Cis ch1

• External audit


  An independent attestation performed by an expert (auditor) who expresses an opinion regarding the presentation of financial statements
• External audit


  • Performed by Certified Public Accountants (CPAs) from public accounting firms independent of the client organization being audited
  • Objective is to assure the fair presentation of financial statements
  • Often referred to as financial audits
• The Securities and Exchange Commission (SEC) requires all publicly traded companies to be subject to a financial audit annually
• Interests represented by CPAs conducting financial audits

  • Stockholders
  • Creditors
  • Government agencies
  • General public
• CPA's role in an audit


  • Similar to a judge who collects and evaluates evidence and renders an opinion
  • Key concept is independence
• Independence in auditing


  Auditor must remain independent from the client organization throughout the audit process
• Public confidence in the reliability of a company's internally produced financial statements relies on evaluation by an independent auditor
• Authorities defining rules for financial audits

  • SEC
  • Financial Accounting Standards Board (FASB)
  • American Institute of CPA (AICPA)
  • Federal law (Sarbanes-Oxley Act of 2002)
• With the passage of the Sarbanes-Oxley Act of 2002, Congress established the Public Company Accounting Oversight Board (PCAOB) to oversee financial auditing
• PCAOB has replaced some functions of the FASB and AICPA under federal law
• Attest service is an engagement where a practitioner issues a written communication expressing a conclusion about the reliability of a written assertion that is the responsibility of another party
• Attestation services


  • Require written assertions and a practitioner's written report
  • Require the formal establishment of measurement criteria and their description in the presentation
• Advisory services


  Professional services offered by public accounting firms to improve their client organizations' operational efficiency and effectiveness
• The domain of advisory services is intentionally unbounded
• Advisory services


  • Actuarial advice
  • Business advice
  • Fraud investigation services
  • Information system design and implementation
  • Internal control assessments for compliance with SOX
• Passed


  SOX legislation
• Prior to the passage of SOX


  Accounting firms could provide advisory services concurrently to audit (attest function) clients
• SOX legislation


  Greatly restricts the types of nonaudit services that auditors may render to audit clients
• Non-permissible services for registered public accounting firms

  • Bookkeeping or other services related to the accounting records or financial statements of the audit client
  • Financial information systems design and implementation
  • Appraisal or valuation services, fairness opinions, or contribution-in kind reports actuarial services
  • Internal audit outsourcing services
  • Management functions or human resources
  • Broker or dealer, investment adviser, or investment banking services
  • Legal services and expert services unrelated to the audit
  • Any other service that the board determines, by regulation, is impermissible
• The Institute of Internal Auditors (IA) defines internal auditing as an independentappraisal function established within an organization to examine and evaluate its activitiesas a service to the organization' Internal auditors perform a wide range of activities onbehalf of the organization, including conducting financial audits, examining an operation's
• Internal auditors are often certified as a Certified Internal Auditor (CIA) or

  Certified Information Systems Auditor (CISA).
• Conceptual distinction between external auditors and internal auditors

  External auditors represent outsiders, internal auditors represent the interests of the organization
• Internal auditors often cooperate with and assist external auditors in performing aspects of financial audits to achieve audit efficiency and reduce audit fees
• Cooperation between internal and external auditors

  Internal auditors can perform tests of computer controls under the supervision of a single external auditor
• Internal audit independence


  Implies no subordination of judgment to another, arises from an independent mental attitude that views events on a factual basis without influence from an organizational structure that subordinates the internal audit function
• Some internal audit departments report directly to the controller, compromising internal auditor's independence and prohibiting external auditors from relying on evidence provided by them
• A truly independent internal audit staff adds value to the audit process
• Value added by independent internal audit staff

  Internal auditors can gather audit evidence throughout a fiscal period, which external auditors may then use at the year's end to conduct more efficient, less disruptive, and less costly audits of the organization's financial statements
• while external auditors represent outsiders, internal auditors represent the interests of the organization.
• Fraud audits have increased in popularity as a corporate governance tool
• Fraud audits have become popular

  Due to an increase in employee theft of assets and major financial frauds by management
• Major financial frauds

  • Enron
  • WorldCom
• Fraud audits are sometimes initiated by


  Corporate management who suspect employee fraud
• Fraud auditors

  Earned the Certified Fraud Examiner (CFE) certification, which is governed by the Association of Certified Fraud Examiners (ACFE)
• The board of directors of publicly traded companies form a subcommittee known as the audit committee, which has special responsibilities regarding audits. This commit- tee usually consists of three people who should be outsiders
• With the advent of the Sarbanes-Oxley Act, at least one member of the audit committee must be a "financial expert."
• Audit committee


  An independent "check and balance" for the internal audit function and liaison with external auditors
• Sarbanes-Oxley Act


  Significant changes imposed on the relationship between management and the external auditors
• SOX mandates that external auditors now report to the audit committee who hire and fire auditors and resolve disputes
• Audit committee


  • Willing to challenge the internal auditors or the entity performing that function as well as management
  • Look for ways to identify risk