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Lesson 1
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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 standardsetting bodies and other entities that affect auditing. 5. Understand the link between independent auditors and accountants who provide other professional services.

An Introduction to Auditing

Prepared by Richard J. Campbell

Important Basics of Auditing

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An Integrated Audit
Exhibit 1-1

Financial statement audit Integrated audit What it means when an auditor issues an unqualified or clean audit report on the financial statements

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PSA 200 Definition of Auditing

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AAA 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)

To enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework

Illustrative definition of auditing

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Independent auditor

1. Auditing is a systematic process 2. An audit involves obtaining and evaluating evidence about assertions regarding economic actions & events 3. An audit is conducted objectively 4. Auditors ascertain the degree of correspondence between assertions & established criteria 5. Auditors communicate the audit results to various interested parties

Follows systematic process

Objective obtains & evaluates evidence

Establish degree of correspondence between assertions and established criteria

Communicates results to interested users

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Difference in Accountants and Auditors

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Roles of Auditors and Management

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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

Management
Authors financial statements

Auditor
Authors audit report

Assertions: financial statements are fair

Opinions: financial statements are fair

By giving an opinion on financial statement fairness, the auditor is indirectly reporting on managements assertions.

The Auditing Process

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Beneficiaries of Audits
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Management produces financial statements Auditor gathers and evaluates evidence Many forms of evidence; anything the auditor uses Auditor uses established standards to compare evidence to the financial statements Looks for correspondence between what is presented and the underlying evidence Uses processes described/required in auditing standards. Auditor issues report

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Value of an Audit
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Value of an Audit
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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

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.

Types of Audit
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Types of auditors
1. External auditor

1. Financial statement audit

conducted by an independent CPA to determine whether FS of an entity are fairly presented in accordance with GAAP Involves a review of an organizations procedures to determine whether it has adhered to specific procedures, rules or regulations A study of a specific unit of an organization for the purpose of measuring its performance. Objective is to assess performance, identify areas for improvements & make recommendations to improve performance

Independent CPAs who offer their professional services to different clients on a contractual basis An entitys own employee who investigate & appraise the effectiveness & efficiency of operations and internal controls Government employees whose main concern is to determine wheter persons or entities comply with government rules & procedures

2. Compliance audit

2. Internal auditor

3. Operational audit

3. Government auditors

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Comparison among different types of audits

Financial audit 17 Compliance audit Operational audit The organizations activities are conducted effectively & efficiently Objectives set by the board of directors Recommendations or suggestions on how to improve operations 18 Financial statements The organization are presented has complied with fairly laws, regulations or contracts Financial reporting standards or other financial reporting framework An opinion about whether the FS are presented fairly in conformity with an identified financial reporting framework External auditors Laws , regulations or contracts

Standard Setters, Governing Authorities

Standard setters and governing authorities International Accounting Standards Board (IASB) International Auditing and Assurance Board (IAASB) Auditing and Assurance Standards Council (AASC) Auditing Standards and Practices Council (ASPC) Board of Accountancy (BOA) Philippine Institute of CPAs (PICPA) Bureau of Internal Revenue (BIR) Securities and Exchange Commissions (SEC)

Degree of compliance with applicable laws, regulations or contracts

Government auditors

Internal auditors

The Accounting Professions Credibility Crisis

2000The Panel on Audit Effectiveness made a variety of suggestions to improve audits. 2001Enron Bankruptcy 2002WorldCom Fraud 2002Sarbanes-Oxley Act

Sarbanes Oxley Act of 2002

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SOX required: The SEC to set up an auditing governance organization Management of public companies to provide an audited report

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Other Audit Related Services

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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 auditors activities Increase efficiency of interface with auditor Enhanced communication

Internal Auditing Operational Auditing Forensic Accounting

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Working in a CPA Firm

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Types of Audit Services: Integrated audits for larger public companies Financial statement audits for nonaccelerated filer public and non-public companies Reviews of interim financial statements for public companies Reviews and compilations for non-public companies

Typical Structure of a CPA Firm

Partners Managers

Seniors

Staff Assistant

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Responsibilities on an Engagement
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Other Types of CPA-Provided Services

Attest engagements Assurance engagements Tax engagements Accounting and bookkeeping Business advising/management

PartnerOverall responsibility is to assure that that audit is performed in accordance with professional standards. ManagerSupervise overall engagement. SeniorsIn charge auditor on a daily basis Staff assistantsWork under the immediate supervision of the senior

consulting

CPA Services, Assurance and Nonassurance

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CPA Services