Chapter 1 - Demand and Assurance Services

What is the definition of auditing?

Accumulating and evaluating evidence about information to report on the degree of correspondence between the information and established criteria (e.g., GAAP). Evidence must be sufficient and appropriate.

What is the difference between accounting and auditing?

Accounting is the recording, classifying, and summarizing of economic events to provide financial information for decision-making. Auditing is the independent evaluation of that financial information to determine if it fairly presents economic reality in accordance with GAAP.

What are assurance services?

Independent professional services provided by CPAs or non-CPAs that improve the quality or context of information for decision-makers. Conclusions can be written or oral.

What are attestation services?

A specific category of assurance services in which a CPA firm issues a written report expressing a conclusion about the reliability of a written assertion that is the responsibility of another party (governed by AT standards).

What are non-assurance services provided by CPAs?

Services where the CPA does not issue an opinion or conclusion on an assertion. Examples include accounting/bookkeeping, tax preparation and planning, and management consulting.

What is information asymmetry in business?

An imbalance of information where company management (who runs daily operations) has more or better information about the business's true financial state than outside investors and creditors.

What is information risk?

The risk that financial information upon which business decisions are made is inaccurate or misleading.

What are the 4 main causes of information risk?

1. Remoteness of information (decision-makers cannot personally inspect assets and must rely on others) ; 2. Provider biases and motives (management optimism or fraud) ; 3. Volume of data (large transaction volumes increase unintentional errors) ; 4. Complex exchange transactions (complex accounting rules make recording difficult).

What are the 3 main ways a business can reduce information risk?

1. User verifies information personally (e.g., inspecting business location) ; 2. User shares information risk with management (legal recourse if statements are wrong) ; 3. Audited financial statements are provided by an independent external auditor (most common and cost-effective method).

What is the formal definition of Auditing and its 5 core components?

Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. 5 components: 1. Information (F/S) ; 2. Criteria (GAAP) ; 3. Evidence (sufficient quality & quantity) ; 4. Written Report ; 5. Competent, independent person.

What are the 4 primary types of audit services?

1. Financial Statement Audit (evaluates fair presentation under GAAP) ; 2. ICOFR Audit (attests to internal control effectiveness) ; 3. Compliance Audit (checks adherence to specific laws/rules) ; 4. Operational Audit (evaluates operational efficiency and effectiveness).

Who is authorized to perform Auditing, Attestation, and Assurance services?

Auditing: Only a CPA firm ; Attestation: Only a CPA ; Assurance Services: Independent professional (CPA or non-CPA).

Who audits governmental entities, and to whom do they report?

The Government Accountability Office (GAO), which reports directly to the U.S. Congress.

How does the CPA Evolution Model restructure the CPA exam licensing process?

Candidates pass 3 Core sections (Auditing & Attestation [AUD], Financial Accounting & Reporting [FAR], Taxation & Regulation [REG]) plus 1 chosen Discipline (Business Analysis & Reporting [BAR], Information Systems & Controls [ISC], or Tax Compliance & Planning [TCP]).

[Source: HW MC 1-13] Which of the following best describes the main reason why an independent auditor reports on financial statements?

Different interests may exist between the company preparing the financial statements and the persons using those statements (conflicts of interest and information risk).

[Source: HW MC 1-14] Which of the following services is an attestation engagement governed by statutory standards?

An engagement to issue a report on the effectiveness of an entity's internal control over financial reporting (ICOFR under SOX 404).

[Source: HW MC 1-15] Which of the following is an operational audit objective?

Evaluating whether a company's computerized payroll processing system is operating efficiently and effectively.

[Source: HW MC 1-15b] What level of assurance is required for an audit of financial statements?

Reasonable assurance (a high, but not absolute, level of assurance that financial statements are free of material misstatement).

[Source: HW Problem 1-16] Categorize the service: Audit of public company internal control over financial reporting under SOX 404.

Attestation Service (specifically an Audit / Examination under PCAOB AT standards).

[Source: HW Problem 1-16] Categorize the service: Report on the accuracy of a company's greenhouse gas emissions disclosure.

Attestation Service (Specifically an Examination / Review under AT-C standards).

[Source: HW Problem 1-16] Categorize the service: Preparing a corporate income tax return or providing tax compliance advice.

Non-Assurance Service (no opinion or written assurance on an assertion is issued).

[Source: HW Problem 1-17] Monterrey Corp scenario: Why does obtaining an independent audit lower the interest rate charged by a bank on a commercial loan?

It significantly reduces the bank's information risk (the risk that financial statements used for credit evaluation are materially misstated), allowing the bank to charge a lower interest rate.

[Source: HW Problem 1-19] Regional Delivery trucks scenario: Samantha Altman, CPA, evaluates the efficiency of truck maintenance routines. What type of audit is this, and who is the auditor?

Operational Audit performed by an Independent External CPA Auditor (evaluating operational efficiency and effectiveness).

[Source: HW Problem 1-23] Can non-CPAs perform: Inspection of gasoline pump accuracy, Organic food certification, or ISO 9000 quality control audits?

Yes! Non-CPA specialists can perform all 3 because none of them involve financial statement audits or statutory CPA attestation assertions.