Auditing Whittington

• Assurance services


  The broad range of information enhancement services performed by a certified public accountant (CPA) that are designed to enhance the degree of confidence in the information
• Types of assurance services

  • Those that increase the reliability of information
  • Those that involve putting information in a form or context that facilitates decision making
• Attest engagement


  CPAs provide a report on subject matter or an assertion about that subject matter
• Types of subject matter CPAs attest to

  • Financial forecasts
  • Internal control
  • Compliance with laws and regulations
  • Advertising claims
• Suitable criteria


  Standards established or developed by groups composed of experts
• Financial reporting framework


  The suitable criteria in a financial statement audit, often generally accepted accounting principles (GAAP)
• Forms of attest engagements

  • Examinations (audits)
  • Reviews
  • Agreed-upon procedures
• Examination (audit)


  Provides the highest form of assurance, selecting from all available evidence to limit the risk of undetected material misstatement
• Review


  Substantially less in scope than an examination, designed to lend limited assurance
• Agreed-upon procedures engagement


  CPAs perform specific procedures and report on their findings
• Attestation services are only a portion of the assurance services offered by CPAs
• Financial statement audit


  Auditors undertake to gather evidence to obtain a high level of assurance (reasonable assurance) that the financial statements follow generally accepted accounting principles
• Financial statement audit


  1. Gather information about the company and its environment

  2. Inspect documents

  3. Observe assets

  4. Make inquiries

  5. Perform other auditing procedures
• The evidence obtained and evaluated by the auditors focuses on whether the financial statements are presented in accordance with the applicable financial reporting framework, usually GAAP
• Auditors perform audits of all types of businesses, governmental and nonprofit organizations
• Reliable accounting and financial reporting


  Aids society in allocating resources efficiently
• Credibility


  Information can be believed and relied upon by outsiders such as stockholders, creditors, government regulators, customers, and other interested third parties
• Audited financial statements


  Reduce the decision maker's information risk, the risk that the financial information used to make a decision is materially misstated
• Unaudited financial statements leave a credibility gap as management cannot be expected to be entirely impartial and unbiased
• Unaudited financial statements may have been honestly, but carelessly, prepared with liabilities overlooked, assets overstated, and net income exaggerated
• Accountants express their professional opinion as to the fairness of the company's financial statements
• Financial statements prepared by management and transmitted to outsiders without first being audited by independent accountants

  Leave a credibility gap
• Management can hardly be expected to be entirely impartial and unbiased in reporting on its own administration of the business
• Independent auditors


  Have no material personal or financial interest in the business, their reports can be expected to be impartial and free from bias
• Reasons unaudited financial statements may depart from generally accepted accounting principles

  • Accidental errors
  • Lack of knowledge of accounting principles
  • Unintentional bias
  • Deliberate falsification
• Audits provide organizations with more credible financial statements to allow users to have more assurance that those statements do not materially depart from generally accepted accounting principles
• Auditor's role


  Public watchdog, requiring total independence from the client at all times and a complete fidelity to the public trust
• Business risk


  Risk associated with a company's survival and profitability
• Information risk


  Risk that the information used to assess business risk is not accurate
• Auditing


  Can significantly affect the level of information risk
• Audits can reduce the overall risk to the bank, making the loan officer more likely to rely on the company's financial information and make the loan at a lower rate of interest
• Investors rely upon annual and quarterly financial statements for investment decisions and for assurance that their invested funds are being used honestly and efficiently
• Regulatory agencies demand audit services to compensate for the inherent weakness of self-interested information provided by taxpayers
• Corporate governance


  The rules, processes, and laws by which businesses are operated, regulated, and controlled
• Public companies must establish audit committees of their board of directors, ordinarily composed of between three and six independent (nonmanagement) board members
• Audit committees are charged with areas such as oversight of financial reporting, regulatory compliance, and risk management
• Audits have been performed throughout the recorded history of commerce and government finance
• Original meaning of the word auditor


  One who hears
• Before 1900, audits often included a study of all, or almost all, recorded transactions
• In the first half of the 20th century, the direction of audit work tended to move away from fraud detection toward determining whether financial statements gave a full and fair picture