1.

ASSURANCE SERVICES

DEFINITION
An Assurance service is an independent professional service that
improves the quality of information for decision makers.
Such services are valued because the assurance provider is
independent and perceived as being unbiased with respect to the
information examined.
Individuals who are responsible for making business decisions seek
assurance services to help improve the reliability and relevance of the
information used as the basis for their decisions.
ASSURANCE SERVICES PROVIDED BY CPAs
Attestation Services
Audit of Historical Financial Statements
Audit of Internal Control Over Financial Reporting
Review of Historical Financial Statements
Attestation Services on Information Technology
Other Attestation Services That May Be Applied to a Broad Range of Subject
Matter (assurance about the companys compliance with the financial provi-
sion of the loan; attest to the information in a clients forecasted financial
statements, which are often used to obtain financing.
Other Assurance Services
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 1. ASSURANCE SERVICES
Controls over and risks related to investments, including policies related to
derivatives
Mystery shopping
Assess risk of accumulation, distribution, and storage of digital information
Fraud and illegal acts risk assessment
Organic ingredients
Compliance with entertainment royalty agreements
ISO 9000 certifications
Corporate responsibility and sustainability
Certain Management Consulting

NONASSURANCE SERVICES
Certain Management Consulting
Other Management Consulting
Accounting and bookkeeping services
Tax services

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 1. NATURE OF AUDITING

DEFINITION
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
Information and Established Criteria
There must be information in a verifiable form: (i) companies financial
statements, individuals income tax returns (quantifiable information), (ii)
effectiveness of computer systems and efficiency of manufacturing
operations (subjective information)
There must be some standards (criteria), that is vary depending on the
information being audited: (i) GAAP, IFRS (in the audit of historical financial
statements); (ii) Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission-
COSO (in the audit of internal control over financial reporting); (iii) Internal
Revenue Code (in the audit of of tax returns by Internal Revenue Services).
Accumulating and Evaluating Evidence
Evidence is any information used by the auditor to determine whether the
information being audited is stated in accordance with established criteria.
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 1. NATURE OF AUDITING
Electronic and documentary data about transactions
Written and electronic communication
Observations by auditor
Oral testimony of the auditee (client)
To satisfy the purpose of the audit, auditors must obtain a sufficient quality and
volume of evidence.
The critical part of every audit and the primary subject of this lecture is: Auditors must
determine the types and amount of evidence necessary and evaluate whether the
information corresponds to the established criteria.

Competent, Independent Person

Auditors must be qualified to understand the criteria used and must be competent to
know the types and amount of evidence to accumulate in order to reach the proper
conclusion after examining the evidence.
Auditors must also have an independent mental attitude (The competence of those
performing the audit is of little value if they are biased in the accumulation and
evaluation of evidence)
Auditors strive to maintain a high level of independence to keep the confidence of
users relying on their reports.
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 1. NATURE OF AUDITING
Reporting
The final stage in the auditing process is preparing the audit report,
which communicates the auditors finding to users.
Report differ in nature, but all must inform readers of the degree of
correspondence between information audited and established criteria.
Reports also differ in form and can vary from the highly technical type
usually associated with financial statement audits to a simple oral
report in the case of an operational audit of a small departments
effectiveness.
DISTINCTION BETWEEN ACCOUNTING AND AUDTING
Accounting is the recording, classifying, and summarizing, of
economic events in a logical manner for the purpose of providing
financial information for decision making. To provide relevant
information, accountants must have a thorough understanding of the
principles and rules that provide the basis for preparing the accounting
information.
Auditing focus on determining whether recorded information properly
reflects the economic events that occurred during the accounting period

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 1. ECONOMIC DEMAND FOR AUDITING

The complexity of the society lead to make decision makers are

more likely to receive unreliable information. There several
reason for this: remoteness of information, biases and motives
of the provider, voluminous data, and the existence of complex
exchange transactions.

REDUCING INFORMATION RISK

User Verifies Information By Themselves
User Shares Information Risk with Management
Uses an Independent Audit

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 1. SUMMARY OF THE AUDIT PROCESS

PHASE- I: Plan and Design an Audit Approach:

1. Accept client and perform initial planning

2. Understand the clients business and industry
3. Assess client business risks
4. Perform preliminary analytical procedures
5. Set materiality and assess acceptable audit risk and inherent risk
6. Understand internal control and assess control risk
7. Gather information to assess fraud risks
8. Develop overall audit strategy and audit program

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 1. SUMMARY OF THE AUDIT PROCESS

