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    of 17

    Auditing and Assurance Services

    Seventeenth Edition, Global Edition

    Chapter 1
    The Demand for Audit and
    Other Assurance Services

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Nature of Auditing (1 of 2)
    • 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
    – Performed by a competent, independent person

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Distinguish Between Auditing and
    Accounting
    • Accounting is the recording, classifying, and summarizing
    of economic events in a logical manner for the purpose of
    providing financial information for decision making
    • Auditors focus on determining whether recorded
    information properly reflects the economic events that
    occurred during the accounting period

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Economic Demand for Auditing
    • Information risk reflects the possibility that the information
    upon which the business risk decision was made was
    inaccurate
    – A likely cause of the information risk is the possibility of
    inaccurate financial statements
    • Auditing can have a significant effect on information risk

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Causes of Information Risk
    • Reasons that increase the likelihood of decision
    makers receiving unreliable information:
    – Remoteness of information
    – Biases and motives of the provider
    – Voluminous data
    – Complex exchange transactions

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Reducing Information Risk
    • There are three main ways to reduce information risk:
    – User verifies information
    – User shares information risk with management
    – Audited financial statements are provided

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Figure 1.2 Relationships Among
    Auditors, Client, and External Users

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Assurance Services
    • Assurance service is an independent professional
    service that improves the quality of information for
    decision makers
    – It can be done by CPAs or by a variety of other
    professionals
    – Provisions in Section 404 of the Sarbanes–Oxley Act
    require CPA firms to provide assurance on internal
    control over financial reporting for larger public
    companies

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Attestation Services
    • 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,
    including:
    – Audit of historical financial statements
    – Audit of internal control over financial reporting
    – Review of historical financial statements
    – Other attestation services that may be applied to a
    broad range of subject matter

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Other Assurance and Nonassurance
    Services
    • Other assurance services are services that do not
    meet the definition of attestation services
    – CPA is not required to issue a written report
    • Nonassurance services are services rendered by CPA
    firms that generally fall outside the scope of
    assurance services such as:
    – Accounting and bookkeeping services
    – Tax services
    – Management consulting services

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Types of Audits
    • CPAs perform three primary types of audits:
    – Operational audit
    – Compliance audit
    – Financial statement audit

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Table 1.2 Examples of the Three
    Types of Audit (1 of 2)
    Type of Audit Example Information Established Available
    Criteria Evidence
    Operational Evaluate whether Number of Company Error reports,
    audit the payroll standards for payroll
    computerized records efficiency records, and
    payroll processed in and payroll
    processing for a month, effectiveness processing
    a Chinese costs of the in payroll costs
    subsidiary is department, department
    operating and number
    efficiently and of errors
    effectively made

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Table 1.2 Examples of the Three
    Types of Audit (2 of 2)
    Type of Audit Example Information Established Available
    Criteria Evidence
    Compliance Determine Company Loan Financial
    audit whether bank records agreement statements
    requirements provisions and
    for loan calculations by
    continuation the auditor
    have been met
    Financial Annual audit of Apple’s Generally Documents,
    statement Apple’s financial accepted records, and
    audit financial statements accounting outside
    statements principles sources of
    evidence

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Types of Auditors
    • There are several types of auditors in practice today:
    – Certified Public Accounting Firms
    – Government Accountability Office Auditors
    – Internal Revenue Agents
    – Internal auditors

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Certified Public Accountant
    • CPA is regulated by state law through the licensing
    departments of each state
    • There are three requirements for becoming a CPA:
    – Education
    – Uniform CPA examination
    – Experience

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Figure 1.3 Three Requirements for
    Becoming a CPA

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.


    Copyright

    This work is protected by United States copyright laws and is


    provided solely for the use of instructors in teaching their
    courses and assessing student learning. Dissemination or sale of
    any part of this work (including on the World Wide Web) will
    destroy the integrity of the work and is not permitted. The work
    and materials from it should never be made available to students
    except by instructors using the accompanying text in their
    classes. All recipients of this work are expected to abide by these
    restrictions and to honor the intended pedagogical purposes and
    the needs of other instructors who rely on these materials.

    Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

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