Chapter 1 Audit

ACCT4412

Why does Management want to do an audit?

They want to do an audit in order to entice investors and creditors in order to raise capital

What is Business Risk?

a risk that a company will fail to meet it’s objectives

What are the four environmental factors that increase demand for reliable information?

Complexity, Remoteness, Time sensitivity, and Consequences

Complexity

modern transactions are too intricate for users to verify independently

Remoteness

Shareholders are too far from management by distance, time, and expertise, hence make audits essential to bridge the principal and agent gap

Time Sensitivity

Fast decision-making in business leaves no room for users to verify information themselves, requiring pre-assured reliable data

Consequences

When significant resources are at stake, the cost of acting on unreliable information is too high, driving demand for audit assurance.

Information Risk

the probability that the information circulated by the company will be false or misleading

Assurance

the lending of credibility to information

Attestation

a professional service resulting in a report on the assertions about subject matter that is responsibility of another party

Auditing

the systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to interested users

Assurance Services

independent professional services that improve the quality of information, or its context, for decision-makers

What are some assurance services?

Attestation services,Financial Audits, Advisory Services, and PSA Authentication

Attestation Engagement

a service where a practitioner is requested to examine whether management’s assertion about some type of subject matter can be relied upon

What are some Attestation Engagements?

Prospective financial info, Reporting on controls at service org, ESG Reporting, and Compliance

Audit(AICPA)

to provide F/S users w/ an opinion by the auditor on whether the F/S are presented fairly, in all material respects, in accordance w/ an applicable financial reporting framework, which enhances the degree of confidence that intended users can place in the F/S

Financial Reporting

process of providing statements of financial position (B/S), results of operations (I/S, SSE, SCI), changes in cash flows (SCF), and accompanying disclosures to outside decision makers who do not have access to mgt’s internal sources of info; a company’s accountants, under the direction of mgt, perform this function.

What are some Financial Statement Assertions?

Existence/Occurrence, Completeness, Valuation/Allocation, Rights and obligations, and Presentation and disclosure

What is Existence?

assertion that all assets, liabilities, and equity interests do actually exist

What is Occurrence?

assertion that all of the transactions and events that have been recorded are valid, pertain to the entity, and have actually taken place

What is Cutoff?

assertion that transactions are accounted for in the proper period (Before Year End)

What is Completeness?

assertion that all of the transactions, events, assets, liabilities, equities, and other disclosures that should have been recorded in the F/S have been recorded

What is Valuation/Allocation?

assertion that all assets, liabilities, and equity interests of the entity have been valued in accordance with the relevant f/r standards (GAAP/IFRS) and are listed in the F/S at the proper amount, and any resulting valuation adjustments have been appropriately recorded in the F/S

What are Rights and Obligations?

assertion that the entity is entitled to all rights of the assets, the liabilities are the legal responsibility of the entity, and all of the disclosed events and transactions pertain to the entity

What are Presentation and Disclosure?

assertion that all transactions and events have been presented correctly and that all relevant information has been disclosed to F/S users, usually in the footnotes to the F/S

What are Significant Accounts?

F/S account or disclosure that could contain a material misstatement. Auditors must conduct procedures on each significant account/disclosure

What are Relevant Assertion?

assertion with reasonable possibility a material misstatement exists related to it for the significant account/disclosure being audited

What is the relationship between Assurance, Attestation, and Audit?

All audits are attestations, and all attestations are assurance services — audit is the most narrow, assurance is the broadest