審計Chapter01

OrganizationPart1 The auditing profession (ch1-5) Part II The audit process (ch6-13) Part 3 Application of the audit process to the sales and collection cycle (ch14-17) Part 4 Application of the audit process to other cycles (ch 18-23) Part 5 Completing the audit (ch24) Part 6 Other assurance and Non-assurance services (ch 25-26)2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1-1

Chapter 1

The Demand for Audit and Other Assurance Services

2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley

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Sarbanes-Oxley ActIn the aftermath of WorldCom and other major

financial reporting frauds, In July 2002, Congress passed the Sarbanes-Oxley Act. The provision of ;the Act apply to publicly held companies and their audit firms. A key provision of the Sarbanes-Oxley Act is the creation of the Public Company Accounting Oversight Board (PCAOB) to provide oversight for auditors of public companies.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1-3

Sarbanes-Oxley Act

Perhaps the most significant provision of the Act is the requirement in Section 404 that management assess and report on the effectiveness of internal control over financial reporting. The companys auditor must also report on the effectiveness of the companys internal companys financial statements, in addition to reporting on the results of their audit of the companys financial statement.1-4


Learning Objective 1

Describe auditing.


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Nature of Auditing

Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. , Auditing should be done by a competent, independent person. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1-6

Information and Established CriteriaTo do an audit, there must be information in a verifiable form and some standards (criteria) by which the auditor can evaluate the information.


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Accumulating and Evaluating EvidenceEvidence is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria.


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Accumulating and Evaluating EvidenceEvidence is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria. ----Evidence takes many different forms, including oral testimony of the auditee (client), written communication with outsiders, observations by the auditor, and electronic data about transactions.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1-9

Accumulating and Evaluating Evidence----It is important to obtain a sufficient quality and volume of evidence to satisfy the purpose of the audit. ----Determining the types and amount of evidence necessary and evaluating whether the information corresponds to the established criteria is a critical part of every audit.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 10

Competent, Independent PersonThe auditor must be qualified to understand the criteria used and must be competent to know the types and amount of evidence to accumulate to reach the proper conclusion after the evidence has been examined. The competence of the individual performing the audit is of little value if he or she is biased in the accumulation and evaluation of evidence.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 11

Competent, Independent Person---The auditor must be qualified to understand the criteria used and must be competent to know the types and amount of evidence to accumulate to reach the proper conclusion after the evidence has been examined. ----The auditor must also have an independent mental attitude.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 12

Competent, Independent Person---The competence of the individual performing the audit is of little value if he or she is biased in the accumulation and evaluation of evidence. ---Although absolute independence is impossible, auditor strive to maintain a high level of independence to keep to donfidence of users relying on their reports. ---Auditors reporting on company financial statements are often called independent auditors.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 13

Reporting

The final stage in the auditing process is preparing the Audit Report,( ) which is the communication of the auditors findings to users.( )


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Audit of a Tax Return Example Information Competent, independent personInternal revenue Agent

Federal tax returns filed by taxpayer( )

Report on results Determines correspondence Established criteria Internal Revenue Code and all interpretations1 - 15

Accumulates and evaluates evidence Examines cancelled checks and other supporting records

Report on tax Deficiencies



Distinguish between auditing and accounting. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 16

Distinguish Between Auditing and AccountingAccounting is the recording, classifying, and

summarizing of economic events for the purpose of providing financial information used in decision making. Auditing is determining whether recorded information properly reflects the economic events that occurred during the accounting period.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 17


Explain the importance of auditing in reducing information risk. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 18

Economic demand for auditingIf the bank makes the loan, it will charge a rate of interest determined primarily by three factors: Risk-free interest rate Business risk for the customer information risk.


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Economic Demand for Auditing Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. Auditing has no effect on either the risk-free interest rate or business risk, Auditing can have a significant effecton information risk. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 20


List the causes of information risk, and explain how this risk may be reduced. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 21

Causes of Information RiskRemoteness of information Biases and motives of the provider

Voluminous data Complex exchange transactions 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 22

Remoteness of InformationIt is impossible for a decision maker to have much firsthand knowledge about the 0organization with which he or she does business. when information is obtained from others, the likelihood of it being intentionally or unintentionally misstated increases.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 23

Biases and Motives of the Providerif information is provided by someone

whose goals are inconsistent with those of the decision maker, the information may be biased in favor of the provider.


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Voluminous Data

As organizations become larger, so

does the volume of their exchange transactions.


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Complex exchange transactions

exchange transactions between

organizations have become increasingly complex and therefore more difficult to record properly.


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Reducing Information RiskUser verifies information. User shares information risk with management. Audited financial statements are provided. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 27

Capital Costs to Shrink Elliotts ExampleAssuming a cost of capital of 13%, Elliott estimates this rate is composed of the following: 5.5% risk-free interest rate 3.5% economic risk premium (business risk) 4.0% information cost (information risk)2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 28

Learning Objective 5Describe assurance services and distinguish audit services from other assurance and non-assurance services provided by CPAs. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 29

Assurance Services Assurance services are professional services that improve the quality of information for decision makers. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 30

Assurance services can be performed by CPAs or by a variety of other professionals.

