Transcript Chapter 1

Chapter 2
The Financial
Statement
Auditing
Environment
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
LO# 1
Problems and Warning Signs
1990
2000
During the economic boom of the late
1990s and the early 2000s, accounting
firms aggressively sought opportunities
to market a variety of high-margin
nonaudit services to their audit clients.
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LO# 1
Problems and Warning Signs
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LO# 1
An Explosion of Scandals
WorldCom
Enron
Tyco
Adelphia
Xerox
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LO# 1
Government Regulation
In July 2002, Congress passed the
Sarbanes-Oxley Public Company
Accounting Reform and Investor
Protection Act.
The Sarbanes-Oxley Act effectively
ended the profession’s era of “selfregulation,” creating and transferring
authority to set and enforce standards
to the Public Company Accounting
Oversight Board (PCAOB).
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The Act
Mandated Broad reform in Corporate
Governance Practices
Impacted




Public Companies
Financial Analysts
External Auditors
Securities Exchange Markets
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Context of Financial Statement
Auditing
LO# 2
The primary context with which an auditor is concerned is the industry or
business of his or her audit client. For example, if you are auditing a computer
hardware manufacturer, one of your concerns will be whether your client has
inventories that are not selling quickly and are becoming obsolete due to
industry innovation. Such inventory might not be properly valued on the client’s
financial records. If you are auditing a jeweler you will probably not be as
worried about obsolescence, but you will be interested in whether the diamonds
and other gems in inventory are valued properly. You may need to hire a
qualified gemologist to help you assess the valuation assertion, and you would
want to keep up on the dynamics of the international diamond and gem
marketsand the audit, . 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.
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LO# 3
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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Corporate Governance
Consists of all of the people,
processes, and activities in place to
help ensure proper stewardship over
an entity’s assets
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LO# 4
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# 4
An Overview of Business
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LO# 5
Management Assertions
Financial statements issued by management contain
explicit and implicit assertions.
Transactions
Management asserts
that transactions
related to inventory
actually occurred.
Account
Balances
Presentation
& Disclosure
Management asserts
that the entity owns
the inventory
represented in the
inventory account.
Management asserts
that the financial
statements properly
classify and present
the inventory.
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LO# 5
Management Assertions
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LO# 6, 7
Auditing Standards
S
E
C
Auditing standards serve as
guidelines for and measures of
the quality of the auditor’s
performance.
PCAOB
Auditing
Standards
Board
Public
Companies
Nonpublic
Companies
AI
C
PA
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The 10 Generally Accepted
Auditing Standards (GAAS)
LO# 6, 7
GAAS
General
Fieldwork
Reporting
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LO# 6, 7
General Standards
Qualifications &
Quality of Audit
Adequate Technical
Training &
Proficiency
Independence
Due Professional
Care
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LO# 6, 7
Standards of Fieldwork
Adequate Planning
& Supervised
Assistants
Obtain Sufficient
Understanding of Client &
Environment, including
Internal Controls
Obtain Sufficient
Appropriate
Evidential Matter
Actual conduct of
a audit
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LO# 6, 7
Standards of Reporting
GAAP
Consistency
Disclosures
Opinion
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LO# 6, 7
GAAS
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Statements on Auditing
Standards (SAS)—Interpretations
of GAAS
LO# 8, 9
GAAS and SAS are considered to be minimum
standards of performance for auditors.
PCAOB adopted, on an
interim basis, GAAS and
SAS. Standards issued
by PCAOB are called
Auditing Standards (AS).
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Statements on Auditing
Standards (SAS)—Interpretations
of GAAS
LO# 8, 9
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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Statements on Auditing
Standards (SAS)—Interpretations
of GAAS
LO# 8, 9
For example, SAS No. 39, “Audit Sampling,” is
found under AU 350 because the AU 300s relate
to the standards of fieldwork on evidence
collection and evaluation.
AU Section
100s
200s
300s
400s
500s
600s
700s
800s
900s
Topical Content
Introduction
The General Standards
The Standards of Field Work
The First, Second, and Third Standards of Reporting
The Fourth Standard of Reporting
Other Types of Reports
Special Topics
Compliance Auditing
Special Reports of the Committee on Auditing Procedures
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Ethics, Independence, and
the Code of Professional
Conduct
LO# 10
Ethics refers to a system or code of conduct
based on moral duties and obligations that
indicates how we should behave.
Professionalism refers to the conduct, aims, or
qualities that characterize or mark a profession or
professional person. All professions operate
under some type of code of ethics or code of
conduct.
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Ethics, Independence, and
the Code of Professional
Conduct
LO# 10
Code of
Professional
Conduct
Principles
Rules of Conduct
Interpretations
of the Rules
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The Auditor’s Responsibility
for Errors, Fraud, and Illegal
Acts
LO# 11
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.
The auditor has no
responsibility to plan and
perform the audit to obtain
reasonable assurance that
misstatements, whether
caused by errors or fraud, that
are not material to the financial
statements will be detected.
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LO# 12
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 Public Accounting Firms
Deloitte
Ernst & Young
KPMG
Pricewaterhouse
Coopers
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LO# 12
Audit Teams
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Types of Audit, Attest, and
Assurance Services
LO# 13
Audit Services
Internal Control Audits
Compliance Audits
Operational Audits
Forensic Audits
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Types of Audit, Attest, and
Assurance Services
LO# 13
Attest Services
Reporting on
Internal Control
Financial
Forecasts and
Projections
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Types of Audit, Attest, and
Assurance Services
LO# 13
Assurance Services
Performance
Measurement
Risk Assessment
Information
System Reliability
& E-Commerce
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Types of Audit, Attest, and
Assurance Services
LO# 13
Non-assurance Services
Management
Advisory
Services
Tax Services
Accounting and
Review Services
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LO# 14
Types of Auditors
External Auditors
Government
Auditors
Internal Auditors
Forensic Auditors
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LO# 15
Organizations That Affect the
Public Accounting Profession
American Institute of
Certified Public
Accountants (AICPA)
Securities and
Exchange
Commission (SEC)
Public Company
Accounting Oversight
Board (PCAOB)
Financial Accounting
Standards Board
(FASB)
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End of Chapter 2
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