PHASE-II: Perform Tests of Controls and Substantive Tests of Transactions

1. Plan to reduce assessed level of control risks?
Yes: 2. Perform tests of controls*
No : 3. Perform substantive tests of transactions
4. Assess likelihood of misstatements in financial statements
(*) The extent of testing of controls is determined by planned reliance on controls. For
public companies, required to have an audit of internal control, testing must be
sufficient to issue an opinion on internal control over financial reporting.
PHASE-III: Perform Analytical Procedures and Tests of Details of Balances
LOW MEDIUM HIGH OR UNKNOWN
1. Perform analytical procedures
2. Perform tests of key items
3. Perform additional tests of details of balances

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 1. SUMMARY OF THE AUDIT PROCESS

PHASE-IV: Complete the Audit and Issue an Audit Report

1. Perform additional tests for presentation and disclosure

2. Accumulate final evidence
3. Evaluate results
4. Issue audit report
5. Communicate with audit committee and management

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 1. TYPES OF AUDIT and AUDITORS

Operational audit
E xample : Evaluate whether the computerized payroll processing for a
subsidiary is operating efficiently and effectively.
Information : Number of payroll records processed in a month, costs of the de-
partment, and number of errors made.
- Established : Company standards for efficiency and effectiveness in pay-
Criteria roll department
- Available : Error reports, payroll records, and payroll processing costs
Evidence
Compliance audit
Example : Determine whether bank requirements for loan continuation have
been met.
- Information : Company records
- Established : Loan agreement provision
Criteria
- Available : Financial statements and calculations by the auditor.
Evidence
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 1. TYPES OF AUDIT and AUDITORS

Financial Statement Audit

Example : Annual audit of a firm financial statements
Information: The firms financial statements
Established: Generally accepted accounting principles
Criteria
- Available : Documents, records, and outside sources of evidence
Evidence

TYPES OF AUDITORS
- Certified Public Accounting Firms
Government Accountability Office Auditors
Internal Revenue Agents
Internal Auditors
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 2. THE AUDIT STANDARDS SETTING PROCESS

ACTIVITIES OF CPA FIRMS:

Audit Services
Other Attestation and Assurance Services
Additional Services: (accounting and bookkeeping services, tax
services, management consulting services).
New product and services development: (Financial planning,
business valuation, forensic accounting, information technology
advisory services)
STRUCTURE OF CPA FIRMS
CPA firms vary in the nature and range of services offered, which affects the
organization and structure of the firms.
Three main factors influence the organizational structure of all firms:
The needs for independence form clients (permit auditors to remain
unbiased in drawing conclusions about financial statements)
The importance of a structure to encourage competence (permits auditors
to conduct audits and perform other services efficiently and effectively)
The increased litigation risk faced by auditors (increasing in litigation-related
costs; some organizational structures afford a degree of protections to
individual firm members)
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 2. THE AUDIT STANDARDS SETTING PROCESS

Organizational Structures
Six organizational structures are available to CPA firms. Except for
the proprietorship, each structure results in an entity separate from
the CPA personally, which helps promote auditor independence. The
last four organizational structures provide some protection from
litigation loss.
Organizational forms:
1. Proprietorship
2. General Partnership
3. General Corporation
4. Professional Corporation
5. Limited Liability Company
6. Limited Liability Partnership
The organizational hierarchy-the hierarchical nature of CPA firms
helps promote competence.
Staff Assistant; 0 2 years Senior or in-charge auditors; 2 5 years
Manager; 5 10 years Partner; 10+ years
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 2. THE AUDIT STANDARDS SETTING PROCESS

SARBANES-OXLEY ACT AND PCAOB

Sarbanes-Oxley Act (triggered by the bankruptcies and alleged audit
failures involving such companies as Enron and WorldCom) is
considered by many to be the most important legislation affecting
auditing profession since 1933 and 1934 Security Acts. The provisions
of the Acts dramatically changed the relationship between publicly held
companies and their audit firms.
The Sarbanes-Oxley Acts established the Public Company Accounting
Oversight Board (PCAOB), appointed and overseen by the SEC. The
PCAOB provides oversight for auditors of public companies,
establishes auditing and quality control standards for public company
audits, and performs inspections of the quality controls at audit firms
performing those audits.
The PCAOB conducts inspections of registered accounting firms to
assess their compliance with the rules of the PCAOB and SEC,
professional standards, and each firms own quality control policies.