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Individuals who are responsible for making business decisions seek assurance services to help improve the reliability and relevance of the information used as the basis for their decisions.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 32

Assurance services are valued because the assurance provider is independent and perceived as being unbiased with respect to the information examined.


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Attestation Services An attestation service is a type of assurance service in which the CPA firm issues a report about the reliability of an assertion that is the responsibility of another party. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 34

An attestation service is a type of assurance service in which the CPA firm issues a written communication that expresses a conclusion about the reliability of a written assertion of another party.


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Attestation ServicesAudit of historical financial statements Review of historical financial statements

Attestation on internal control over financial reporting

Other attestation services 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 36

Audit of historical financial statementsIs a form of attestation service in which the auditor issues a written report expressing an opinion about whether the financial statements are in material conformity with generally accepted accounting principles. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 37

Audit of historical financial statements--the value the auditors assurance because of the auditors independence from the client and knowledge of financial statement reporting matters. --publicly traded companies in the United States are required to have. Audits under the federal securities acts


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Review of historical financial statements--many nonpublic companies want to provide assurance on their financial statements, without incurring the cost of an audit. --An audit provides a high level of assurance, a review service provides a moderate amount of assurance on the financial statement, and less evidence is necessary to support this level of assurance. --another type of attestation service performed by CPAs.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 39

Review of historical financial statementsThis type of review is often adequate to meet users needs and can be provided by the CPA firm at a much lower fee than an audit.


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Review of historical financial statementsA review of historical financial statements is another type of attestation service performed by CPAs.


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Other Assurance Services

The Elliott Committee was charged with researching and developing new assurance services opportunities( ) for CPAs to provide to business and individual clients who need relevant and reliable information for critical decision making.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 42

Assurance Services on Information TechnologyWebTrust is an attestation service, and the WebTrust seal is a symbolic representation of the CPAs report on managements assertions about its disclosure of electronic commerce practices. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 43

Other Assurance Services

For example: banks often require debtors to engage CPAs to provide assurance about the debtors compliance with certain financial covenant provisions stated in the loan agreement.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 44

Assurance Services on Information TechnologyThere is an increased demand for assurance about computer controls surrounding information transacted electronically and the security of the information related to the transactions.

assurance over Web site controls( ) assurance about information system reliability ( )


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Assurance Services on Information TechnologySysTrust is an attest-type engagement to evaluate and test system reliability in areas such as security and data integrity.


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Assurance Services on Other Types of Information


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Nonassurance Services provided by CPAsaccounting and bookkeeping services, tax services, management consulting services.


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Assurance, Attestation, and Nonassurance ServicesASSURANCE SERVICESATTESTATION SERVICES Audits Reviews Certain Management Consulting Other Attestation Services (e.g., WebTrust, SysTrust)

Other Assurance Services (e.g., CPA Performance View)2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 49

Assurance, Attestation, and Nonassurance ServicesNONASSURANCE SERVICES Other Management Consulting Certain Management Consulting Accounting and Bookkeeping

Tax Services 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 50

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Differentiate the three main types of audits. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 55

Types of Audits


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1. : 2. : , 3. : -the first two services are often called audit activities, even though they are most similar to assurance and attestation services.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 57

--Normally, the criteria are generally accepted

accounting principles (GAAP), although it is also common to conduct audits of financial statements prepared using the cash basis or some other basis of accounting appropriate for the organization. --The financial statements most often included are the statement of financial position, income statement, and statement of cash flows including accompanying footnotes.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 58

--In determining whether financial statements are fairly stated in accordance with GAAP, the auditor performs appropriate tests to determine whether the statements contain material errors or other misstatements.


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--at the completion of an operational audit, management normally expects recommendations for improving operations. --In operational auditing, the reviews are not limited to accounting. They can include the evaluation of organization structure, computer operations, production methods, marketing and any other area in which the auditor is qualified.2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 60

to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority.


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Operational Audit Example Information Established Criteria Available Evidence Evaluate computerized payroll system for efficiency and effectiveness Number of records processed, cost of the department, and number of errors Company standards for efficiency and effectiveness in payroll department Error reports, payroll records, and payroll processing costs1 - 62


Compliance AuditExample Information Established Criteria Available Evidence Determine whether bank requirements for loan continuation have been met Company records Loan agreement provisions Financial statements and calculations by the auditor1 - 63


Financial Statement AuditExample Information Established Criteria Available Evidence Annual audit of Boeings financial statements Boeing's financial statements Generally accepted accounting principles Documents, records, and outside sources of evidence1 - 64



Identify the primary types of auditors. 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 65

Types of AuditorsCertified public accounting firms General accounting office auditors Internal revenue agents

Internal auditors 2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 66


Describe the requirements for becoming a CPA.


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Three Requirements for Becoming a CPAEducational requirement Uniform CPA examination requirement Experience requirement2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 68

CPA Examination SectionsAuditing and attestation Financial accounting and reporting Regulation Business environments and concepts2005 Prentice Hall Business Publishing, Auditing and Assurance Services 10/e, Arens/Elder/Beasley 1 - 69

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