1
Auditing
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
- must be done by a competent, independent person
- capable of having the knowledge to do so
- competent to know the types and amount of evidence needed to reach proper conclusions
- not affiliated with the company and no bias
- audit adds little to no value if the individual is biased towards any of the information
independent auditors: CPAs or firms that perform audits of commercial and noncommercial entities
- information must be in a verifiable form and some standards or criteria in order to evaluate information
- audits of quantifiable information
- financial statements
- historical financial statements audited by CPAs, criteria needs to match GAAP
- can also be audited over internal controls of financial reporting
- federal income tax returns
- criteria is found in the Internal revenue code (IRC)
- audits of subjective information
- efficiency of systems
- criteria can be the level of input or output errors
- efficiency of manufacturing operations
- compliance
- internal controls
- criteria needs to match the COSOs framework
evidence: any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria
- data on transactions
- communication with outsiders
- observations
- oral testimony of client
must obtain sufficient quality and quantity of evidence
determine the amount of evidence needed to evaluate information and its correspondence to establish criteria
audit report: communication of auditors findings to its users
- final stage of the audit
- informs readers of the degree of correspondence between the information audited and established criteria
- can differ in forms
- financial statement audits are highly technical
- operational audits can be given orally
\
2
Auditing vs. Accounting
accounting: the recording, classifying, and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making
- accountants must develop a systems in order to make sure events are recorded timely and at a reasonable cost
- auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period
- auditors must have the expertise in accumulation and interpretation of audit evidence
\
3
Information Risk
rate of interest usually determined by 3 factors
- risk free rate - the rate the bank could earn by investing in treasury notes for the same length of time as business loans
- business risk for the customer - risk reflects the possibility that the business will not be able to repay its loan because of economic or business conditions (recession, management decisions, competition)
- information risk - reflects the possibility that the information was inaccurate
information risk: the risk that information upon which a business decision was made is inaccurate
auditing has no effect on RFR or BR, but can have a significant effect on information risk
makes sure that the information given to outsiders is as accurate as possible
\
4
Causes of Information Risk
- Remoteness
- information gathered is often relied on others, when its obtained from others the likelihood of It being intentionally or unintentionally misstated increases
- Bias and motives of providers
- information by someone whose goals are inconsistent with those of the decision maker
- can result in inadequate or incomplete disclosures of information
- Voluminous Data
- in larger organizations, the volume of exchange transactions is fairly large
- increases the prob. that there is improperly recorded data in the record
- Complex Exchange Transactions
- exchange transactions between orgs have become more and more complex
- acquisitions
- combining and disclosing results of operations in different industries
- properly valuing and disclosing derivative financial instruments
reducing information risk
smaller businesses tend to keep info risk higher in order to reduce the cost of trying to reduce it
larger businesses will pay the extra money in order to reduce their information risk
\
3 main ways to reduce it
user verifies information
- user may go to the business and examine records and obtain information such as physical count
- often impractical due to cost of it
- IRS does this with tax returns
- in acqusitions, company may hire an outside audit team to perform these tasks
user shares information risk with management
- managemnet is responsible for providing reliable Information to users
- legal issues may arise is decisions were made on false information
audited financial statements are provided
- most common way to obtain reliable information is to have an independent audit
- external users like stockholders and lenders rely on such information to be as accurate as possible
- audit assurance is valued because the information is complete, accurate and unbiased
\
5
Assurance Services
assurance service: Is an independent professional service that improves the quality of information for decision makers
- done by an independent person relaying unbiased information
SOX 404
- provisions resulted in the act now requires CPAs to perform internal control audits
- CPAs have also expanded their audits to include things such as:
- information of interest to investors
- reports on CSR and sustainability reports
attestation services: a type of assurance service in which the CPA firm issues a report about a subject matter or assertion that is made by another party
primary categories include
- audit of historical financial statements
- audit of internal controls over financial reporting
- reviews of historical financial statements
- other attestation services that may be applied to a broad range of subject matter
audit of historical financial statements: a form of attestation service in which the auditor issues a written report stating whether the financial statements are in material conformity with accounting standards
- most common assurance service provided by CPA firms
- designed to provide reasonable assurance that statements are free of material misstatements
- publicly traded companies are required to have audits under the federal securities act and opinions can be found in their annual financial reports
internal control over financial reporting: an engagement in which the auditor reports in the effectiveness of internal control over financial reporting; such reports are required for accelerated filer public companies under SOX 404
- must attest to the effectiveness of internal control over financial reporting
review of historical financial statements: management asserts that the statements are fairly stated in accordance wiht accounting standards, the same as an audit, but a lower level of assurance is needed
- requires less evidence to perform
- requires less money
- but gives a lower assurance level
nonassurance services provided by CPAs
- accounting and bookkeeping services
- tax services
- management consulting services
the quality of information is often an important criterion in management consulting, this gial is not the primary purpose
\
6
Types of Audits
operational audits: evaluates the efficiency and effectiveness of any part of an organization’s operating procedures and methods, gives recommendations for improving operations
- operational audit
- reviews are not limited to accounting
- can evaluate organizational structure, computer operations, production methods, marketing, and any other area that auditor is qualified
- effective and efficiency must also meet the established criteria for compliance and financial audits
- more like management consulting than auditing
compliance audit: conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority
- compliance audit
- determine whether personnel are following the procedures prescribed by controller
- review wage rates for compliance with minimum wage laws
- contractual agreements with bankers and lenders
- mortages in compliance with governmental regulations
- governmental units like school districts, subject to audits due to governmental regulations
- results are typically reported to management rather than outsiders
financial statement audits: conducted to determine whether financial statements are stated in accordance with specific criteria
- financial statement audit
- using cash basis or other
- stated in accordance to accounting standards and regulations
- gathers evidence to look for material errors or misstatements
- auditors must have extensive knowledge of the company due to different complexities within
\
7
Types of Auditors
Certified public accounting firms: responsible for auditing historical financial statements of all publicly traded companies, large, small and noncommercial organizations
Government accountability office auditors: an auditor working for the US government accountability office (GAO), a nonpartisan agency in the legislative branch of the federal government
- reports and is responsible solely to Congress
- audits information prepped by federal government agencies before its submitted to congress
- evaluates the operational efficiency and effectiveness of federal programs
Internal revenue agents: auditors who work for the IRS and conduct examinations of taxpayers returns
- responsible for enforcing federal tax laws
- solely compliance audits
Internal auditors: auditors employed by a company to audit for the companies board of directors and management
- can range from 1-100s, depending on the size of the company
- involved in operational auditing or computer systems
- reports directly to high executive office to remain independent from rest of business
- outsiders don’t rely solely on internal audits because of the lack of independence
Certified Public Accountant: a person who has met state regulatory requirements, including passing the Uniform CPA exam, and thus has been certified; a CPA may have their primary responsibility the performance of the audit function on historical financial statements of commercial and noncommercial financial entities
\
\
\
\