Chapter 1 - Demand and Assurance Services

Define Assurance Services

Independent professional services that improve the quality of information for decision

• Provided by CPAs or non-CPAs

• Express a written or oral conclusion on reliability and relevance of information and/or systems

How is information improved by assurance services?

• Independent professional (objective expertise)

• Use of process/procedures to confirm credibility (quality and consistency of service performed)

• Provides oral or written report on results (reputation)

Why are audit and assurance services important?

Information alone is not sufficient

• What’s the issue? Information asymmetry

• Decision-makers must have confidence that information is reliable

  • Information risk

What causes information risk?

• Remoteness of information

• Biases and motives of the providers

• Volume of data

• Complexity

Define attestation services

Requires a CPA

• When a CPA practitioner is engaged to issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party

What are the types of audit services?

• Financial Statement Audit: Designed to provide reasonable assurance that financial statements are free of material misstatements

• Internal Controls over Financial Reporting (ICOFR) Audit: Management asserts that internal controls have been developed and implemented, and the auditor attests to the effectiveness of internal controls

• Compliance Audit: Conducted to determine if specific procedures, rules, or regulations have been followed

• Operational Audit: Evaluates efficiency and effectiveness of an organization’s operations

Define auditing

The accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria

• Information → Financial Statements

• Criteria or standard → GAAP

• Evidence → Must be sufficient in quality and quantity

• Written report → Audit Report

What are the key characteristics of CPA firms

External and Independent

Who audits governmental entities?

Government Accountability Office (GAO) — Reports to congress

Who can do auditing, attestation, or assurance

• Audit — Only a CPA (CPA firm)

• Attestation — Only a CPA

• Assurance — Independent professional (CPA or non-CPA)

What are the types of reports for all of the following: auditing, attestation, or assurance

• Audit — Written

• Attestation — Written

• Assurance — Written or oral

What information are the following services lending credibility to: auditing, attestation, or assurance

• Audit — Financial Statements

• Attestation — Assertions by management

• Assurance — Any information management

What are the 3 major demands for audits

1. Reduce information risk

2. Signaling

3. Monitoring

What are the causes of information risk?

• Remoteness of info

• Biases and motives of provider

• Voluminous data

• Complex exchange transactions

How does signaling cause demand for auditing?

Prove quality or legitimacy

Who demands assurance? Why?

Producers/sellers to command a higher price

Why is monitoring a driver for the demand for an audit?

There is a tension between the Owner (Principal) and Manager (Agent) because the manager may want to overrepresent revenue for benefits