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Chapter 1
1

An Introduction to Auditing

Auditing and Assurance Services:

Understanding the Integrated Audit
First Edition
Karen L. Hooks

Prepared by Richard J. Campbell

Copyright 2011, Wiley and Sons

Chapter 1
2

An Introduction to Auditing

Prepared by Richard J. Campbell

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Learning Objectives
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1. Recognize an integrated audit and a financial statement audit
report.
2. Describe the overall purpose and value of an audit, and
identify the differences among an integrated audit, and audit
of internal control, an audit of internal control over financial
reporting, and a financial statement audit.
3. Define and contrast the responsibilities and expectations of
different parties affected by the audit.
4. Learn the roles and interaction of the governing and standard-
setting bodies and other entities that affect auditing.
5. Understand the link between independent auditors and
accountants who provide other professional services.

Important Basics of Auditing

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ƒ Financial statement audit

ƒ Audit of ICFR
ƒ Integrated audit
ƒ What it means when an auditor issues
an “unqualified” or “clean” audit
report on ICFR and the financial
statements

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An Integrated Audit
5 Exhibit 1-1

A Definition of Auditing
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Auditing is a systematic process of
objectively obtaining and evaluating evidence
regarding assertions about economic actions
and events to ascertain the degree of
correspondence between these assertions and
established criteria and communicating the
results to interested users.

American Accounting Association, Committee on Basic Auditing Concepts, A Statement of Basic Auditing Concepts
(Sarasota, FL: American Accounting Association, 1973)

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Difference in Accountants and Auditors

7 ƒ To be an accountant, it is necessary to have
accounting knowledge.
ƒ Understand business transactions
ƒ Know what information to capture
ƒ Know controls needed for activity and
information
ƒ Be able to report it for various purposes
ƒ Be able to record it according to accounting
standards
ƒ To be an auditor, it is also it is necessary to know
audit processes and audit reporting

Roles of Auditors and Management

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By giving an opinion on financial statement fairness and

ICFR effectiveness the auditor is indirectly reporting on
management’s assertions.

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The Auditing Process

9 ƒ Management produces financial statements and ICFR
report
ƒ Auditor gathers and evaluates evidence
ƒ Many forms of evidence; anything the auditor uses
ƒ Auditor uses established standards to compare
evidence to the financial statements and ICFR report
ƒ Looks for correspondence between what is presented
and the underlying evidence
ƒ Uses processes described/required in auditing
standards.
ƒ Auditor issues report

Beneficiaries of Audits
Exhibit 1-3
10

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Value of an Audit
11 ƒ To society: capital markets benefit
ƒ To owners and prospective owners: remote ownership, complex
transactions, investment decisions
ƒ To corporate governance, the Board of Directors and audit
committee: representing shareholders’ interests
ƒ To management
ƒ running the company with good information
ƒ cost of and access to capital
ƒ operating efficiency and effectiveness
ƒ credibility of performance indicators
ƒ properly accounting for complex transactions

Value of an Audit
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ƒ Constituents: society, owners and prospective

owners, corporate governance, management
ƒ All of these constituents need good information.
Even nonpublic companies elect to have audits,
although they are not required to do so by any
law or regulation.

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Standard Setters, Governing Authorities

13 ƒ Standard setters and governing authorities involved with U.S.
audits
ƒ Congress
ƒ States
ƒ Securities and Exchange Commissions (SEC)
ƒ Public Companies Accounting Oversight Board (PCAOB)
ƒ American Institute of CPAs (AICPA)
ƒ FASB/GASB
ƒ International Accounting Standards Board (IASB)
ƒ International Auditing and Assurance Board (IAASB)

Sarbanes Oxley Act of 2002

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SOX required:
ƒ The SEC to set up an auditing governance
organization (PCAOB)
ƒ Management of public companies to provide an
audited ICFR report
ƒ An ICFR audit of public companies
ƒ Dodd-Frank (2010) permanently exempts “non-
accelerated” filers from an ICFR audit
ƒ Financial statement and ICFR audits to be one
engagement

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PCAOB Responsibility and Authority

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ƒ Registration of firms
ƒ The SEC will not accept a company’s filings unless
they have been audited by a registered firm
ƒ Lots of information required in registration process
ƒ Firm must agree to assist in any investigations
ƒ Inspections
ƒ Required by SOX
ƒ SOX required the SEC to have the PCAOB perform
inspections
ƒ Sets auditing standards and other rules

