Auditing
The accumulation and evaluation of evidence about information and established criteria. Auditing should be done by a competent, independent person.
Required for an audit:
1. Information in
verifiable
form.
2.
Criteria
by which to evaluate the information.
Evidence
Any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria.
An auditor must be:
1. Competent to know the types and amount of evidence to accumulate in order to reach the proper conclusion.
2. Of independent mental attitude.
Accounting
The recording, classifying, and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making.
Risk-free interest rate
Rate the bank could earn by investing in US treasury notes.
Auditing has no effect on this.
Business risk
Reflects the possibility that the business will be unable to repay its loan because of economic or business conditions.
Auditing has no effect on this risk.
Information risk
Reflects possibility that the information upon which the business risk decison was made was inaccurate.
Auditing can have a significant effect on this.
Causes of information risk:
1. Remoteness of information.
2. Biases and motives of the provider.
3. Voluminous data.
4. Complex exchange transactions.
Reducing information risk:
1. User verifies information.
2. User shares information risk with management.
3. Audited financial statements are provided.
Assurance services
Independent professional service that improves the quality of information for decision makers.
Attestation services
Type of assurance service in which the CPA firm issues a report about a subject matter of assertion that is made by another party.
Explain the relationships among audit services, attestation services, and assurance services:
An assurance service is an independent professional service to improve the quality of information for decision makers. An attestation service is a form of assurance service in which the CPA firm issues a report about the reliability of an assertion that i
Discuss the major factors in today's society that have made the need for independent audits much greater than it was 50 years ago.
An independent audit is a means of satisfying the need for reliable information on the part of decision makers. Factors of a complex society that contribute to this need are.
1. Remoteness of Information
2. Biases and motives of the provider
3. Voluminous
Distinguish risk-free interest rate, business risk, and information risk. Which one does the auditor reduce by performing an audit?
1. Risk-free interest rate is the rate a bank could earn by investing in US Treasury notes.
2. Business risk reflects the possibility economic or business conditions could make the business unable to repay its loan.
3. Information risk reflects the possib
Identify the major causes of information risk and identify three main ways information risk can be reduced.
Causes:
1. Remoteness of information
2. Biases and motives of provider
3. Voluminous data
4. Complex exchange transactions
Ways to reduce:
1. User verifies info
2. User shares information risk with management
3. Audited financial statements are provided.
User Verifies Info
Advantage:
1. User obtains information desired.
2. User can be confident of the qualifications and activities of person getting the information.
Disadvantage:
1. High cost of obtaining information.
2. Inconvenience to the person providing info because of
User Shares Info Risk with Management
Advantage:
1. No audit costs incurred.
Disadvantage:
1. User may not be able to collect on losses.
Audited financial statements provided
Advantage:
1. Multiple users obtain info.
2. Risk reduced sufficiently to satisfy users at reasonable cost.
3. Minimal inconvenience to management
Disadvantage:
1. May not meet needs of certain users.
2. Costs may be higher than benefits in some situation
Explain what is meant by determining the degree of correspondence between information and established criteria.
To do an audit there must be information in a verifiable form and some standards (
criteria
) by which the auditor can evaluate the information. Determining the degree of correspondence between information and established criteria is determining whether a
What is the difference between auditing and accounting?
Accounting is the recording, classifying, and summarizing of economic events to provide relevant information to decision makers. The rules of accounting are the criteria used by the auditor for evaluating the presentation of economic events for financial
Audits of Financial Statements
Purpose: Determine whether the overall financial statements are presented IAW specified criteria (
GAAP
).
Highly Standardized
Performed by: CPA, GAO, Internal Auditors
Operational Audits
Purpose: Evaluate whether operating procedures are efficient and effective.
Used by Management; Highly Non-Standard; Subjective
Performed by: CPA, GAO, Internal Auditors
Compliance Audits
Purpose: Determine whether the client is following specific procedures set by higher authority.
Used by authorities setting procedures
Performed by: CPA, GAO,
IRS
, Internal Auditors
What are the four parts of the CPA examination?
1. AUD - Auditing and Attestation
2. FAR - Financial Accounting and Reporting
3. REG - Regulation
4. BEC - Business Environment and Concepts
What knowledge does the auditor need about the client's business in an audit of historical financial statements?
An auditor must have thorough understanding of the client and its environment. This should include the client's regulator and operating environment, business strategies and processes, and measurement indicators (comparing to industry peers).
What are the major differences in scope and audit responsibilities of CPAs, GAO auditors, IRS agents, and internal auditors?
1. CPA - perform audits with auditing standards of published financial statements prepared IAW GAAP or IFRS
2. GAO - perform compliance or operational audits to assure congress of the expenditure of public funds IAW directives and laws
3. IRS - perform co
Explain how the move toward greater use of fair value accounting might increase information risk.
Information risk is the risk information upon which a business decision is made is inaccurate.
Fair value accounting is based on estimates and requires judgement.
Fair value can be estimated using multiple methods with some estimates being more subjective