Chapter 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
1
Chapter 1
An Introduction to Auditing
Prepared by Richard J. Campbell
2
Learning Objectives
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.
3
Important Basics of Auditing
Financial statement audit
Audit of ICFR
Integrated audit
What it means when an auditor issues
an “unqualified” or “clean” audit
report on ICFR and the financial
statements
4
An Integrated Audit
Exhibit 1-1 5
A Definition of Auditing
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)
6
Difference in Accountants and Auditors
To be an accountant, it is necessary to have
accounting knowledge.
Understand business transactions
Know what information to capture
Know controls needed for activity and
information
Be able to report it for various purposes
Be able to record it according to accounting
standards
To be an auditor, it is also it is necessary to know
audit processes and audit reporting
7
Roles of Auditors and Management
By giving an opinion on financial statement fairness and
ICFR effectiveness the auditor is indirectly reporting on
management’s assertions.
8
The Auditing Process
Management produces financial statements and ICFR
report
Auditor gathers and evaluates evidence
Many forms of evidence; anything the auditor uses
Auditor uses established standards to compare
evidence to the financial statements and ICFR report
Looks for correspondence between what is presented
and the underlying evidence
Uses processes described/required in auditing
standards.
Auditor issues report
9
Beneficiaries of Audits
Exhibit 1-3 10
Value of an Audit
To society: capital markets benefit
To owners and prospective owners: remote ownership, complex
transactions, investment decisions
To corporate governance, the Board of Directors and audit
committee: representing shareholders’ interests
To management
running the company with good information
cost of and access to capital
operating efficiency and effectiveness
credibility of performance indicators
properly accounting for complex transactions
11
Value of an Audit
Constituents: society, owners and prospective
owners, corporate governance, management
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.
12
Standard Setters, Governing Authorities
Standard setters and governing authorities involved with U.S.
audits
Congress
States
Securities and Exchange Commissions (SEC)
Public Companies Accounting Oversight Board (PCAOB)
American Institute of CPAs (AICPA)
FASB/GASB
International Accounting Standards Board (IASB)
International Auditing and Assurance Board (IAASB)
13
Sarbanes Oxley Act of 2002
SOX required:
The SEC to set up an auditing governance
organization (PCAOB)
Management of public companies to provide an
audited ICFR report
An ICFR audit of public companies
Dodd-Frank (2010) permanently exempts “non-
accelerated” filers from an ICFR audit
Financial statement and ICFR audits to be one
engagement
14
PCAOB Responsibility and Authority
Registration of firms
The SEC will not accept a company’s filings unless
they have been audited by a registered firm
Lots of information required in registration process
Firm must agree to assist in any investigations
Inspections
Required by SOX
SOX required the SEC to have the PCAOB perform
inspections
Sets auditing standards and other rules
15
PCAOB Auditing Standards
AS 1: References in Auditors’ Reports to the
Standards of the Public Company Accounting
Oversight Board
AS 2: An Audit of Internal Control Over Financial
Reporting Performed in Conjunction With an Audit of
Financial Statements (superseded)
AS 3: Audit Documentation
AS 4: Reporting on Whether a Previously Reported
Material Weakness Continues to Exist
16
PCAOB Auditing Standards continued
AS 5: An Audit of Internal Control Over Financial
Reporting That is Integrated with an Audit of Financial
Statements
AS 6: Evaluating Consistency of Financial Statements
AS 7: Engagement Quality Review
17
Newest, PCAOB Risk Assessment Standards
AS No. 8, Audit Risk
AS No. 9, Audit Planning
AS No. 10, Supervision of the Audit Engagement
AS No. 11, Consideration of Materiality in Planning and
Performing an Audit
AS No. 12, Identifying and Assessing Risks of Material
Misstatement
AS No. 13, The Auditor’s Responses to the Risks of Material
Misstatements
AS No. 14, Evaluating Audit Results
AS No. 15, Audit Evidence
18
AICPA
Voluntary membership
Non-public company audit standards
Standards for many other types of
engagements
Code of conduct, applies to members
Writes CPA and grades exam
19
State Governments
License to practice
Requirements to sit for CPA exam
Requirements to be licensed
Continuing education requirements
Conduct requirements
Regulations on doing business
20
Other AICPA Standards
Code of Professional Conduct
Statements on Standards for Attestation Engagements
(SSAE)
Statements on Standards for Accounting and Review
Services (SSAR)
Statements on Quality Control Standards
Statements on Standards for Tax Services (SSTS)
Statements on Standards for Valuation Services (SSV)
Statements on Standards for Consulting Services
(SSCS)
21
IAASB
International code of conduct is
covered on the CPA Exam
AICPA audit standards (SAS) and
IAASB audit standards (ISA) are
being aligned through the AICPA’s
“Clarification Project”
22
Other Audit Related Services
Internal Auditing
Operational Auditing
Forensic Accounting
General Accountability Office
23
Value of Audit Knowledge for Non-Auditors
In other words, why is this course required
at most universities for all accounting
majors?
Understand purpose of auditor’s activities
Increase efficiency of interface with auditor
Enhanced communication
Implementation of ICFR
24
Appendix A- Working in a CPA Firm
Types of Audit Services:
Integrated audits for larger public companies
Financial statement audits for non-
accelerated filer public and non-public
companies
Reviews of interim financial statements for
public companies
Reviews and compilations for non-public
companies
25
Other Types of CPA-Provided Services
Attest engagements
Assurance engagements
Tax engagements
Accounting and bookkeeping
Business advising/management
consulting
26
CPA Services, “Assurance” and “Nonassurance”
Exhibit A-1 – CPA Services
27
Common Firm Structures
Sole proprietorship
Professional corporation
General partnership
Limited liability company
Limited liability partnership
28
Firm Sizes
Big Four
International networks; national
Regional; large local
Small local
29
Common Auditor Position Titles
Partner/Owner
Manager
In Charge Accountant
Staff Accountant
30
Copyright
“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.”
31
