arens chapter 1
TRANSCRIPT
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 1
The Demand for Auditand Assurance Services
Chapter 1
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 2
Learning Objective 1
Describe assurance services
and distinguish audit services
from other assurance and
nonassurance services
provided by CPAs.
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 3
Assurance Services
Assurance services are professionalservices that improve the quality of
information for decision makers.
Assurance services can beperformed by CPAs or by
a variety of other professionals.
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Attestation Services
An attestation service is a type of assuranceservice in which the CPA firm issues a
report about the reliability of an assertionthat is the responsibility of another party.
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Other Assurance Services
Most other assurance services do not meet theformal definition of attestation services.
The CPA must be independent.
The CPA is not required to provide a written report.
The CPA must provide assurance.
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Other Assurance Services
The Elliott Committee was charged withresearching and developing new assuranceservices opportunities for CPAs to provideto business and individual clients who need
relevant and reliable information forcritical decision making.
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Assurance Services on Information Technology
There is an increased demand for assuranceabout computer controls surroundinginformation transacted electronicallyand 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 Technology
WebTrust is an attestation service, and theWebTrust seal is a symbolic representation
of the CPA’s report on management’sassertions about its disclosure ofelectronic commerce practices.
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Assurance Services on Information Technology
SysTrust is an attest-type engagement to evaluate and test system reliability inareas such as security and data integrity.
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Other AssuranceServices Examples
Controls over and risks related to investments,including policies related to derivatives…
assessing the processes in a company’sinvestment practices to identify risks and to
determine the effectiveness of those processes.
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Other AssuranceServices Examples
Mystery shopping…
performing anonymous shopping toassess sales personnel dealings with
customers and procedures they follow.
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Other AssuranceServices Examples
Assess risks of accumulation, distribution,and storage of digital information…
assessing security risks and relatedcontrols over data and other information
stored electronically, including theadequacy of backup and off-site storage.
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Other AssuranceServices Examples
Fraud and illegal acts risk assessment…
developing fraud risk profiles and assessing theadequacy of company systems and policies inpreventing and detecting fraud and illegal acts.
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Assurance, Attestation, and Nonassurance Services
ASSURANCE SERVICES
Other Attestation Services(e.g., WebTrust, SysTrust)
Other Assurance Services(e.g., CPA Performance View)
CertainManagementConsulting
ATTESTATION SERVICES
Audits Reviews
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Assurance, Attestation, and Nonassurance Services
NONASSURANCE SERVICES
Other ManagementConsulting
TaxServices
CertainManagementConsulting
Accounting andBookkeeping
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Learning Objective 2
Explain the importance
of auditing in reducing
information risk.
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Economic Demandfor Auditing
Information risk reflects the possibility thatthe information upon which the businessrisk decision was made was inaccurate.
Auditing can have a significant effecton information risk.
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Learning Objective 3
List the causes of information
risk, and explain how this
risk may be reduced.
List the causes of information
risk, and explain how this
risk may be reduced.
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Causes of Information Risk
1. Remoteness of information
2. Biases and motives of the provider
3. Voluminous data
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Reducing Information Risk
1. User verifies information
2. User shares information risk with management
3. Audited financial statements are provided
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Capital Costs to Shrink Elliott’s Example
Assuming a cost of capital of 13%, Elliottestimates 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)
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Capital Costs to Shrink Elliott’s Example
Elliott believes the following factors willdrastically reduce information risk:
Advanced technology
New accounting and auditing standards
Auditors finding more efficient ways to audit
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Learning Objective 4
Describe auditing.Describe auditing.
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Nature of Auditing
Auditing is the accumulation andevaluation of evidence aboutinformation to determine and
report on the degree ofcorrespondence between the
information and established criteria.
Auditing should be done by a competent, independent person.
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Accumulating andEvaluating Evidence
Evidence is any information used by the auditorto determine whether the information being
audited is stated in accordance with theestablished criteria.
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Competent, Independent Person
The auditor must be qualified to understand thecriteria used and must be competent to know
the types and amount of evidence to accumulateto 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.
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Reporting
The final stage in the auditing processis preparing the Audit Report, which
is the communication of theauditor’s findings to users.
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Audit of a Tax ReturnExample
Internalrevenue
agent
Examines cancelledchecks and other
supporting records
Federal taxreturns filedby taxpayer
Internal RevenueCode and all
interpretations
Report on taxdeficiencies
Competent,independent
person
Information
Established criteria
Determinescorrespondence
Accumulates andevaluates evidence
Report on results
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Learning Objective 5
Distinguish between
auditing and accounting.
Distinguish between
auditing and accounting.
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Distinction BetweenAuditing and Accounting
Accounting is the recording, classifying,and summarizing of economic eventsfor the purpose of providing financialinformation used in decision making.
Auditing is determining whetherrecorded information properly
reflects the economic events thatoccurred during the accounting period.
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Learning Objective 6
Differentiate the three
main types of audits.
Differentiate the three
main types of audits.
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Types of Audits
Financial Statement Audit
Operational Audit
Efficiency Effectiveness
Compliance Audit
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Financial Statement Audit
Example
Information
EstablishedCriteria
AvailableEvidence
Annual audit of Boeing’sfinancial statements
Boeing's financialstatements
Generally accepted accountingprinciples
Documents, records, and outsidesources of evidence
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Operational Audit
Example
Information
EstablishedCriteria
AvailableEvidence
Evaluate computerized payroll systemfor efficiency and effectiveness
Number of records processed, cost ofthe department, and number of errors
Company standards for efficiency andeffectiveness in payroll department
Error reports, payroll records, andpayroll processing costs
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Compliance Audit
Example
Information
EstablishedCriteria
AvailableEvidence
Determine whether bank requirementsfor loan continuation have been met
Company records
Loan agreement provisions
Financial statements andcalculations by the auditor
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Learning Objective 7
Explain the strategic systems
approach to auditing.
Explain the strategic systems
approach to auditing.
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Strategic Systems Audit
The auditor must have a thorough understandingof the entity and its environment.
Client’s industry
Regulations
Operations
Relationships
Business strategies
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Learning Objective 8
Identify the primary
types of auditors.
Identify the primary
types of auditors.
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Types of Auditors
Internal Auditors
Certified Public Accounting Firms
Internal Revenue Agents
General Accounting Office Auditors
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Learning Objective 9
Describe the requirements
for becoming a CPA.
Describe the requirements
for becoming a CPA.
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Three Requirements for Becoming a CPA
Educational Requirement
Uniform CPA Examination Requirement
Experience Requirement
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CPA Examination Sections
Audit and Attestation
Accounting and Reporting
Regulations
Business Environments and Concepts
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Learning Objective 10
Describe the impact of
e-commerce on CPAs.
Describe the impact of
e-commerce on CPAs.
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Impact of E-commerce
CPAs need to understand how keytechnologies are transforming all
aspects of business.
Information Technology
Hardware
Software Communications
Internet
©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1 - 45
End of Chapter 1