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8/13/2019 Arens Audit C10e Ch01
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Copyright 2007 Pearson Education Canada
1
Chapter 1: The Demand for
Auditing and Assurance Services
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Copyright 2007 Pearson Education Canada1-2
Chapter 1 objectives
Learn about thedifferent types ofaccountants and whatthey do
Explain the differencebetween accounting,auditing, assuranceand non-assuranceservices
Describe how publicaccounting firms areorganized
List the market forces
that help ensure highquality audit andassurance engagements
Explain how standards
are developed andquality assurancemonitored
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Copyright 2007 Pearson Education Canada1-3
1.1 Professional accountants and
their work Professional accounting/auditing organizations
represented in Canada (p. 3):
Canadian Institute of Chartered Accountants Certified General Accountants Association of
Canada
Society of Management Accountants of Canada
Institute of Internal Auditors
Information Systems Audit and Control
Association
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Copyright 2007 Pearson Education Canada1-4
What is an audit? (text, p. 4)
Auditing is the accumulation
and evaluation of evidence
about information to
determine and report on thedegree of correspondence
between the information and
established criteria.
Auditing is done by a
competent, independent
person.
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Five key components of auditing
1. Quantifiable information (related to entity)
2. Criteria: normally generally accepted
accounting principles (GAAP)
3. Evidence gathering and evaluation
4. Competent, independent person
5. Report
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Figure 1-1 Audit of a tax return
illustrates these principles
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Copyright 2007 Pearson Education Canada1-7
Practice question 1-19 (p. 29)
Review the components of an
auditA PA (public accountant) can
even audit truckslets discuss
how this is done!
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Copyright 2007 Pearson Education Canada1-8
Factors that affect demand for
audits Remoteness of information
Bias and motives of provider
Voluminous data
Complex exchange transactions
Perceived cost/benefit
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Copyright 2007 Pearson Education Canada1-9
Economic demand for auditing:
illustrates why auditing is necessary Auditing can reduce information risk
associated with financial statements (the
risk that the financial statements areinaccurate)
The independent audit provides assurance
to users with respect to the reliability of thefinancial statements
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Copyright 2007 Pearson Education Canada1-10
Practice question 1-22 (p. 30)
Compare an unusual service to the work
done by PAs
Discuss the nature of information risk
Compare the risks of using financial
statements to the risks of buying a vehicle
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Copyright 2007 Pearson Education Canada1-11
Distinctionbetweenaccounting
andauditing What is accounting?
What is auditing?
Who is responsible for accounting or
auditing?
Can an auditor do both for the same
company?
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Copyright 2007 Pearson Education Canada1-12
Types of audits
Financial statement audit: Conducted todetermine whether the overall financialstatements are stated in accordance with specifiedcriteria.
Compliance audit: To determine whether theauditee is following specific procedures or rulesset down by a higher authority.
Operational audit: A review of any part of an
organizations operating procedures and methodsfor the purpose of evaluating economy, efficiencyand effectiveness.
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Copyright 2007 Pearson Education Canada1-13
Assurance services, attestation
services, and nonassurance services
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Copyright 2007 Pearson Education Canada1-14
Types of auditors
What type of auditor would you like to be?
Public accountant
Government auditor
Canada Revenue Agency auditor
Internal auditor
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Copyright 2007 Pearson Education Canada1-15
Practice problem 1-20 (p. 29)
Lets familiarize ourselves with the
different activities completed by auditors
This question provides a list of activitiesfor us to examine
Which type of auditor does what kind of
work?
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What type of public accounting firms
are present in your city or town? Go through the local business pages of
your telephone directory and see how
many of the following types of firms youcan identify:
International firms
National firmsLarge local and regional firms
Small local firms or sole proprietorships
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Copyright 2007 Pearson Education Canada1-17
Encouraging professional conduct
among PAs
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Copyright 2007 Pearson Education Canada1-18
Generally Accepted Auditing Standards
(GAAS) (p. 18)
These are broad guidelines that helpauditors in fulfilling their professional
responsibilities.General: qualifications and conduct
Examination: performance of the
audit
Reporting: describing the results
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Copyright 2007 Pearson Education Canada1-19
Structure of GAAS
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Copyright 2007 Pearson Education Canada 1-20
General: qualifications and conduct
Adequate technical training and
proficiency in auditing
Due care
Objective state of mind
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Copyright 2007 Pearson Education Canada 1-21
Examination: performance of the
audit Adequate planning
Proper execution
Proper supervision
Sufficient understanding of environment
and internal control
Sufficient appropriate audit evidence
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Copyright 2007 Pearson Education Canada 1-22
Reporting: results
Prepare a standardized report
Identify the financial statements
State responsibilities of management and
the auditor
Explain the scope of the engagement
Provide the appropriate type of opinion (or
state why you could not do so)
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Copyright 2007 Pearson Education Canada 1-23
Practice problem 1-26 (p. 31)
This practice problem shows you what can
go wrong when GAAS is not followed.
Take a look at this problem and identifywhat Holmes did wrong (or simply did not
do!) in the context of GAAS.
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Sources of auditing standards
Canadian CICA Assurance Handbook:Recommendations and Guidelines
U.S. have both the AICPA (AmericanInstitute of Certified Public Accountants)and the PCAOB (Public CompanyAccounting Oversight Board)
IFAC (International Federation ofAccountants)
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Copyright 2007 Pearson Education Canada 1-25
Quality control
Why is it important for the public
accounting firm to have quality control
procedures? What could go wrong without them?
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Quality control
Consists of the methods used to make sure
that the firm meets its professional
responsibilities Includes the organizational structure of the
PA firm and its procedures
Helps to ensure that GAAS is follows onevery audit
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Elements of quality control
1. Leadership and responsibilities within the firm.
E.g. An organizational culture that promotes
audit quality; quality control procedures that aredeveloped, documented, implemented, and
communicated.
2. General ethical requirements. E.g. Address at
the policy level general ethical principles ofintegrity, objectivity, professional competence
and due, confidentiality
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Elements of quality control (contd)
3. Independence. E.g. develop, communicate and
monitor policies and procedures to ensure that the
firm complies with the independence guidelines. 4. Client acceptance or continuance. E.g.
Document annual risk assessment processes,
including evaluation of a clients management
integrity and auditor competence andindependence.
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Elements of quality control (contd)
5. General human resource policies. E.g. Have
adequate hiring policies that ensure competence
and integrity of personnel. 6. Extent of professional development. E.g.
Employees adequately trained in the skills
needed to conduct audits.
7. Engagement performance. E.g. Have adequate
processes and procedures to ensure that the audit
is conducted in accordance with GAAS.
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Elements of quality control (contd)
8. Engagement quality control review. E.g.
Ensure that quality control review takes place
during the engagement and that monitoringoccurs after the engagement is completed.
9. Documentation. E.g. Have policies that
address the extent of documentation (hard copy
or electronic) including retention, storage,security and back-up.
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Enforcement of quality control
Quality control is enforced by means of
practice inspection
A practice inspection can occur by any oneof:
One owns firm quality control staff
By the provincial institute or ordre
By the CPAB (Canadian Public
Accountability Board)
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Practice question 1-25 (p. 31)
Lets look at the differences between
conducting an audit for a private company
and for a public company How are the audit standards involved?
How are quality control procedures and
quality control enforcement different forthe audit of a public company?