Transcript Day One

BUS 425 – Auditing
Chapter 1
The Demand for Audit Services
Auditing
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WorldCom – Cynthia Cooper
The company had recorded billions
of dollars of regular fees paid to local
telephone companies as capital
assets. This accounting trick allowed
the company to turn a $662 million
loss into a $2.4 billion profit in 2001.
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WorldCom – Cynthia Cooper
Line cost expense
Cash
3,062
3,062
Adjusting JE
PP&E
3,062
Line cost expense
3,062
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Adam
What is the definition of Auditing?
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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.
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Brian C
What is audit evidence?
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Evidence ---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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Evidence ---electronic data about transactions
documented data about transactions
written communications
observations by the auditor
oral testimony (responses to questions)
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Brianna
What is the objective of AU-C 330
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AU-C 330 response to RoMM
The objective of the auditor is to obtain
sufficient appropriate audit evidence
regarding the assessed risk of material
misstatement through designing and
implementing appropriate responses to
those risks.
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Chelsey
What is the objective of AU-C 500
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AU-C 500 Audit Evidence
The objective of the auditor is to design
and perform audit procedures that
enable the auditor to obtain sufficient
appropriate audit evidence to be able to
draw reasonable conclusions on which
to base the auditor’s opinion.
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Vouch or Trace project
Go to web site
http://clubs.cob.calpoly.edu/~cmiller/ACTG%20425%20page.html
look up sales journal - talk about overstatement / occurrence
look at sales journal – talk about overstatement / valuation
look at sales orders – talk about understatement / completeness
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Independent Auditor’s Report
Report on the Financial Statements
We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as of December 31, 20X1, and the
related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes to the financial
statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally
accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation
and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures
selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity's internal control.2 Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Company as of
December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally
accepted in the United States of America.
[Auditor's signature, city and state, date of report]
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Independent Auditor’s Report
Report on the Financial Statements
We have audited the accompanying financial statements of ABC
Company, which comprise the balance sheet as of December 31, 20X1, and the related statements of income, changes in stockholders'
equity, and cash flows for the year then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of
these financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes the
design, implementation, and maintenance of internal control relevant
to the preparation and fair presentation of financial statements that
are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Auditing
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Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditor's judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. In
making those risk assessments, the auditor considers internal control relevant to
the entity's preparation and fair presentation of the financial statements in order to
design audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the entity's internal
control. Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well
as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our audit opinion.
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Opinion
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ABC Company as of
December 31, 20X1, and the results of its operations and its cash flows
for the year then ended in accordance with accounting principles generally
accepted in the United States of America.
Report on Other Legal and Regulatory Requirements
Auditor's signature
Auditor's city and state
Date of the auditor's report
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Materiality page 118

Auditing
The magnitude of an omission or
misstatement of accounting information
that, in light of the surrounding
circumstances, makes it probable that
the judgment of a reasonable person
relying on the information would have
been changed or influenced by the
omission or misstatement,
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Christopher
What is “our” operational definition of
independence?
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Independence
A member should maintain objectivity and be
free of conflicts of interest in discharging
professional responsibilities. A member in
public practice should be independent in
fact and appearance when providing
professional auditing or attestation
services.
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Independence
Independence enhances the auditor’s ability
to act with integrity, to be objective, and to
maintain an attitude of professional
skepticism.
Independence includes
independence of mind (fact)
Independence of appearance
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Colby
What is Business Risk?
 What is Information Risk?

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Business Risk - the risk (probability)
that an entity will fail to meet its
objectives
Information Risk - the probability
that the information upon which the
decision was made was inaccurate.
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Colleen

Auditing
What is the Risk-Free interest rate?
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Craig
You are a bank lending officer
In relation to the risk-free interest rate
What interest rate would you charge to a
company with a great deal of business
risk?
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Donne
You are a bank lending officer
In relation to the risk-free interest rate
What interest rate would you charge to a
company with a great deal of
information risk?
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Holly

Auditing
What are some causes of information
risk?
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What are some causes of
Information Risk
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Remoteness owner separate from management
Motives of the provider
Voluminous data
Complex transactions
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Talk about the difference between
assurance
attestation
auditing
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Assurance – improves the quality of
information
Attestation – report regarding the
reliability of specific assertions made
by management
Audit – opinion regarding
management’s assertions embodied in
financial statements
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Important

Specified audit objectives
• AU-C 200, 315, 500, 700 & Independence)
Unmodified Audit Report
 Management’s Assertions p. 59

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Ifunanya
What are the three lines of service
typically provided by a public accounting
firm ?
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Typical lines of business
Audit (accounting, attestation, audit)
Tax
Consulting (advisory services)
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Kaitlyn P
What are the various job levels or career
levels in a public accounting firm ?
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CPA partnership structure
Partner
P
Senior Mngr
Manager
Senior
Staff
Auditing
SM
X
SM
Y
Z
X
X
X
Y
Y
Y
Z
Z
XXX XXX XXX YYY YYY YYY ZZZ ZZ
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Education cpa exam
As of Dec. 31, 2013 / Jan. 1, 2014
•
•
•
•
Bachelors degree
225 quarter hours
36 business
36 + 30 accounting
– 20 accounting
– 10 ethics
• + 1 year experience
Auditing
• http://www.dca.ca.gov/
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transactions
Account
balances
Presentation
& disclosure
occurrence
existence
occurrence & rights &
obligations
completeness
completeness
completeness
accuracy
valuation &
allocation
accuracy &
valuation
classification &
understandability
classification
cutoff
rights & obligations
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