...service in which the public accounting firm issues a written communication that expresses a conclusion about the reliability of a written assertion of another party. Audit of historical financial statements: A form of attestation services, the auditor issues a written report expressing an opinion about whether the F/S is in material conformity (一致) with accounting standards. e.g.: listed company must provide shareholders with annual financial statements that are audited by an independent accounting firm. Review of historical cost financial statements: A form of attestation services, a public accounting firm issues a written report that provides less assurance than an audit as to whether the financial statements are in material conformity with accounting standards. Auditing standards: Establish mandatory (强制) requirements and provide explanatory (解释) guidance to auditors in fulfilling their professional responsibilities in the audit of financial reports. 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. Auditing should be performed by a competent, independent person. Compliance audit: 合规性审计 One of three primary types of audits, a review of an organization’s financial records performed to determine whether the organization is following specific procedure, rules or regulations set by some higher authority. An audit performed to determine whether an entity...
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...Chapter 01 An Introduction to Assurance and Financial Statement Auditing True / False Questions 1. | Independence standards are required for audits of public companies, but not for audits of private companies. True False | 2. | Decision makers demand reliable information that is provided by accountants. True False | 3. | Information asymmetry seldom occurs. True False | 4. | Conflicts of interest often occur between absentee owners and managers. True False | 5. | Auditing services and attestation services are the same. True False | 6. | Auditing is a type of attest service. True False | 7. | Testing all transactions that occurred during the period is cost prohibitive. True False | Multiple Choice Questions 8. | Why do auditors generally use a sampling approach to evidence gathering? A. | Auditors are experts and do not need to look at much to know whether the financial statements are correct or not. | B. | Auditors must balance the cost of the audit with the need for precision. | C. | Auditors must limit their exposure to their auditee to maintain independence. | D. | The auditor's relationship with the auditee is generally adversarial, so the auditor will not have access to all of the financial information of the company. | | 9. | Which of the following statements best describes a relationship between sample size and other elements of auditing? A. | If materiality increases, so will...
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...auditing was demanded prior to government regulation such as statutory audit requirements. Additionally, many private companies and other entities not subject to government auditing regulations also purchase various forms of auditing and assurance services. 1-3 There is a natural conflict of interest in the agency relationship between an owner and manager because of differences in the two parties’ goals. For example, the manager may spend funds on excessive personal benefits or favour entity growth at the expense of stockholders values. If both parties seek to maximize their own self-interest, it is likely that the manager will not act in the best interest of the owner and may manipulate the information provided to the owner accordingly. 1-7 Audit risk is defined as the risk that ‘the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated’ (ISA 200). Materiality: ‘Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.’(ISA 320). The audit report states that the auditor obtains ‘reasonable assurance’ whether the financial statements are free from ‘material’ misstatement. The term ‘reasonable assurance’ informs the reader that there is some level of risk that the audit did not...
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...CHAPTER 1 AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING Answers to Review Questions 1-1 The study of auditing is more conceptual in nature compared to other accounting courses. Rather than focusing on learning the rules, techniques, and computations required to prepare financial statements, auditing emphasizes learning a framework of analytical and logical skills to evaluate the relevance and reliability of the systems and processes responsible for financial information, as well as the information itself. To be successful, students must learn the framework and then learn to use logic and common sense in applying auditing concepts to various circumstances and situations. Understanding auditing can improve the decision-making ability of consultants, business managers, and accountants by providing a framework for evaluating the usefulness and reliability of information—an important task in many different contexts. 1-2 There is a demand for auditing in a free-market economy because the agency relationship between an absentee owner and a manager produces a natural conflict of interest due to the information asymmetry that exists between the owner and manager. As a result, the agent agrees to be monitored as part of his/her employment contract. Auditing appears to be a cost-effective form of monitoring. The empirical evidence suggests auditing was demanded prior to government regulation. In 1926, before...
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...Audit Week 2: Financial Statement Audits, Financial Statement Assertions and Audit Evidence Financial Statement Audit * A systematic process of objectively obtaining and evaluating evidence regarding assertions about the economic actions and events to ascertain the degree of correspondence between assertions and established criteria * Purpose: To enhance the degree of confidence of intended users in the financial statements by the expression of an opinion by the auditor Overall Objectives of the Auditor: * To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material aspects, in accordance with an applicable financial reporting framework * To report on the financial statements and communicate in accordance with the auditor’s findings Audit Process Overview: * Step 1: Client Acceptance and Retention * Step 2: Risk Assessment (Through understanding client business environment and operations Assess risks of material misstatement Assess Audit Risk) * Step 3: Audit Procedures Planning * Step 4: Test of controls (IF reliance on controls) * Step 5: Perform substantive tests * Step 6: Audit Completion and Reporting Financial Statement Assertions: * Assertions are representations made by management, explicit or otherwise, that are embodied in...