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 2. THE AUDIT STANDARDS SETTING PROCESS

SECURITIES AND EXCHANGE COMMISSION

Assist in providing investors with reliable information upon which to
make investment decisions.
The SEC Act of 1933 - requires most companies planning to issue new
securities to the public to submit a registration statement to the SEC for
approval.
The SEC Act 1934 provides additional protection by requiring public
companies and others to file detailed annual reports with the
commission. The commission examines these statements for
completeness and adequacy before permitting the company to sell its
securities through the securities exchanges.
The SEC Acts 1933 and 1934 require financial statements,
accompanied by the opinion of an independent public accountant, as
part of a registration statement and subsequent reports.
The SEC has considerable influence in setting GAAP and disclosure
requirements for financial statements as a result of its authority for
specifying reporting requirements considered necessary for fair
disclosure to investors, such as the recent requirement to begin filing
financial statement data in XBRI format
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 2. THE AUDIT STANDARDS SETTING PROCESS

The SEC has the power to establish rules for any CPA associated with
audited financial statements submitted to the commission. The SEC
requirements of greatest interest to CPA are set forth in the
commissions Regulation S-X, Accounting Series Releases, and
Accounting and Auditing Enforcement Releases. Its constitute
important regulation, as well as decisions and opinions on accounting
and auditing issues affecting any CPA dealing with publicly held
companies.
Of special interest to auditors are several specific reports that are
subject to the reporting provisions of the securities acts:
Form S-1 - must be completed and registered with the SEC when a
company plan to issue new securities to the public.
Form 8-K - filed to report significant events that are of interest to public
investors (acquisition, sale of subsidiary, change in officers)
Form 10-K - filed annually within 60 90 days after the close of each fiscal
year, depending on the size of the company.
Form 10-Q - filed quarterly for all publicly held companies. It contains
certain financial information and requires auditor reviews of
the financial statements before filling with the commission.

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 2. THE AUDIT STANDARDS SETTING PROCESS

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

CPAs licensed by the state in which they practice, but a significant
influence on CPAs is exerted by their national professional
organization, the AICPA. Membership of the AICPA is restricted to
CPAs, but not all members are practicing as independent auditors.
The AICPA sets standards and rules that all members and other
practicing CPAs must follow. Four major areas in which the AICPA
has authority to set standards and make rules
1. Auditing standards
2. Compilation and review standards
3. Other attestation standards
4. Codes of Professional Conduct.
Writing and grading the CPA examination
Performs many educational and other functions (research)
Publish a variety of materials (journals, industry audit guides for
several industries, periodic updates of the Codification of Statements
on Auditing Standards, and the Code of Professional Conduct)
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 2. THE AUDIT STANDARDS SETTING PROCESS

THE ROLE OF ISA (International Standards on Auditing)

Auditing standards are general guidelines to aid auditors in fulfilling
their professional responsibilities in the audit of historical financial
statements. (They include: consideration of professional qualities, such
as competence and independence, reporting requirements, and
evidence).
There are three main sets of auditing standards (in the U.S)
International Standards on Auditing issued by the International Auditing
and Assurance Standards Board (IAASB) of the International Federation of
Accountants (IFAC). ISAs applicable to entities outside the US.
AICPA Auditing Standards (US Generally Accepted Auditing Standards-
GAAS). AICPA Auditing Standards established by the ASB of the AICPA.
The US GAAS are referred to Statements on Auditing Standards (SASs)
are applicable to private entities in the US.
PCAOB Auditing Standards issued by PCAOB and are applicable to U.S
Public Companies and other SEC registrants.

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 2. THE AUDIT STANDARDS SETTING PROCESS

GENERALLY ACCEPTED AUDITING STANDARDS

Historically, auditing standards (issued by ASB of the AICPA) have
been organized along 10 generally accepted auditing standards
(GAAS) that fall into three categories:
General standards
Standards of field work
Reporting standards
As part of its Clarity Project, the ASB also issued a new Preface to the
Codification of Auditing Standards which contains the Principles
Underlying an Audit in Accordance with GAAS. The principles provide
a framework to help auditors fulfill the two objectives when conducting
an audit of financial statements:
Obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatements, whether due to fraud or
error, thereby enabling the auditor to express an opinion on whether the
financial statements are presented fairly, in all material respects, in
accordance with an applicable reporting framework; and

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 2. THE AUDIT STANDARDS SETTING PROCESS
Report on the financial statements, and communicate as required by GAAS, in
accordance with the auditors findings
Principles in AICPA Auditing Standards
(1) Purpose of an Audit -Provide an opinion about the financial statements.
(2) Responsibilities -Possess appropriate competence and capabilities
-Comply with ethical requirements
-Maintain professional skepticism and exercise
professional judgment
(3) Performance -Obtain reasonable assurance about whether financial state-
ments are free of material misstatement.
-Plan work and supervise assistants.
-Determine and apply materiality level or levels.
-Identify and assess risks of material misstatement
based on understanding of entity and its environment,
including internal control.
- Obtain sufficient appropriate audit evidence.
(4) Reporting - Express opinion on financial statements in a written
report
-Whether financial statements were presented fairly in
accordance with financial reporting framework

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 2. THE AUDIT STANDARDS SETTING PROCESS

Linkage of AICPA Principles Underlying an Audit to PCAOB Generally

Accepted Auditing Standards

Principles in AICPA PCAOB

Auditing Standards Generally Accepted Auditing Standards
Purpose of an Audit -
Responsibilities General Standards
Performance Standards of Field Work
Reporting Standards of Reporting

QUALITY CONTROL
The methods used to ensure that the firm meets its professional responsibilities
to clients and others.
Quality control is closely related to but distinct from auditing standards. To
ensure that the principles in auditing standards are followed on every audit, a
CPA firm follows specific quality control procedures that help it meet those
standards consistently on every engagement.
Quality control are established for the entire CPA firm, where as auditing
standards are applicable to individual engagements.

