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8/6/2019 Chp01[1] Auditing
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Chapter 1-
The Role of thePublic Accountant
in the Economy
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McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Attest Function
Management
Subject
Matter
SuitableCriteria
The CPA
Gathers
Evidence
Subject
Matter*The Attest
Report
Issues
Report
*May be managements assertion about the subject matter.
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Attestation Engagements
Type of
Engagement
Level of
Assurance
Nature of
Report Procedures
Examination Highest Expresses
opinion
Sufficient to limit
attestation risk tolow level
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McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Attestation Engagements
Type of
Engagement
Level of
Assurance
Nature
of
Report
Procedures
Examination
Review
Highest
Moderate or
Limited
Expresses
opinion
Expresses
negative
assurance
Sufficient to limit
attestation risk tolow level
Generally limited to
inquiry & analytical
procedures
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McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Attestation Engagements
Type of
Engagement
Level of
Assurance
Nature of
Report Procedures
Examination
Review
Agreed-upon
procedures
Highest
Moderate or
Limited
Varies with
procedures
Expresses
opinion
Expresses
negative
assurance
States
findings
Sufficient to limit
attestation risk tolow level
Generally limited to
inquiry & analytical
procedures
Procedures
agreed-
upon with the
specified users
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McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Audit of Financial Statements
Management
PreparesFinancial
Statements
Criteria(e.g., GAAP)
The
Auditors
Gathers
Evidence
Financial
StatementsThe Auditors
Report
Issues
Report
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McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
What Creates the Demand for Audits?
Audits lend credibility to information by reducinginformation risk, the risk that information is materiallymisstated
Financial statement misstatements arise due to-- Accidental errors
Lack of knowledge of accounting principles
Unintentional bias
Deliberate falsification
Audits do not directly address business risk, the risk that acompany will not be able to meet its financial obligationsdue to economic conditions or poor management decisions
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McGraw-Hill/Irwin 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
History of the Attest Function
PeriodPeriod DevelopmentsDevelopments Audit ObjectiveAudit Objective Nature of AuditNature of Audit
AncientAncient --
18501850
Audits of city states,Audits of city states,
individuals & venturesindividuals & ventures
Detection of fraudDetection of fraud Detailed; No reliance onDetailed; No reliance on
controlscontrols
18501850--19051905
Industrial revolutionIndustrial revolution
resulted in the need forresulted in the need for
corporate auditscorporate audits
Detection of fraud &Detection of fraud &
clerical errorsclerical errors
Some testing; No relianceSome testing; No reliance
on controlson controls
19051905--19401940
Development of stockDevelopment of stock
marketsmarkets -- increasedincreased
emphasis on earningsemphasis on earnings
Determination ofDetermination of
fairness; detection offairness; detection of
fraud & errorsfraud & errors
Increased emphasis onIncreased emphasis on
testing; Slight reliance ontesting; Slight reliance on
controlscontrols
19401940--19751975 Development of auditingDevelopment of auditing
standardsstandardsDetermination ofDetermination of
fairnessfairness
Substantial reliance onSubstantial reliance on
controlscontrols
19751975--19851985 Criticism by Congress;Criticism by Congress;
Increased selfIncreased self--regulationregulation
Determination ofDetermination of
fairnessfairness
Internal control determinesInternal control determines
scope of auditscope of audit
19851985--19951995 Increased demands forIncreased demands for
reporting on compliance &reporting on compliance &
internal controlinternal control
Determination ofDetermination of
fairnessfairnessRisk assessment determinesRisk assessment determines
audit scope; must assessaudit scope; must assess
risk of fraudrisk of fraud
19951995--PresentPresentPanel on AuditPanel on Audit
Effectiveness; SarbanesEffectiveness; Sarbanes--
Oxley Act of 2002Oxley Act of 2002
Determination ofDetermination of
fairnessfairness
Business risk approach toBusiness risk approach to
auditsaudits
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The Accounting Professions Credibility
Crisis
2000The Panel on Audit Effectivenessmade a variety of suggestions to improve
audits. 2001Enron Bankruptcy
2002WorldCom Fraud
2002Sarbanes-Oxley Act 2003Public Company Accounting
Oversight Board began operations
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Sarbanes Oxley act
The act creates a new, quasi-public agency,
the Public Company Accounting Oversight
Board, or PCAOB, charged with overseeing,
regulating, inspecting and disciplining
accounting firms in their roles as auditors of
public companies. The act also covers issues
such as auditorindependence, corporategovernance, internal control assessment, and
enhanced financial disclosure.
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Types of Audits
Audits of Financial Statements
Compliance Audits
Operational Audits
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Types of Auditors
External Auditors
Internal Auditors
GAO Auditors
Tax Auditors
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AICPAs Traditional Role
Establishes Standards
Research and Publication
Continuing Professional Education Self-Regulation
CPA Examination
Note: The standards setting and regulation roles havebeen taken over by the SEC and the PCAOBwith respect to auditors of public companies.
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Types of Professional Services
Attestation and Assurance
Tax
Consulting
Accounting
Personal Financial Planning Fraud Investigation
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Typical Structure of a National
CPA Firm
Partners
Managers
Seniors
Staff