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CHAPTER 1 Professional Practice

• 1.User demand for reliable information

• 2.Brief history of auditing

• 3.DEFINITIONS OF AUDITING

• 4.Other kinds of audits and auditors

• 5.The accounting profession

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Checkpoints

• 1.What is the difference between a client and auditee?

• 2.Define and explain auditing.• 3.What is the essence of the risk-reduct

ion of auditing?• 4.Define an “assurance engagement”.• 5.Other kinds of audits and auditors.

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1.User demand for reliable information

1.1 ACCOUNTING

• (1)It is the process of recording, classifying, and summarizing into financial statements a company`s transactions for the users.

• (2)The conditions affect demand:

• A.complexity: numerous and complicated

• B.remoteness: distance and time, expertise

• C.consequencesFinancial decision

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1.2 AUDITING

(1)Potential conflict of interest

• A.The user need reliable information

• B.The preparers might benefit by giving false, misleading, and overly optimistic information.

(2) Potential information risk: false, misleading, overly optimistic

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ASSURANCE

(3)Lend some credibility to financial information.

(4) “Lending of credibility” is providing assurance.

• external auditing of Financial Statements is an assurance engagement.

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委托人 Client

审计人Auditor

经理人Auditee

委托经营

受托经营并报告业绩

受托

审计

并报

告审

计

委托

审计

独立审计

接受审计

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1.3 Distinguish

(1)Auditing does not include the function of financial report production.

(2)The function is performed by a company`s accountants under the direction of its management.

(3)Auditors obtain evidence to determine whether the information in the FS is reliable

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1.4 Client and Auditee

(1) They usually are the same economic entity.

(2) Occasionally they are different.

banker: Client

company: Auditee Financial statement

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委托人 Client

审计人Auditor

经理人Auditee

委托经营

受托经营并报告业绩

受托

审计

并报

告审

计

委托

审计

独立审计

接受审计

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审计关系模型的异化形式Ⅰ

被审计人

审计人

利益共同体

请求 合谋

操纵审 计意见

接受

合谋

威 胁

模型外其他因

素 压力

审计委托人

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审计关系模型的异化形式Ⅱ

丧失独立性，被操纵

操纵审计意见

审计人

买方威胁

审计委托人

受托

经营

管理

被审计人

受托

经营

管理

合作谋取私利

利益共同体

模型外其他因素

压力

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新的委托者加入的审计关系模型

所有者

企业管理者

委托

经营

管理

受托

经营

管理

被审计人

审计委托人 ( 新的独立委托

者)

审计人

雇用

或监

督

对其

负责

向其

汇报

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2.Brief history of auditing

• (1)The first recorded auditors were

the spies

of King Darius of ancient Persia

(522-486 B.C)

（古 波斯大流士）• 中国 . 周西 (1100-771B.C). 宰夫

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(2) AUDIT ,Auditor

• Auditors acted as “the King's ears”• The word AUDITOR comes from the Latin

word “AUDIT:to hear”

•Listened to the oral reports 听审

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(3)Modern auditing

• 1844, British Parliament passed

the Joint Stock Companies Act,

• which for the first time required that corpor

ate report to shareholders via an audited financial statement

--------the balance sheet.

• No independent auditor

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(4)An independent auditor

• 1900, Companies Act

• required an independent auditor

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(5)The first public accounts' organization

• 1854

• Society of Accountants in Edinburgh

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(6)Audited income statements

• A.Stock market crash in 1929,

• Great Depression in 1930.

• Misleading financial reporting

• B.1933, the U.S. Securities Acts

• 1934, Securities and Exchange Commission C.Audited income statements, balance sheets

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(7)GAAS

• A.1941,Mckesson and Robbin`s fraud case• 为取得贷款，伪造存货 $1000 万，应收帐

款 $ 900 万。• Price Waterhouse 予以证实。• 贷款方朱利安•汤普逊公司投诉，法院确

认为公司欺诈行为。• 会计公司不负法律责任，但仍退回 $40 万

审计费。

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(7)GAAS

• B.SEC recommended references to “generally accepted audit standards ” (GAAS) in the auditor`s report

• C.1948, American Institute of Certified Public Accountants(AICPA)

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(8) 中国1982 年 , 《中华人民共和国宪法》1983 年 9 月 15 日 , 国家审计署正式成立 .1980 年 12 月 23, 财政部《关于成立会计顾问处的暂

行规定》1986 年 , 《中华人民共和国注册会计师条例》1995 年，第一批独立审计准则， 1-7 号1996 年，第二批独立审计准则， 8-15 号1999 年，第三批独立审计准则， 16-24 号2001 、 2002 年， 25 ， 26-27 号

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3.Definitions of Auditing

3.1Report of Committee on Basic Auditing Concepts

• 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 the assertions and established criteria and communicating the results to interested users.

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Assertions

P8 E1-1

F. S

cpa

Obtains and EvaluatesEvidence

GAAS

GAAP

Audit report

Othercommunications

Ascertains degree of

correspondence

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Management assertions

• 5 very general assertions• existence or occurrence

• completeness• rights and obligations

• valuation or allocations• presentation and disclosure

• P119, exhibit 4-3 • Compliance assertion

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定义要点• （ 1 ） a systematic process

• （ 2 ） objectively

• （ 3 ） obtaining and evaluating evidence

• （ 4 ） assertions about economic actions and events

• （ 5 ） ascertain the degree of correspondence

• （ 6 ） communicating the results.

