of auditing in reducing information risk.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 19
    20. 20. Economic Demand for Auditing To illustrate the need for auditing, consider the decision of a bank officer in making a loan to a business… (Risk-free interest rate, business risk for the customer, İnformation risk… 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.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    21. 21. Learning Objective 4 List the causes of information risk, and explain how this risk may be reduced.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 21
    22. 22. Causes of Information Risk  Remoteness of information When information is obtained from others,likelihood of it being intentionally or unintentionally misstated increases  Biases and motives of the provider If information is provided by someone whose goals are İnconsistent with those of the decision maker, the İnformation may be biased in favor of the providerVoluminous data organizations become larger, so does the volume of theirchange transactions. This increases the likelihood thatproperly recorded information is included in the records  Complex exchange transactions ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    23. 23. Reducing Information Risk  User verifies information  User shares information risk with management  Audited financial statements are provided©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 23
    24. 24. Reducing Information Risk  User verifies information The user may go to the business premises to examine records and obtain information about the reliability of the statements  User shares information risk with management If users rely on inaccurate financial statements and as a result incur a financial loss, they may have basis for a lawsuit against management But users may not be able to collect on losses  Audited financial statements are provided The most common way for users to obtain reliable information İs to have an independent audit©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    25. 25. Relationships Among Auditors, Client, and External Users Client or audit Auditor issues committee hires report relied auditor Auditor upon by users to reduce information risk Provides capital External Client Users Client provides financial statements to users©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 25
    26. 26. Learning Objective 5 Describe assurance services and distinguish audit services from other assurance and non-assurance services provided by CPAs.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 26
    27. 27. Assurance Services An independent professional service that improves the quality of information for decision makers. Individuals who are responsible for making business decisions seek assurance services to help improve the reliability and relevance of the information used Can be performed by CPAs or by a variety of other professionals©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 27
    28. 28. Assurance Services  CPAs have provided many assurance services for years, particularly assurances about historical financial statements  They have also performed assurance services related to lotteries and contests to provide assurance that winners were determined in an unbiased fashion in accordance with contest rules©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    29. 29. Attestation Services A type of assurance service CPA reports on the reliability of an assertion That is the responsibility of another party.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 29
    30. 30. Attestation Services 1. Audit 3. Review Historical Financial Statements 2. Internal Control over 4. Information Financial 5. Other Reporting Technology©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 30
    31. 31. 1. Audit of historical financial statements  The auditor issues a written report expressing an opinion about whether the financial statements are fairly stated in accordance with the applicable accounting standards.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    32. 32. 2. Audit of Internal Control over Financial Reporting  Management asserts that internal controls have been developed and implemented following well established criteria  Section 404 of the SOX act requires public companies to report management’s assessment of the effectiveness of control  The act also requires auditors to attest to the effectiveness of internal control over financial reporting  This evaluation increases user confidence about future financial reporting©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    33. 33. 3. Review of Historical Financial Statements  Management asserts that the statements are fairly stated in accordance with accounting standard  The CPA provides only a moderate level of assurance for reviews of financial statements, compared to a high level for audits, therefore less evidence is needed©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    34. 34. 4. Attestation Services on Information Technology Management makes various assertions about the reliability and security of electronic information WebTrust and SysTrust also meet the criteria of attestation service©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 34
    35. 35. 5. Other Assurance Services Most of the other assurance services that CPAs provide do not meet the formal definition of attestation services. The CPA is not required to issue a written report. The assurance does not have to be about the reliability of another party’s assertion about compliance with specified criteria.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 35
    36. 36. Green Initiatives Bring Assurance Opportunities, Competition Global interest has triggered a surge in reports. 80% of the Global Fortune 250 released environmental, social, and governance data. Presented in standalone reports or integrated into annual financial reports.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 36
    37. 37. Other Assurance Services Examples Assess risks of accumulation, distribution, and storage of digital information… including assessing security risks and related controls over data and other information stored electronically, including the adequacy of backup and off-site storage.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 37
    38. 38. Other Assurance Services Examples  Compliance with trading policies and procedures  Compliance with entertainment royalty agreements  ISO 900 certification  Environmental audit©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 38
    39. 39. Nonassurance Services Provided by CPAs 1. Accounting and bookkeeping services 2. Tax services 3. Management consulting services©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    40. 40. Assurance, Attestation, and Nonassurance Services©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    41. 41. Learning Objective 6 Differentiate the three main types of audits.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 41
    42. 42. Types of Audits  Operational  Compliance  Financial Statement©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 42
    43. 43. Operational Audit  Evaluates the efficiency and effectiveness of any part of an organization’s operating procedures and methods  At the end, management normally expects recommendations for improving operations  The reviews are not limited to accounting.  They can include the evaluation of organizational structure, computer operations, production methods…©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    44. 44. Operational Audit  It is impossible to characterize the conduct of a typical operational audit  It is more diffucult to objectively evaluate whether the efficiency and effectiveness of operations meets established criteria than it is for compliance and financial statement audits  In this sense operational audit is more like management consulting©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    45. 45. 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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 45
    46. 46. Compliance Audit  Conducted to determine whether the auditee is follow,ng specific procedures, rules, or regulations set by some higher authority  Governmental units, such as school districts are subject to considerable compliance auditing because of extensive government regulation  Results of compliance audit is typically reported to management©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    47. 47. 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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 47
    48. 48. Financial Statement Audit  Conducted to determine whether the financial statements are stated in accordance with specified criteria (GAAP or IFRS…)  The auditor gathers evidence to determine whether the statements contain material errors or other misstatements©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
    49. 49. Audit of Historical Financial Statements Annual audit of Boeing’s financial Example statements Information Boeings financial statements Established Generally accepted accounting Criteria principles Available Documents, records, and outside Evidence sources of evidence©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 49
    50. 50. XBRL Electronic Data to Improve Financial Reporting Extensible Business Reporting Language Enables sorting and comparing of financial data Public companies required to provide interactive financial statement data©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 50
    51. 51. Learning Objective 7 Identify the primary types of auditors.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 51
    52. 52. Types of Auditors  Independent certified public accounting firms  Governmental general accounting office auditors  Internal Revenue agents  Internal auditors©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 52
    53. 53. Learning Objective 8 Describe the requirements for becoming a CPA.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 53
    54. 54. Three Requirements for Becoming a CPA  Educational requirement  Uniform CPA examination requirement  Experience requirement©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 54
    55. 55. CPA Examination Sections Financial Auditing Accounting and And Attestation Reporting Business Environment Regulation and Concepts©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 55
    56. 56. CBT-e: The CPA Exam Gets a Makeover New content and skill specification outline revisions. Exam structure changes and weighting of individual exam components. Coverage of international auditing and financial reporting standards.©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 56
    57. 57. Three Requirements for Becoming a CPA©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 57
    58. 58. End of Chapter 1©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 1 - 58

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