CHAPTER 1 Auditing

Does management have an incentive to present financial statements in a way that will entice future investors and creditors?

yes

What do investors and creditors need before they invest?    

Assurance

Since the need for assurance exists, what does it create the demand for?    

Financial statement audits

What is required for the audit to have true value to investors and creditors?                                                                                                                                              

Completed in accordance with professional standards and by independent auditors

Why is audit quality important?

Investors and creditors need Reliable financial statement information

Why is audit quality important?

Investors and creditors need Reliable financial statement information

When audit quality is comprised what happens?

The confidence of creditors and investors

 

What did the SOX Act of 2002 help create?

PCAOB, responsible for setting all audit standards to be followed on audits of public companies

Is the PCAOB required to perform inspections of the audit work being completed?

YES, and the quality control process employed by an audit firm

When companies make everyday decisions like decisions to purchase or sell goods, lend money, what effect does this have?             

it effects Business risk – the risk that an entity will fail to meet its objectives

 

What are some examples of business risk?

Product lines are becoming obsolete, taxes increasing, contract loss.

How can business risk be minimized?         

Timely, relevant and reliable information

What can auditors provide?                

High-quality information to make educated investing and lending decisions

The four environmental factors that increase user demand for relevant and reliable information?

Complexity- transactions are numerous and complicated

Remoteness – investors are far away from what the are investing in, they can’t travel to visit locations to check up on investments

Time Sensitivity- decisions need to be made quickly and rapidly. Receiving high-quality information promptly is essential.

Consequences- decisions can cost tons in resources. It can be so important that reliable information is necessary.

What is information risk?

The probability that information circulated by a company will be false or misleading

The primary source of information is the target company itself, does there exist an incentive for companies’ management to make itself look good?

Yes

Where is there a potential conflict of interest?

Between providers and users of financial statements

How do auditors serve as intermediaries?

They are independent and objective professionals who lend credibility to the information.

If I lend credibility to something, what am I doing?

Providing assurance

When I give assurance to management’s assertion about something what is that called?

We refer to that assurance provided as attestation

When auditing work is completed what happens?               

Supply an opinion as to whether the financial statements are presented fairly and in all material respects/

When the assertions made by management are related to the financial statements that is called audit.

yes

What is a business risk?

Risk that management will not reach its objectives

What four environmental conditions that increase user demand for relevant and reliable information?

Complexity- transactions are numerous and complicated

Remoteness- investors cannot visit distant locations to check up on investment

Time sensitivity – there is a need to be able to make quick decisions. Users must be able to make decisions quickly

Consequence- decisions can involve significant resources

How does AICPA define an assurance service?

Any independent professional service that improves the quality of information or its context for decisions makers

Major elements and boundaries for the AICPA definition for assurance service?

Independence- preserve integrity and objectivity

Professional service – some element of judgement based on education and experience

Improving quality of information -assure users about the relevance of information

Decision makers – consumers of assurance services

Most common type of assurance service providing by CPAs?

Attestation services, the most common type of attestations service provided by CPAs, is audits. Attestations services are not always audits.

 

Can there be assurance services other than attestation and financial statement auditing?

ask dr met

What are some assurance services?

XBRL reporting, IA outsourcing, fraud and illegal acts prevention and deterrence

What is important to realize about assurance service?     

Assurance services focus entirely on the information that decision makers use, such as stakeholders, shareholders, users of financial information,