Transcript Chapter 1

Chapter 2
The Financial
Statement
Auditing
Environment
LO# 1
Types of Auditors
External Auditors
Government
Auditors
Internal Auditors
Forensic Auditors
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LO# 2
Types of Audit, Attest, and
Assurance Services
Audit Services:
Internal Control Audits, Compliance Audits, Operational
Audits, Forensic Audits
Attest Services:
Reporting on nature and quantity of inventory stored in a
client’s warehouse so that the client can obtain a bank loan
Assurance Services:
Auditing is a specialized form of assurance service
Non-assurance Services:
Tax Preparation and Planning Services, Management
Advisory Services, Compilation and Review Services
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LO# 3
Public Accounting Firms
Public accounting firms range in size from a single proprietor
to thousands of owners (or “partners”) and thousands of
professional and administrative staff employees.
Big 4
PwC
EY
Mid-Tier
Regional
Local
Grant Thornton
BDO Seidman
McGladrey LLP
Deloitte
Crowe Horwath
KPMG
MaloneBailey
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LO# 3
Public Accounting Firms in the EU
The Big 4 also dominate Public accounting in the EU.
However, the next largest CPA firms, by audit revenue, vary:
France
Germany
Italy
Fiducial
BDO
Praxity
Praxity
Nexia
Mazars
Mazars
Grant Thornton
BDO
Eurus/BKR
Rodl & Partner
PKF Italy
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LO# 3
Audit Teams
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LO# 4
A Time of Challenge and Change
2001
2007
At the end of booms in 2001 and then
again in 2007, CPA firms were blamed for
their audit clients’ financial reporting
frauds.
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LO# 4
An Explosion of Scandals
WorldCom
Enron
Parmalat
Countrywide
Lehman
Brothers
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LO# 4
Government Regulation
In 2002, Congress passed the
Sarbanes-Oxley, and in 2010, the
Dodd-Frank Act.
The PCAOB is considering mandatory
rotation of the CPA firm that does the audit;
the EU has recently passed rules in this
area as well as is the area of the provision
of non-audit services to audit clients
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LO# 5
Society’s Expectations and the
Auditor’s Responsibilities
The auditor has a responsibility to plan and
perform the audit to obtain reasonable
assurance about whether the financial
statements are free of material
misstatement, whether caused by error or
fraud.
Because of the nature of audit evidence and the
characteristics of fraud, the auditor is able to obtain
reasonable, but not absolute, assurance that material
misstatements are detected.
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LO# 6
Context of Financial Statement
Auditing
The primary context with which an auditor is concerned is the industry or
business of his or her audit client. In other words, the context provided by the
client’s business impacts the auditor and the audit, and is thus a primary
component of the environment in which financial statement auditing is
conducted.
Thought Question:
How would your concerns about the
inventory account differ for a Computer
Hardware Manufacturer compared to a
Financial Derivatives Broker?
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LO# 6
A Model of Business
Business organizations exist to create value for their
stakeholders. Due to the way resources are invested and
managed in the modern business world, a system of
corporate governance is necessary, through which
managers are overseen and supervised.
Board of Directors
Audit
Committee
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LO# 6
A Model of Business
Objectives
Strategies
Processes
(5 broad
categories)
Controls
Transactions
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LO# 7, 8
A Model of Business Processes:
Five Components
Financing
Process
Purchasing
Process
Human
Resource
Management
Process
Inventory
Management
Process
Revenue
Process
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LO# 7, 8
An Overview of Business
Figure 2-1 An Overview of Business
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LO# 9
Organizations That Affect the
Public Accounting Profession
Securities and Exchange
Commission (SEC)
Public Company
Accounting Oversight
Board (PCAOB)
Financial Accounting
Standards Board (FASB)
American Institute of
Certified Public
Accountants (AICPA)
International Auditing and
Assurance Standards
Board (IAASB)
International Accounting
Standards Board (IASB)
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LO# 10,11
Auditing Standards
Auditing standards serve as
guidelines for and measures of
the quality of the auditor’s
performance.
PCAOB
Auditing
Standards
Board
IAASB
Public
Companies
Nonpublic
Companies
126
Countries
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LO# 10,11
The 10 Generally Accepted
Auditing Standards (PCAOB)
GAAS
General
Fieldwork
Reporting
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LO# 10,11
General Standards
Adequate Technical
Training &
Proficiency
Independence
Due Professional
Care
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LO# 10,11
Standards of Fieldwork
Adequate Planning
& Supervised
Assistants
Obtain Sufficient
Understanding of
Internal Controls
Obtain Sufficient
Appropriate
Evidential Matter
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LO# 10,11
Standards of Reporting
GAAP
Consistency
Disclosures
Opinion
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LO# 10,11
GAAS - PCAOB
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LO# 10,11
Principles Underlying an Audit – ASB and IAASB
Purpose:
To provide financial statement users with an opinion by the auditor on whether
the financial statements are presented fairly, in all material respects, in
accordance with an applicable financial reporting framework (AU-C 200.04)
Responsibilities:
Have competence and capability; comply with ethical requirements; maintain
professional skepticism; exercise professional judgment
Performance:
Sufficient appropriate audit evidence supporting reasonable (not absolute)
assurance that the financial statements are free of material misstatement
Reporting:
Express an opinion, in the form of a written report, based on an evaluation of the
audit evidence obtained; or state that an opinion cannot be expressed
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LO# 12
Statements on Auditing Standards
(SAS)—Interpretations of GAAS
GAAS and SAS are considered to be minimum
standards of performance for auditors.
PCAOB adopted, on an
interim basis, GAAS and
SAS existing in 2003.
Standards issued by
PCAOB are called
Auditing Standards (AS).
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LO# 12
Statements on Auditing Standards
(SAS)—Interpretations of GAAS
SAS are classified by two numbering categories:
SAS and AU numbers. The SAS number applies to
the order in which the standards are issued and are
thus chronological. The AU codification organizes
the SAS according to topical content.
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LO# 12
Statements on Auditing Standards
(SAS)—Interpretations of GAAS
For example, SAS No. 39, “Audit Sampling,” is
found under AU 530 because the AU 500s relate
to the standards of Evidence.
AU Section
AU 200
AU 300-499
AU 500
AU 600
AU 700
AU 800-999
Topical Content
General Principles and Responsibilities
Risk Assessment and Response to Assessed Risks
Audit Evidence
Using the Work of Others
Audit Conclusions and Reporting
Special Considerations
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LO# 13
Ethics, Independence, and the
Code of Professional Conduct
Ethics refers to a system or code of conduct
based on moral duties and obligations that
indicate how we should behave.
Professionalism refers to the conduct, aims, or
qualities that characterize a profession or
professional person. All professions operate
under some type of code of ethics or code of
conduct.
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LO# 13
Ethics, Independence, and the
Code of Professional Conduct
Code of
Professional
Conduct
Principles
Rules of Conduct
Interpretations
of the Rules
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End of Chapter 2
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