audit ch 1

Information Risk

The risk that information disseminated by a company will be materially false or misleading.

Business Risk

The risk that an entity will fail to meet its stated business objectives due to poor performance, such as failing to pay debt when due.

What can audits not directly do?

Address business risk.

Financial Statement 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.

Attestation Engagement

Services where a practitioner is requested to examine whether management's assertions about a specific type of subject matter can be relied upon.

Attestation Engagement Examples

Financial forecasts, internal control effectiveness, environmental compliance, and sustainability reporting.

Assurance Services

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

Assurance Services Examples

XBRL reporting, information risk assessment, internal audit outsourcing, ESG reports, and cyber risk assessment.

Relationship Among Audit, Attestation, and Assurance

SOX Important Provision

Management team is responsible for the financial reporting process and the financial statements.

SOX Section 302 Requirements

Requires company CEOs and CFOs to certify the financial statements by signing a statement confirming they have read the statements, are not aware of any false or misleading statements or omitted disclosures, and believe the statements accurately present the financial condition.

SOX Section 404 Requirements

Requires auditors to issue an attestation report on the internal controls over financial reporting for accelerated filers, which are companies with a public float of 75 million dollars or more, providing assurance that the internal controls are appropriately designed and operating effectively.

Accelerated filers’ ($75M) additional assertion

The effectiveness of the company’s internal controls over financial reporting.

Existence or occurrence

Assets and liabilities included in the accounts exist and recorded transactions are valid and have actually occurred.

Completeness

All balances and transactions have been recorded in the financial statements.

Valuation or allocation

Assets, liabilities, and recorded transactions have been valued in accordance with GAAP.

Rights and obligations

Entity has a legal claim on all assets and revenues reported and has a legal responsibility for all liabilities and expenses.

Presentation and disclosure

All accounts are presented in the appropriate place and all information required has been disclosed in the statements and footnotes.

Professional Skepticism

An auditor’s questioning mind and critical assessment of presentation by management and evidential matter gathered.

Why do auditors have to be skeptical?

Because a potential conflict of interest always exists between the auditor and the client.

Sarbanes-Oxley prohibits professional service firms from providing any of the following services to an audit client:

Bookkeeping, financial system design or implementation, appraisals, actuarial services, internal audit outsourcing, HR services, broker services, and legal and expert services that are unrelated to the audit.

SOX prohibits professional service firms from performing any client services for audit clients in which the auditors may:

Make management decisions or audit their own work.