Chapter 1 - The Nature, Purpose, Scope of Audit and
Chapter 1 - The Nature, Purpose, Scope of Audit and
Chapter 1 - The Nature, Purpose, Scope of Audit and
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Describe assurance services and
distinguish audit services from other
assurance and nonassurance services
provided by CPAs.
Differentiate the three main types of
audits.
Identify the primary types of auditors.
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Nature of Auditing
The Latin meaning of the word “auditor” was
a “hearer or listener”
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.
Skill
Competence = Qualification
Experience
Judgment
Auditor
Independence :
Competence No bias , No conflict of
interest &/or undue
influence
Evaluation of
Evidence
Example
Transaction A/R ---------Sales Invoice
data A/P------Purchase Order
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Accounting is the recording, classifying, and
summarizing of economic events for the
purpose of providing financial information
used in decision making.
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Explain the importance of
auditing
in reducing information risk.
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The Importance of Auditing
It can be said that the function of
auditing is to lend credibility to the
financial statements.
the auditor enhances the usefulness
and the value of the financial
statements, but he also increases the
credibility of other non-audited
information released by
management.
Demand Driver Information risk
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Remoteness of information
Voluminous data
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User verifies information
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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
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Describe assurance services and
distinguish audit services from other
assurance and non-assurance services
provided by CPAs.
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Assurance Services
An assurance service is an independent
professional service that improves the
quality of information for decision
makers.
Assurance services can be done by
CPAs or by a variety of other
professionals. For example, Consumers
Union, a non-prof it organization, tests a
wide variety of products used by
consumers and reports their evaluations
of the quality of the products tested in
Consumer Reports.
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Attestation Services
An attestation service is a type of assurance
service in which the CPA firm issues a report
about a subject matter or assertion that is made
by another party.
Primary categories of attestation services
include:
1) Audit of historical financial statements
2) Audit of internal control over financial
reporting
3) Review of historical financial statements
4) Other attestation services that may be
applied to a broad range of subject matter
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Attestation Services cont'd…
1) Audit of historical financial
statements
In an audit of historical financial
statements, management asserts that
the financial statements are fairly
stated in accordance with applicable,
Audits are designed to provide
reasonable assurance that the
financial statements are free of
material misstatements.
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Attestation Services cont'd…
2) Audit of internal control over financial
reporting
an audit of internal control over financial
reporting, management asserts that internal
controls have been developed and
implemented
3) Review of historical financial statements
management asserts that the statements
are fairly stated in accordance with
accounting standards(IFRS), the same as
for audits.
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Attestation Services cont'd…
4) Other attestation services that may be applied to a
broad range of subject matter
Typically, the CPA is engaged to provide written
assurance about the reliability of an assertion made
by management.
5) Other assurance Services
These assurance services differ from attestation
services in that the CPA is not required to issue a
written report, and the assurance does not have to be
about the reliability of another party’s assertion
about compliance with specified criteria.
These other assurance service engagements focus on
improving the quality of information for decision
makers,
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just like attestation services.
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Attestation Services cont'd…
Five
Categories
1. Audit 3. Review
Historical
Financial
Statements
2. Internal
Control over 4. Information
Financial 5. Other
Technology
Reporting
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Most of the other assurance services that CPAs
provide do not meet the formal definition
of attestation services.
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Non-assurance Services provided by CPAs
CPA firms perform numerous other services that generally
fall outside the scope of assurance services. Three specific
examples are:
1) Accounting and bookkeeping services
2) Tax services
3) Management consulting services
Most accounting and bookkeeping services, tax services,
and management consulting services fall outside the
scope of assurance services, although there is similarity
between some consulting and assurance services. While
the primary purpose of an assurance service is to
improve the quality of information, the primary purpose
of a management consulting engagement is to generate a
recommendation to management
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Non-assurance Services provided by CPAs
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Differentiate the three main types
of audits.
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Operational Audit
Compliance Audit
Forensic Audit
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Checks efficiency, effectiveness and economy in day to day
activities .
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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Determine whether bank requirements
Example
for loan continuation have been met
Established
Loan agreement provisions
Criteria
Available Financial statements and
Evidence calculations by the auditor
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Checks if financial statements are prepared/stated in
accordance with specified criteria(International GAAP/IFRS)
Annual audit of Boeing’s financial
Example
statements
Established
International GAAP/IFRS
Criteria
Available Documents, records, and outside
Evidence sources of evidence
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A forensic audit is an examination and evaluation of a firm's or
individual's financial records to derive evidence that can be used in a court
of law or legal proceeding.
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Certified public accounting firms:
Certified public accounting(CPA) firms are responsible for
auditing the historical financial statements of all publicly
traded companies, most other reasonably large companies,
and many smaller companies and noncommercial
organizations.
Government Accountability Office Auditor
Auditor working for the Government Accountability Office (GAO), a
nonpartisan agency in the legislative branch of the federal government.
Headed by the Comptroller/Audit General, the GAO reports to and is
responsible solely to Congress/House of Peoples Representative
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IRA is responsible for enforcing the federal tax laws as they have been
defined by Congress and interpreted is responsible for enforcing the federal
tax laws as they have been defined by Congress and interpreted by the
courts. A major responsibility of the IRS is to audit taxpayers’ returns to
determine whether they have complied with the tax laws. These audits are
solely compliance audits. The auditors who perform these examinations are
called internal revenue agents.
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Educational requirement
Experience requirement
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Educational Examination
Experience Requirement
Requirement Requirement
An undergraduate or
graduate degree with a
major in business
studies or any other 14 Papers
field Minimum of 3 years as
A person can sit four an audit manager.
Depending on a times a year .
person’s background
the association
provides exemptions
of 4 papers.
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Financial
Auditing Accounting
and And
Attestation Reporting
Business
Environment
Regulation
and
Concepts
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Concept Check
What is meant by determining the degree of correspondence between
information and established criteria? What is the criteria for an audit of a
company’s financial statements?
What are the major causes of information risk? How can information risk be
reduced?
Review Questions
What are the information and established criteria for the audit of Jones
Company’s tax return by an internal revenue agent? What are they for the audit of
Jones Company’s financial statements by a CPA firm?
Discuss changes in accounting and business operations over the last decade
that have
44 increased the need for independent audits.
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Distinguish among the following three factors impacting a loan interest rate:
risk-free interest rate, business risk, and information risk. Which one or ones
does the auditor reduce by performing an audit?
Identify the three main ways information risk can be reduced. What are the
advantages and disadvantages of each?
Explain how the increased use of fair value accounting might increase
information risk.
Explain audit services, attestation services, and assurance services, and give
examples of each.
Describe the nature of the evidence the internal revenue agent will use in the
audit of Jones Company’s tax return.
What knowledge does the auditor need about the client’s business in an audit
of historical financial statements? Explain how this knowledge may be useful in
performing other assurance or consulting services for the client.
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