Transcript 1-1 Chapter One An Introduction to Assurance and Financial Statement Auditing McGraw-Hill/Irwin © The McGraw-Hill Companies.2006 All rights reserved.

1-1
Chapter One
An Introduction to Assurance
and Financial Statement Auditing
McGraw-Hill/Irwin
© The McGraw-Hill Companies.2006 All rights reserved.
1-2
The Demand for Auditing and
Assurance
The development of the corporate form of
business and the expanding world economy
over the last 200 years have given rise to
an explosion in the demand for assurance
provided by auditors.
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Principals and Agents
A public company is a company that sells its stocks or
bonds to the public, giving the public a valid interest in
the proper use, or stewardship, over the company’s
resources.
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Managers
Stockholders
Agents
Principals
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The Role of Auditing
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Auditing and Assurance Defined
Auditing
Assurance
Services
A systematic process of objectively
obtaining and evaluating evidence
regarding assertions about economic
actions and events to ascertain the
degree of correspondence between
those assertions and established
criteria and communicating the results
to interested users.
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Auditing and Assurance Defined
Auditing
Assurance
Services
An engagement in which practitioner
expresses a conclusion designed to
enhance the degree of confidence of
the intended users other than the
responsible party about the outcome of
the evaluation or measurement of a
subject matter against criteria.
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Fundamental Concepts in Conducting a
Financial Statement Audit
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Audit Risk
Audit risk is the risk that the auditor express an
inappropriate audit opinion when the financial
statements are materially misstated.
The auditor’s standard
report states that the audit
provides only reasonable
assurance that the
financial statements do not
contain material
misstatements.
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Reasonable assurance
implies some risk that a
material misstatement
could be present in the
financial statements and
the auditor will fail to
detect it.
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Materiality (IASB)
Omissions or misstatements of
items are material if they could,
individually or collectively, influence
the economic decisions of users
taken on the basis of the financial
statements. Materiality depends on
the size and nature of the omission
or misstatement judged in the
surrounding circumstances. The
size or nature of the item, or a
combination of both, could be the
determining factor.
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Evidence Regarding Management
Assertions
Evidence that assists the auditor in evaluating
management’s financial statement assertions
consists of the underlying accounting data and any
corroborating information available to the auditor.
Relevance
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Reliability
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Sampling: Inferences Based on
Limited Observations
Auditors use (1) their knowledge about the
transactions and/or (2) a sampling approach to
examine the transactions.
It would be too
costly for the auditor
to examine every
transaction.
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Major Phases
of the Audit
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End of Chapter 1
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