Assurance Services

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Assurance Services
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The Demand for Auditing and Assurance
LO 2
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 the assurance provided by auditors.
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The Demand for Auditing and Assurance
LO 2
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 companys resources.
Managers
Stockholders
Agents
Principals
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What Creates the Demand for Auditing and
Assurance?

• Audits lend credibility to information by
  reducing information risk, the risk that
  information is materially misstated
• Financial statement misstatements arise due to--
• Accidental errors
• Lack of knowledge of accounting principles
• Unintentional bias
• Deliberate falsification
• Audits do not directly address business risk, the
  risk that a company will not be able to meet its
  financial obligations due to economic conditions
  or poor management decisions

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Forms of Audit and Attestation of Financial
Statements
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Guiding Principles of Financial Statement Audits

• GAAP/IFRS
• GAAS
• SAS
• SOX

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Auditing Standards
LO 6, 7
Auditing standards serve as guidelines for and
measures of the quality of the auditors
performance.
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Sarbanes-Oxley Act

• Public Company Accounting Oversight Board
  established
• Audit Committee strengthened
• Corporate reporting improved
• Auditor independence redefined

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Organizations Impacting Financial Statement
Audits

• FASB
• SEC
• AICPA
• PCAOB
• ASB

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Typical Structure of a National CPA Firm
Partners
Managers
Seniors
Staff Assistant
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Responsibilities on an Engagement

• PartnerOverall responsibility is to assure that
  that audit is performed in accordance with
  professional standards.
• ManagerSupervise overall engagement.
• SeniorsIn charge auditor on a daily basis
• Staff assistantsWork under the immediate
  supervision of the senior

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Categories of Public Accounting Firms

• Local
• Regional
• National
• Big 4

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The Big Four

• Deloitte
• ErnstYoung
• KPMG
• PricewaterhouseCoopers

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Types of Professional Services

• Audit, Attestation and Assurance
• Tax
• Consulting
• Accounting
• Personal Financial Planning
• Litigation Support
• Fraud Investigation

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The Auditors Standard Report

• Board of Directors, Stockholders, Owners, and/or
  Management ofABC Company, Inc.123 Main
  St.Anytown, Any Country
• We have audited the accompanying financial
  statements of ABC Company, Inc. (a California
  corporation), which comprise the balance sheet as
  of December 31, 20XX, and the related statements
  of income, retained earnings, 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 consolidated financial
  statements in accordance with U.S. generally
  accepted accounting principles this includes the
  design, implementation, and maintenance of
  internal control relevant to the preparation and
  fair presentation of consolidated 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 consolidated financial statements based on
  our audit. We conducted our audit in accordance
  with U.S. generally accepted auditing standards.
  Those standards require that we plan and perform
  the audit to obtain reasonable assurance about
  whether the consolidated financial statements are
  free from material misstatement.
• An audit involves performing procedures to obtain
  audit evidence about the amounts and disclosures
  in the consolidated financial statements. The
  procedures selected depend on the auditors'
  judgment, including the assessment of the risks
  of material misstatement of the consolidated
  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 consolidated 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 consolidated 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,
  Inc. as of December 31, 20XX, and the results of
  its operations and its cash flows for the year
  then ended in accordance with U.S. generally
  accepted accounting principles.
• AUDITOR'S SIGNATUREAuditor's name and address

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Unqualified

• Unqualified opinion when financial statements
  present fairly
• Financial position
• Results of operations
• Cash flows
• Stockholders Equity

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Qualified Opinions

• Difference of opinion with management over
  application of GAAP that is material in amount
• Nature of the difference

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Adverse Opinion

• Financial statements taken as a whole do not
  present fairly financial position or the results
  of operations or cash flows in conformity with
  GAAP
• Preceded by a separate paragraph that provides
  all the substantive reasons for the auditors
  conclusion and principal effects of the subject
  matter on financial position, results of
  operation and cash flows

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Disclaimer

• Unable to gather sufficient evidence to warrant
  the expression of an opinion on the statements as
  a whole

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Withdrawing from the Engagement

• Significant conflict exists with management
• Management cannot be trusted

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Assumptions Underlying the Audit Report

1. Reasonable assurance
2. Materiality
3. Present fairly

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Materiality

• Magnitude of an omission or misstatement of
  accounting information that the judgment of
  reasonable person relying on the information
  would have been changed or influenced by the
  omission or misstatement

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Judging Materiality

• May not rely solely on a quantitative threshold
  as a rule of thumb to determine materiality
• 5 is a common materiality test
• Unintended consequence of materiality is that it
  is subject to manipulation
• Full analysis of all relevant considerations
• Consideration of risk of fraud

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Present Fairly

• Auditors assessment of fair presentation depends
  on whether
• Accounting principles used have general
  acceptance
• Accounting principles are appropriate
• Financial statements are informative

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Present Fairly

• Information presented is classified and
  summarized in a reasonable manner
• Financial statements reflect the underlying
  transactions and events in a manner that is
  consistent with materiality and reflects economic
  substance

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Expectations Gap

• Difference between
• What the public and users of financial statements
  perceive as the responsibilities of accountants
  and auditors and
• What accountants and auditors themselves see as
  their responsibilities

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Error versus Fraud

• Error
• Innocent mistake in application of GAAP
• Omission of information
• Mathematical mistake
• Fraud
• Deliberate decision made to deceive another party

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Techniques Used to Falsify Financial Information

• Lengthening estimated useful lives
• Special Purpose Entities (SPE)
• Bogus invoices to record revenue
• Backdated sales agreements
• Misapplication of GAAP
• Bill and Hold
• Channel Stuffing
• Others

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Common Types of Fraud

• Theft of company assets
• Understate cash or other assets
• Overstate expenses
• Bury the expenses in an innocuous account
• Lapping of accounts receivable
• Theft of inventory
• Other

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End of Auditing