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The Demand for Audit

and Assurance Services

The Demand for Audit and Assurance Services Chapter 1 ©2003 Prentice Hall Business Publishing, Auditing and

Chapter 1

Learning Objective 1
Learning Objective 1

Describe assurance services and distinguish audit services from other assurance and nonassurance services provided by CPAs.

Assurance Services
Assurance Services

Assurance services are professional

services that improve the quality of

information for decision makers.

Assurance services can be

performed by CPAs or by

a variety of other professionals.

Attestation Services
Attestation Services
An attestation service is a type of assurance service in which the CPA firm issues
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.
Other Assurance Services
Other Assurance Services

Most other assurance services do not meet the

formal definition of attestation services.

The CPA must be independent.

The CPA must provide assurance.

The CPA is not required to provide a written report.

Other Assurance Services
Other Assurance Services
The Elliott Committee was charged with researching and developing new assurance services opportunities for CPAs
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.

Assurance Services on Information Technology

Assurance Services on Information Technology There is an increased demand for assurance about computer controls

There 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

Assurance Services on Information Technology

Assurance Services on Information Technology WebTrust is an attestation service, and the WebTrust seal is a

WebTrust is an attestation service, and the

WebTrust seal is a symbolic representation

of the CPA’s report on management’s

assertions about its disclosure of

electronic commerce practices.

about its disclosure of electronic commerce practices. ©2003 Prentice Hall Business Publishing, Auditing and

Assurance Services on Information Technology

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

Other Assurance Services Examples

Other Assurance Services Examples Controls over and risks related to investments, including policies related to

Controls over and risks related to investments,

including policies related to derivatives…

investments, including policies related to derivatives… assessing the processes in a company’s investment

assessing the processes in a company’s

investment practices to identify risks and to

determine the effectiveness of those processes.

Other Assurance Services Examples

Other Assurance Services Examples Mystery shopping… performing anonymous shopping to assess sales personnel dealings

Mystery shopping…

Other Assurance Services Examples Mystery shopping… performing anonymous shopping to assess sales personnel dealings

performing anonymous shopping to

assess sales personnel dealings with

customers and procedures they follow.

Other Assurance Services Examples

Other Assurance Services Examples Assess risks of accumulation, distribution, and storage of digital information…

Assess risks of accumulation, distribution,

and storage of digital information…

distribution, and storage of digital information… assessing security risks and related controls over data

assessing security risks and related

controls over data and other information

stored electronically, including the

adequacy of backup and off-site storage.

Other Assurance Services Examples

Other Assurance Services Examples Fraud and illegal acts risk assessment… developing fraud risk profiles and assessing

Fraud and illegal acts risk assessment…

Services Examples Fraud and illegal acts risk assessment… developing fraud risk profiles and assessing the adequacy

developing fraud risk profiles and assessing the

adequacy of company systems and policies in

preventing and detecting fraud and illegal acts.

Assurance, Attestation, and Nonassurance Services

ASSURANCE SERVICES
ASSURANCE SERVICES

ATTESTATION SERVICES

Audits

Reviews

Other Attestation Services (e.g., WebTrust, SysTrust)

Certain

Management

Consulting

Other Assurance Services

(e.g., CPA Performance View)

Assurance, Attestation, and Nonassurance Services

Assurance, Attestation, and Nonassurance Services NONASSURANCE SERVICES Certain Management Consulting Other Management

NONASSURANCE SERVICES

Certain

Management

Consulting

Other Management

Consulting

Accounting and Bookkeeping

Tax

Services

Learning Objective 2
Learning Objective 2

Explain the importance of auditing in reducing

information risk.

Economic Demand for Auditing

Economic Demand for Auditing Information risk reflects the possibility that the information upon which the business

Information risk reflects the possibility that

the information upon which the business

risk decision was made was inaccurate.

Auditing can have a significant effect

on information risk.

Learning Objective 3
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.
Causes of Information Risk
Causes of Information Risk
1. Remoteness of information
1. Remoteness of information
2. Biases and motives of the provider
2. Biases and motives of the provider
3. Voluminous data
3. Voluminous data
Reducing Information Risk
Reducing Information Risk
1. User verifies information
1. User verifies information
2. User shares information risk with management
2. User shares information risk with management
3. Audited financial statements are provided
3. Audited financial statements are provided

Capital Costs to Shrink Elliott’s Example

Capital Costs to Shrink Elliott’s Example Assuming a cost of capital of 13%, Elliott estimates this

Assuming 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)

Capital Costs to Shrink Elliott’s Example

Capital Costs to Shrink Elliott’s Example Elliott believes the following factors will drastically reduce

Elliott believes the following factors will

drastically reduce information risk:

Advanced technology

New accounting and auditing standards

Auditors finding more efficient ways to audit

Learning Objective 4
Learning Objective 4
Describe auditing.
Describe auditing.
Nature of Auditing
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.