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...attest services and financial statement audits * Reporting not only on the reliability and credibility of information, but also on the relevance and timelines. * Attest (声明): A service when a practitioner (从业者) is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. Encompasses financial statement audits. * A broader auditing service, including not only economic events or actions. * Financial statement auditing is a specialized form of an attest service * Audit evidence (审计证据): All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements, as well as other information. * Sufficiency: The quantity of evidence the auditor obtains * Appropriateness: The quality * Relevance: Whether the evidence is relevant to the specific management assertion being test * Reliable: The diagnosticity (可诊断性) of the evidence * Audit risk: The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. * The auditor may unknowingly give a “clean” opinion (无保留意见) on financial statements that are materially misstated. * Auditing: A systematic process of (1) objectively obtaining and evaluating evidence regarding assertions about economic actions and events to...
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...Comprehensive Case A.1 – Enron I. Technical Audit Guidance To maximize the knowledge acquired by students, this book has been designed to be read in conjunction with the post-Sarbanes-Oxley technical audit guidance. All of the post-Sarbanes-Oxley technical guidance is available for free at http://www.pcaobus.org/Standards/index.aspx. In addition, a summary of the Sarbanes-Oxley Act of 2002 is also available for free at http://thecaq.aicpa.org/Resources/Sarbanes+Oxley/Sarbanes-Oxley+–+The+Basics.htm. II. Recommended Technical Knowledge The Sarbanes-Oxley Act of 2002 Section 103 Section 201 Section 203 Section 204 Section 206 Section 301 Section 302 Section 305 Section 401 Title IX PCAOB Auditing Standard No. 5 Paragraph #2 Paragraph #9 Paragraph #11 Paragraph #21-22 Paragraph #25 Paragraph #28-30 Paragraph #69 Paragraph #A5 (in Appendix A) Paragraph #A8 (in Appendix A) III. Case Questions – Answer Key 1. Refer to the second general standard of Generally Accepted Auditing Standards (GAAS). What is auditor independence and what is its significance to the audit profession? What is the difference between independence in appearance and independence in fact? The second general standard of generally accepted auditing standards (GAAS) is, “In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.” If the auditor is not independent, the financial statements are considered unaudited...
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...and accounting schemes to enhance the company’s reported earnings. The alleged scams included trade loading, improper accounting for loading discounts, shipping to the yard, and guaranteed sales. In this case, these four main scams represent how Campbell Soup used improper business practices to manipulate its periodic income statements. Pricewaterhouse Coopers (PWC) was the auditor’s for Campbell soup. Campbell offered sizable trade discounts near the end of accounting period to entice customers to make product purchases that they would otherwise defer. By doing so, Campbell Soup not only used price concessions to prop up its reported revenues and profits but they also manipulated the reports on their periodic income statement. During the audit PwC also learned that Campbell recorded some trade discounts as Selling General and Administrative expenses (SG&A) instead of reduction to Gross revenues. However, Campbell officials guaranteed that in the future proper recording of key amounts would be reported in its statement. Campbell also recorded all customer sales on an FOB shipping point basis. In fact, the actual shipping terms for many of Campbell sales were FOB...
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...need to know about SSA SSA 200: Objective and General Principles Governing an Audit of Financial Statements 2 SSA 300: Planning an Audit of Financial Statements 3 SSA 500: Audit Evidence 4 SSA 520: Analytical Procedures 5 SSA 580: Management Representations 6 SSA 315: Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement (PART 1) 6 SSA 315: Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement (PART 2) 8 SSA 320: Audit Materiality 8 SSA 330: The Auditor’s Procedures in Response to Assessed Risks (PART 1) 9 SSA 330: The Auditor’s Procedures in Response to Assessed Risks (PART 2) 10 SSA 620: Using the Work of an Expert 11 SSA 240: The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements (PART 1) 12 SSA 240: The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements (PART 2) 13 SSA 240: The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements (PART 3) 14 SSA 240: The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements (PART 4) 15 SSA 250: Consideration of Laws and Regulations in an Audit of Financial Statements (PART 1) 16 SSA 250: Consideration of Laws and Regulations in an Audit of Financial Statements (PART 2) 17 SSA 505: External Confirmations 18 SSA 540: Audit of Accounting Estimates 19 SSA 501: Audit Evidence – Additional Considerations for Specific Items 21 SSA 545: Summary...
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...Whinney never issued an audit opinion on financial statements of ZZZZ Best but did issue a review report on the company’s quarterly statements for the three months ended July 31, 1986. How does a review differ from an audit, particularly in terms of the level of assurance implied by the auditor’s report? There are numerous differences between performing a review and actual audit on the financial statements, but the major one is that the review does not contemplate obtaining an understanding of internal control structure. Also, a review does not assess control risk, tests of accounting records and responses to inquiries by obtaining corroborating evidence through inspection, observation or any other audit procedure. It can point out significant matters of the financial statements but does not provide assurance of their accuracy. The issue with ZZZZ Best case is that the auditors review was not sufficient enough to review any misstatements on the financial statements. Erns & Whinney never questioned the internal control, reviewed contractual agreements or made comparison of the previous statements. If they had done any of the above, they would have revealed a glitch in the system. In addition, the review does not provide the assurance that an audit opinion would do on the financial statement. 2. SAS No.106, "Audit Evidence," identifies the principal "management assertions" that underlie a set of financial statements. The occurrence assertion was particularly critical...
