Auditing - Ch. 01 Intro To Assurance & Fin Stmt Auditing

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AUDITING

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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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ATTESTATION

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A practitioner is engaged to provide "a report on subject matter, or an assertion about subject matter, that is the responsibility of another party". A consulting service in which a CPA expresses a conclusion about the reliability of a written statement that is the responsibility of someone else. Financial statement audits

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ASSURANCE

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An independent professional service, typically provided by CPAs, with the goal of improving the information or the context of the information so that decision makers can make more informed, and presumably better decisions. Provide independent and professional opinions that reduce the information risk (risk that comes from incorrect information). Attest services and Financial statement audits

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AGENCY THEORY

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A theory explaining the relationship between principals, such as a shareholders, and agents, such as a company's executives. In this relationship the principal delegates or hires an agent to perform work. The theory attempts to deal with two specific problems: first, that the goals of the principal and agent are not in conflict (agency problem), and second, that the principal and agent reconcile different tolerances for risk.

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CONSEQUENCES OF AGENCY THEORY

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1. Conflict of Interest
2. Information Assymetry
3. Information Risk

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HOW DOES CONFLICT OF INTEREST ARISE AND HOW DOES IT LEAD TO A DEMAND FOR ACCOUNTING AND AUDITING?

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Two parties (such as a buyer and seller) have 2 separate agendas..... the buyer wants a lower price, wants to find something wrong with the product, and the seller wants a higher price, and wants to show the product without faults.

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HOW DOES INFORMATION ASSYMETRY ARISE AND HOW DOES IT LEAD TO A DEMAND FOR ACCOUNTING AND AUDITING?

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Usually is present because one party has more information than the other party in regards to a sale or trade or some kind of deal, so the first party has an advantage. Accounting or Auditing would help balance the "playing field".

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HOW DOES INFORMATION RISK ARISE AND HOW DOES IT LEAD TO A DEMAND FOR ACCOUNTING AND AUDITING?

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The risk that information circulated by a company will be false or misleading. Accounting or Auditing could help shine a light on the "true information".

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WHAT IS AUDIT RISK?

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The risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated. Audit provides only REASONABLE ASSURANCE that the F/S do not contain material misstatements.

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WHY CAN YOU NOT ELIMINATE AUDIT RISK?

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Due to the cost and work involved in investigation, and due to the concept of reasonable assurance, a material misstatement could still be present and the auditor would fail to detect it.

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WHAT IS MATERIALITY?

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A concept within auditing relating to the importance/significance of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

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MATERIALITY - WHO SETS IT - HOW THEY SET IT?

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It is a PROFESSIONAL JUDGMENT call by the AUDITOR as to whether there has been information omitted or misstated in the financial statements. The AUDITOR assesses and can provide REASONABLE ASSURANCE as to how large the misstatement was and how it affected the user's decisions, and determines if the misstatement is critical to the buyer's decision.

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WHAT IS AUDIT EVIDENCE?

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All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Includes info from the accounting records and MANAGEMENT'S ASSERTIONS. The auditor is concerned with the RELEVANCE and RELIABILITY of the evidence.

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AUDIT REPORT - WHAT ARE THE ELEMENTS IN THE STANDARD REPORT? PARTS 1 - 3

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1. Title
2. Addressee (who the report is addressed to)
3. Introductory paragraph (what financial statements are being audited, time period, who is responsible for the financial statements, that the auditor has responsibility to express an opinion)

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AUDIT REPORT - WHAT ARE THE ELEMENTS IN THE STANDARD REPORT? PARTS 4 - 5

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4. Scope paragraph (General explanation as to HOW the audit is being conducted, what rules and principles are being used, and that the audit provides only a reasonable assurance that there are no material misstatements)
5. Opinion paragraph (contains the auditor's opinion concerning the fairness of the financial statements based on the audit evidence, according to the criteria against which they were audited)

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AUDIT REPORT - WHAT ARE THE ELEMENTS IN THE STANDARD REPORT? PARTS 6 - 8

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6. Explanatory paragraph (anything that was audited other than the financial statements, such as Internal Control)
7. Name of auditor (Signature of the CPA firm providing the audit and the date of the report.)
8. Date of report (last day of the auditor's responsibility for review of the significant events that have occurred after the date of the F/S)

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DIFFERENCE BETWEEN INFO ASSYMETRY, CONFLICT OF INTEREST AND INFORMATION RISK

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When purchasing a house, the seller normally has more info than the buyer about the house, so there is information assymetry. Conflict of interest arises because both the buyer and seller have different goals..... one wants the price to be lower, the other wants to make the house look better so the price goes up. The buyer has INFORMATION RISK because he does not have the information that the seller has about the house.

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WHAT IS CONFLICT OF INTEREST?

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Where one party has some personal or financial interest in a deal, so that there are inconsistencies between the interests of the party and he/she cannot perform his/her duties in a fair and impartial manner.

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WHAT IS INFORMATION ASSYMETRY?

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Where one party has superior information over another. (home inspection, used card history reports, diamond grading)

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WHAT IS INFORMATION RISK?

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Where one party has a risk because the other party KNOWS something that he doesn't. The risk that information that is given might be false or misleading.

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WHAT IS PCAOB?

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Public Companies Accounting Oversight Board

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WHAT IS GAAS?

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Generally Accepted Auditing Standards

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WHAT IS ASB?

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Auditing Standards Board

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WHAT IS AICPA?

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American Institute of Certified Public Accountants

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WHAT IS SAS?

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Statements on Auditing Standards