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 2. THE AUDIT STANDARDS SETTING PROCESS

Elements of Quality Control

Leadership responsibilities for quality within the firm (tone at the top).
Relevant ethical requirements
Acceptance and continuation of clients and engagements
Human resources
Engagement performance
Monitoring
Audit Practice and Quality Centers
Established by the AICPA as resource centers to improve audit
practice quality. The Center for Audit Quality (CAQ) is an
autonomous public policy organization affiliated with the AICPA
serving investors, public company auditors, and the capital markets.
The Centers mission is to foster confidence in the audit process and
to make public company audits even more reliable and relevant for
investors (SEE FIGURE 2-3: Relationships Among Auditing
Standards, Quality Control, AICPA Practice Centers, and Peer
Review).

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 2. THE AUDIT STANDARDS SETTING PROCESS

Ways the Profession and Society Encourage CPAs

to Conduct Themselves at a High Level
(Figure 2-4)

Auditing Standards
CPA Examination
Quality Control
Peer Review
PCAOB and SEC
Codes of Professional Conduct
AICPA Practice and Quality Centers
Legal Liability
Continuing Education Requirements

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 3. AUDIT REPORTS

Reports are essentials to audit and assurance engagements because

they communicate the auditors findings. Financial statements users
rely on auditors report to provide assurance on the companys financial
statements. The auditor will likely be held responsible if an incorrect
audit report is issued.
The AICPA Auditing Standard Board (ASB) sets standards for non-
public entities, and the PCAOB sets auditing standards for public
companies. Since the PCAOB adopted the existing AICPA standards
as interim standards, auditing standards, including those related to
audit reporting, were similar for public companies and non-public
entities.
However, as part of the AICPA Clarity Project, the ASB modified audit
reporting for non-public entities to be similar to reporting under
international auditing standards. As a result, the format of audit reports
for public and non public entities currently differ, although the overall
substance of the content in the report is similar under both AICPA and
PCAOB auditing standards.

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 3. AUDIT REPORTS

Standard Unqualified Audit Report for Non-public Entities

The AICPA auditing standards provide uniform wording for the
auditors report of non-public entities. Different auditors may alter the
wording or presentation slightly, but the meaning must be the same.
The auditors standard unqualified audit report contains 8 distinct parts:
Report title
Audit report address
Introductory paragraph
Managements responsibility (including: Scope paragraph)
Auditors responsibility
Opinion paragraph
Name and address of CPA firm
Audit report date
The standard unqualified audit report is issued when 4 conditions have
been met;

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 3. AUDIT REPORTS
All statements (BS, IS, SCSE, SCF) are included in the financial statements
Sufficient appropriate evidence has been accumulated, the auditor has
conducted the engagement in a manner that enables him or her to conclude
that the audit was performed in accordance with auditing standards.
The financial statements are presented in accordance with the U.S GAAP
or other appropriate accounting framework (This also means that adequate
disclosures have been included in the footnotes and other parts of the
financial statements).
There are non circumstances requiring the addition of an explanatory
paragraph or modification of the wording of the report.
The standard unqualified audit report is sometimes called a clean
opinion because there are no circumstances requiring qualification or
modification of the auditors opinion. The standard unqualified report is
the most common audit opinion.
Sometimes circumstances beyond the clients or auditors control
prevent the issuance of a clean opinion. However, in most cases,
companies make the appropriate changes to their accounting records
to avoid a qualification or modification by the auditor.
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 3. AUDIT REPORTS

If any of the requirements for the standard unqualified audit report are not met,
the standard unqualified report cannot be issued.
Four categories of audit reports that can be issued by the auditor:

1. Standard Unqualified -The four conditions stated have been met.

2. Unqualified with Empha- - A complete audit took place with satisfactory
sis-of-matter Explanatory results and financial statements that are fairly
Paragraph of Modified presented, but the auditor believes that it is
Wording important or is required to provide additional
information.
3. Qualified - The auditor concludes that the overall financial
statements are fairly presented, but the scope
of the audit has been materially restricted or
applicable accounting standards were not
followed in preparing the financial statements.
4. Adverse or Disclaimer - The auditor concludes that the financial
statements are not fairly presented (adverse),
he or she is unable to form an opinion as to
whether the financial statements are fairly
presented (disclaimer), or he or she is not independent
(disclaimer)
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