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...auditing and assurance services play|1, 2, 3 |48, 50 | |a role in reducing this business risk. | | | | | | | |Define and contrast accounting, auditing, and assurance services. |4, 5, 6, 7, 8 |47 | | | | | |Describe and define the management assertions embodied in financial |9, 10, 11 |52, 54 | |statements, and why auditors use them as a focal point of the audit. | | | | | | | |Explain some characteristics of “professional skepticism.” |12 | | |...
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...Case 1.9 Case 1.9 Question 1: Ernst & Whinney never issued an audit opinion on financial statements of ZZZZ Best but did issue a review report on the company’s quarterly statements for the three months ended July 31, 1986. How does a review differ from an audit, particularly in terms of the level of assurance implied by the auditor’s report? Answer: A review report does not assess the control risk of a company, which means Ernst & Whinney could have not gotten the proper risk that a material misstatement could occur within a relevant assertion. The report could have pointed out problems in the financial statements but it would not give the audit teams assurance of their accuracy. Ernst & Whinney never investigated ZZZZ Best’s internal control either, if they had done so they may have caught onto some of the fraudulent acts that were being committed. The main difference between an audit opinion and a review is an audit opinion provides assurance on the financial statements that they are accurate. Question 2: SAS No. 106, “Audit Evidence,” indentifies the principal “management assertions” that underlie a set of financial statements. The occurrence assertion was particularly critical for ZZZZ Best’s insurance restoration contracts. ZZZZ Best’s auditors obtained third-party confirmations to support contracts, reviewed available documentation, performed analytical procedures to evaluate the reasonableness of the revenues recorded on the contracts, and visited selected...
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...AUDIT 401-01 Chapter 1: Auditing and Assurance Services User Demand for Reliable Information A. Information and Information Risk * ****Business risk: the risk that an entity will fail to meet its objectives**** * Environmental conditions to increase user demand for relevant, reliable, information: 1. Complexity 2. Remoteness 3. Time sensitivity 4. Consequences * Information risk: the probability that the information circulated by a company will be false or misleading * ****Assurance: Depend on information professionals to serve as an independent and objective intermediaries who will lend credibility to the information**** * ****Attestations: when the assurance is provided for specific assertions made by management**** Auditing, Attestation, and Assurance Services A. Definition of Financial Statement Auditing * ****Auditing: systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between the assertions and established criteria and communicating the results to interested users **** OVERVIEW: Independent auditor – obtains and evaluates evidence knowledge of client’s business, observation of physical assets, inquiry of managers, confirmations from third parties, inspection of documents Management assertions about economic actions and events: * Balance sheet * Income statement * Statement...
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...with the predecessor auditor. The burden of communication rests with the successor auditor but the predecessor is required respond. The predecessor does have to get the client’s permission before making communication with successor auditor. The purpose of communication is to help the successor auditor evaluate whether to accept the engagement. 2. What is the purpose of the engagement letter? What is included in the engagement letter? Audit standards require that auditors document their understanding with the client in an engagement letter. It includes the engagement’s objectives, the responsibilities of the auditor and management, identification of the financial reporting framework used by management, reference to the expected form and content of the audit report, and the engagement’s limitations. It should also state any restrictions, deadlines and assistance to be provided by the client. 3. What does the auditor have to document about the audit strategy and plan? Documents the nature, timing and extent of the planned audit procedures to be used in order to comply with...
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...QUALITY AUDIT 9th Edition Karla M. Johnstone | Audrey A. Gramling | Larry E. Rittenberg CHAPTER 5 PROFESSIONAL AUDITING STANDARDS AND THE AUDIT OPINION FORMULATION PROCESS Copyright © 2014 South-Western/Cengage Learning LEARNING OBJECTIVES 1. 2. 3. 4. Identify and compare the various auditing standards that provide guidance on the audit opinion formulation process List and discuss the foundational principles underlying the auditing standards List the phases and related activities in the audit opinion formulation process Explain the concept of accounting cycles and discuss their importance to the audit opinion formulation process Copyright © 2014 South-Western/Cengage Learning 5-2 LEARNING OBJECTIVES 5. 6. 7. 8. Describe the assertions that are inherent to financial statements and explain their importance to the audit opinion formulation process Define audit evidence and describe the purpose and types of audit procedures used to obtain audit evidence Discuss the importance of audit documentation and provide examples Discuss audit activities in Phase I of the audit opinion formulation process Copyright © 2014 South-Western/Cengage Learning 5-3 LEARNING OBJECTIVES 9. 10. 11. 12. Discuss audit activities in Phase II of the audit opinion formulation process Discuss audit activities in Phase III of the audit opinion formulation process Discuss audit activities in Phase IV of the audit opinion...
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