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定义（ 1 ）• 审计是客观地收集和评价

关于经济活动和事项认定的证据，以确认认定与既定标准的符合程度，并将结果传递给有利益关系的使用者的系统化过程。

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定义（ 2 ）• 审计是为了确认认定与既

定标准的符合程度并将结果传递给有利益关系的使用者，而客观地收集和评价关于经济活动和事项申明的证据的系统化过程。

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1989 年我国审计基本理论研讨会的审计定义

• 审计是由专职机构和人员，依法对被审单位的财政、财务收支及其有关经济活动的真实性、合法性和效益性进行审查，评价经济责任，以维护财经法纪，改善经营管理，提高经济效益，促进宏观调控的独立性经济监督活动 。

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1995 年全国审计定义研讨会的简明审计定义

• 审计是独立检查会计账目，监督财政、财务收支真实、合法、效益的行为。

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3.2 Audit objective and the auditor`report

The objective of financial statements is to express an opinion whether the financial statements present fairly, in all material

respects, the financial position, results of operations and changes in financial position in

accordance with generally accepted accounting principles, or in special

circumstance another appropriate disclosed basis of accounting.

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AUDITOR’S REPORT

I have audited the balance sheet of _____ as at _____, 20__, and the statements of income, retained earnings and cash flow for the year then ended. These financial statements are the responsibility of the company’s management. My responsibility is to express an opinion on the financial statements based on my audit.

I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In my opinion, these financial statements present fairly in all material respects the financial position of the company as at _____, 20__, and the results of its operations and the cash flows for the year then ended in accordance with generally accepted accounting principles.

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3.3 “risk reduction” definition

• (1)business risk

• (2)information risk: false and misleading

• (3)Auditor perform the assurance function and reduce the information risk.

• Information hypothesis

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Monitoring hypothesisAppendix 1B

(1)Agency theory predicts that utility-maximizing agents, if unchecked, will consume more resources than optimal.

(2)COST

(3)Owners Pay managers more with monitoring

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Insurance hypothesis

• Business failure

• INSURANCE

• On the basis of audited financial statements

• Losses

• Recourse against the auditor.

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4. Other kinds of audits and auditors

• Independent auditor

• external auditor

• chartered accountant(CA)

• certified general accountant (CGA)

• public accountant(PA)

• financial auditing

• operational auditing

• management auditing

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Other kinds of audits and auditors

• Performance auditing

• compliance auditing

• 3E and 4E auditing

• value-for-money auditing

• comprehensive auditing

• internal auditing

• governmental auditing

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分类标准与类别(1) public accounting firms

• public accountant(PA)

• chartered accountant(CA)

• certified general accountant (CGA)

• certified public accountant(CPA)

• Independent auditor

• external auditor

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(2) 隶属关系• Internal auditing

• external auditing

• A. Governmental auditing

• B. public accountant(PA)

• (1) chartered accountant(CA)

• (2) certified General accountant (CGA)

• (3) certified public accountant(CPA)

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(3) 审计对象• (1)Financial auditing• Financial statements auditing • (2) operational auditing• management auditing• (performance auditing)•

• (3)comprehensive auditing

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operational auditingalso known as performance auditing and

management auditing

• Study of business operations for the purpose of making recommendations about the economic and efficient use of resources, effective achievement of business objectives, and compliance with company policies.

• the goal is to help managers discharge their management responsibilities and improve profitability.

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(4) 审计目标• （ 1 ） compliance auditing

• （ 2 ） Performance auditing

• value-for-money auditing

• 3E and 4E auditing

• Economy

• Efficiency

• Effectiveness

• Equality

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(5) 审计范围

• comprehensive auditing• single auditing

• A• B• C

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(6) 效益审计形式• Performance auditing (governmental)

• value-for-money auditing

• 3E and 4E auditing( Economy,Efficiency, Effectiveness, Equality)

• management auditing (internal)

• operational auditing

• management consulting (firms)

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（ 7 ） Independent auditor

• Auditing

• Attest

• Taxation

• Consulting

(accounting, management)

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（ 8 ） Internal auditing

• Financial auditing

• operational auditing

• management auditing

• Performance auditing

• control system

• 3E or 4E(Economy,Efficiency, Effectiveness, Equality)

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Organizational arrangement(IA)

• NO OTHER RESPONSIBILITIES THAN TO AUDIT

• Report to a very high level in the organization, such as a financial vice

president and audit committee of the board of directors

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9 、 Governmental auditing

• Office of the Auditor General of CANADA (OAG)

• Accounting, auditing and investigating

• 3E and 4E auditing( Economy,Efficiency, Effectiveness, Equality)

• Value-for- money auditing

• comprehensive auditing

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Parliament

• 审计长公署是众议院系列机构• 审计长直接向议会负责

• 不受行政干预，独立行使职权• 立法型

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补充：政府审计组织体系• （ 1 ）立法型• 属于立法机构，如美、英、加、西、奥• （ 2 ）司法型• 属于司法体系，如法、意、希、巴西• （ 3 ）行政型，如中国、泰国• （ 4 ）独立型，如日、德、印度

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10 、 Public accounting• (1) The accounting profession

• Canadian Institute of Chartered Accountants (CICA)

• Certified General Accountants’ Association of CANADA (CGAAC)

• Society of Management Accountants of CANADA

• (SMAC)

• Institute of Internal Auditors

• (IIA)

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CGA

• Auditing and public accounting services

• for even the largest companies.

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Public Accounting firms

• Organization, P15

• Services

• Assurance

• Taxation

• Consulting

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自学• Appendix 1A

• Overview of U.S. And international Auditing

• Appendix 1B

• Alternative Theories of the Role of Auditing in Society

• Appendix 1C

• How to become A PA

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Homework(1)

• (1)P4, 1.2,

• P10,1.7/1.8

• (2)P13,1.10/1.11/1.12/1.13

• (3)P19-20,1.17-25

• (4)P21,1.26-27,30

• 1.32-33-34

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GOODBYE