Accumulating and Evaluating Evidence

Accumulating and Evaluating Evidence Evidence is any information used by the auditor to determine whether the

Evidence is any information used by the auditor

to determine whether the information being

audited is stated in accordance with the

established criteria.

Competent, Independent Person

Competent, Independent Person The auditor must be qualified to understand the criteria used and must be

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 competence of the individual performing the

audit is of little value if he or she is biased in the

accumulation and evaluation of evidence.

Reporting
Reporting
The final stage in the auditing process is preparing the Audit Report, which is the
The final stage in the auditing process
is preparing the Audit Report, which
is the communication of the
auditor’s findings to users.

Audit of a Tax Return Example

Information
Information

Competent,

independent

person

Federal tax

returns filed

by taxpayer

independent person Federal tax returns filed by taxpayer Internal revenue agent Determines correspondence
Internal revenue agent
Internal
revenue
agent

Determines

correspondence

Accumulates and evaluates evidence

Established criteria

Examines cancelled checks and other supporting records

Report on results

Report on tax deficiencies

records Report on results Report on tax deficiencies Internal Revenue Code and all interpretations ©2003

Internal Revenue Code and all interpretations

deficiencies Internal Revenue Code and all interpretations ©2003 Prentice Hall Business Publishing, Auditing and
Learning Objective 5
Learning Objective 5
Distinguish between auditing and accounting.
Distinguish between
auditing and accounting.

Distinction Between Auditing and Accounting

Distinction Between Auditing and Accounting Accounting is the recording, classifying, and summarizing of economic

Accounting 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.

Learning Objective 6
Learning Objective 6
Differentiate the three main types of audits.
Differentiate the three
main types of audits.
Types of Audits
Types of Audits

Financial Statement Audit

Operational Audit Efficiency Effectiveness
Operational Audit
Efficiency
Effectiveness

Compliance Audit

Financial Statement Audit
Financial Statement Audit
Example Information Established Criteria Available Evidence Annual audit of Boeing’s financial statements Boeing's

Example

Information

Information

Established

Criteria

Available

Evidence

Annual audit of Boeing’s

financial statements

Boeing's financial

statements

Generally accepted accounting

principles

Documents, records, and outside

sources of evidence

Operational Audit
Operational Audit
Example Information Established Criteria Available Evidence Evaluate computerized payroll system for efficiency and

Example

Information

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 costs

Compliance Audit
Compliance Audit

Determine whether bank requirements

for loan continuation have been met

Example

Information

Company records

Established

Criteria

Loan agreement provisions

Available

Evidence

Financial statements and

calculations by the auditor

Learning Objective 7
Learning Objective 7
Explain the strategic systems approach to auditing.
Explain the strategic systems
approach to auditing.
Strategic Systems Audit
Strategic Systems Audit

The auditor must have a thorough understanding

of the entity and its environment.

Client’s industry

Regulations

Operations

Relationships

Business strategies

Learning Objective 8
Learning Objective 8
Identify the primary types of auditors.
Identify the primary
types of auditors.
Types of Auditors Certified Public Accounting Firms
Types of Auditors
Certified Public Accounting Firms
General Accounting Office Auditors
General Accounting Office Auditors
Internal Revenue Agents
Internal Revenue Agents
Internal Auditors
Internal Auditors
Learning Objective 9
Learning Objective 9
Describe the requirements for becoming a CPA.
Describe the requirements
for becoming a CPA.

Three Requirements for Becoming a CPA

Three Requirements for Becoming a CPA Educational Requirement Uniform CPA Examination Requirement Experience Requirement
Educational Requirement
Educational Requirement
Uniform CPA Examination Requirement
Uniform CPA Examination Requirement
Experience Requirement
Experience Requirement
CPA Examination Sections Audit and Attestation
CPA Examination Sections
Audit and Attestation
Accounting and Reporting
Accounting and Reporting
Regulations
Regulations
Business Environments and Concepts
Business Environments and Concepts
Learning Objective 10
Learning Objective 10
Describe the impact of e-commerce on CPAs.
Describe the impact of
e-commerce on CPAs.
Impact of E-commerce
Impact of E-commerce

CPAs need to understand how key

technologies are transforming all

aspects of business.

Information Technology Hardware Internet Software Communications
Information Technology
Hardware
Internet
Software
Communications

End of Chapter 1

End of Chapter 1 ©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 1