PCAOB Auditing Standards

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ƒ AS 1: References in Auditors’ Reports to the
Standards of the Public Company Accounting
Oversight Board
ƒ AS 2: An Audit of Internal Control Over Financial
Reporting Performed in Conjunction With an Audit of
Financial Statements (superseded)
ƒ AS 3: Audit Documentation
ƒ AS 4: Reporting on Whether a Previously Reported
Material Weakness Continues to Exist

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PCAOB Auditing Standards continued

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ƒ AS 5: An Audit of Internal Control Over Financial
Reporting That is Integrated with an Audit of Financial
Statements
ƒ AS 6: Evaluating Consistency of Financial Statements
ƒ AS 7: Engagement Quality Review

Newest, PCAOB Risk Assessment Standards

18 ƒ AS No. 8, Audit Risk
ƒ AS No. 9, Audit Planning
ƒ AS No. 10, Supervision of the Audit Engagement
ƒ AS No. 11, Consideration of Materiality in Planning and
Performing an Audit
ƒ AS No. 12, Identifying and Assessing Risks of Material
Misstatement
ƒ AS No. 13, The Auditor’s Responses to the Risks of Material
Misstatements
ƒ AS No. 14, Evaluating Audit Results
ƒ AS No. 15, Audit Evidence

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AICPA
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ƒ Voluntary membership
ƒ Non-public company audit standards
ƒ Standards for many other types of
engagements
ƒ Code of conduct, applies to members
ƒ Writes CPA and grades exam

State Governments
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License to practice
ƒ Requirements to sit for CPA exam
ƒ Requirements to be licensed
ƒ Continuing education requirements
ƒ Conduct requirements
ƒ Regulations on doing business

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Other AICPA Standards

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ƒ Code of Professional Conduct
ƒ Statements on Standards for Attestation Engagements
(SSAE)
ƒ Statements on Standards for Accounting and Review
Services (SSAR)
ƒ Statements on Quality Control Standards
ƒ Statements on Standards for Tax Services (SSTS)
ƒ Statements on Standards for Valuation Services (SSV)
ƒ Statements on Standards for Consulting Services
(SSCS)

IAASB
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ƒ International code of conduct is

covered on the CPA Exam
ƒ AICPA audit standards (SAS) and
IAASB audit standards (ISA) are
being aligned through the AICPA’s
“Clarification Project”

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Other Audit Related Services

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ƒ Internal Auditing

ƒ Operational Auditing

ƒ Forensic Accounting

ƒ General Accountability Office

Value of Audit Knowledge for Non-Auditors

24 In other words, why is this course required
at most universities for all accounting
majors?

ƒ Understand purpose of auditor’s activities

ƒ Increase efficiency of interface with auditor
ƒ Enhanced communication
ƒ Implementation of ICFR

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Appendix A- Working in a CPA Firm

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Types of Audit Services:
ƒ Integrated audits for larger public companies
ƒ Financial statement audits for non-
accelerated filer public and non-public
companies
ƒ Reviews of interim financial statements for
public companies
ƒ Reviews and compilations for non-public
companies

Other Types of CPA-Provided Services

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ƒ Attest engagements
ƒ Assurance engagements
ƒ Tax engagements
ƒ Accounting and bookkeeping
ƒ Business advising/management
consulting

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CPA Services, “Assurance” and “Nonassurance”

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Exhibit A-1 – CPA Services

Common Firm Structures

28 ƒ Sole proprietorship

ƒ Professional corporation

ƒ General partnership

ƒ Limited liability company

ƒ Limited liability partnership

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Firm Sizes
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ƒ Big Four

ƒ International networks; national

ƒ Regional; large local

ƒ Small local

Common Auditor Position Titles

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ƒ Partner/Owner

ƒ Manager

ƒ In Charge Accountant

ƒ Staff Accountant

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Copyright
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“Copyright © 2011 John Wiley & Sons, Inc. All rights
reserved. Reproduction or translation of this work
beyond that permitted in Section 117 of the 1976
United States Copyright Act without the express
written permission of the copyright owner is unlawful.
Request for further information should be addressed to
the Permissions Department, John Wiley & Sons, Inc.
The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or
damages, caused by the use of these programs or from
the use of the information contained herein.”

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