Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the

Integrity of Financial Reporting, Integrity of Financial Reporting, 88thth Edition Edition

William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State University at San Luis ObispoUniversity at San Luis ObispoRaymond N. JohnsonRaymond N. JohnsonPortland State UniversityPortland State University

Chapter 1 – Auditing and the Public Accounting Profession – Integrity of Financial Reporting

Chapter 1 OverviewChapter 1 Overview

Auditing DefinedAuditing Defined• Systematic process

• Objectively obtaining and evaluating evidence

• Assertions about economic actions and events

• Degree of correspondence

Auditing Defined (cont.)Auditing Defined (cont.)• Established criteria

• Communicating the results

• Interested users

Comparative Summary of Types Comparative Summary of Types of Auditsof Audits

Types of AuditorsTypes of Auditors• Independent Auditors

• Internal Auditors

• Government Auditors

Assurance Services DefinedAssurance Services Defined• Independence

• Professional services

• Quality of information

• Decision maker

• Audit Engagements

• Attest Services– Examination– Review Engagement– Agreed-upon Procedures Engagement

• Accounting Services

• Compilation Services

Levels of AssuranceLevels of Assurance• Reasonable Assurance

• Negative Assurance

• Agreed-upon Procedures

• Compilation Without Assurance

Universe of Assurance Universe of Assurance ServicesServices

The Accountant’s Value The Accountant’s Value ChainChain

Study BreakStudy Break1. This type of audit involves obtaining

and evaluating evidence about the efficiency and effectiveness of an entity’s operating activities.

A. Financial Statement AuditB. Compliance AuditC. Operational AuditD. Internal Control Audit

C. Operational Audit

Study BreakStudy Break2. These auditors are typically

CPA’s who render professional auditing services to clients.

A. Independent AuditorsB. Internal AuditorsC. Government AuditorsD. IRS Auditors

A. Independent Auditors

The Roots of AuditingThe Roots of Auditing• British influence and migration

• Stock market crash

• Legislation of the 1930’s

• Important changes in the 1940’s

The Roots of AuditingThe Roots of Auditing• Scrutiny of 1980’s lead to changes

• Increasing amount of consulting in 1990’s

• Growing numbers of earnings restatements

• Sarbanes-Oxley Act of 2002

Need for Financial Statement Need for Financial Statement AuditsAudits

• Conflict of Interest

• Consequence

• Complexity

• Remoteness

Economic Benefits of an AuditEconomic Benefits of an Audit

• Access to Capital Markets

• Lower Cost of Capital

• Deterrent to Inefficiency and Fraud

• Control and Operational Improvements

Limitations of a Financial Limitations of a Financial Statement AuditStatement Audit

• Economic Limitations– Reasonable Cost– Reasonable Length of Time

• Accounting Framework Limitations– Alternative Accounting Principles– Accounting Estimates

Study BreakStudy Break3. Which of the following is not an

economic benefit of a financial statement audit?

A. Access to Capital MarketsB. Lower Cost of CapitalC. Control and Operational

ImprovementsD. Maintain Fair Competition

D. Maintain Fair Competition

Study BreakStudy Break4. Which of the following is not an

inherent limitation of a financial statement audit?

A. Reasonable CostB. Unlimited TimeframeC. Alternative Accounting

PrinciplesD. Accounting Estimates

B. Unlimited Timeframe

Organizations Associated with Organizations Associated with the Public Accounting the Public Accounting

ProfessionProfession

Regulatory Framework for Regulatory Framework for Ensuring High-Quality Ensuring High-Quality

ServicesServices• Standard Setting

• Firm Regulation

• Inspection and Peer Review

• Government Regulation

Standard-Setting Standard-Setting Organizations in the United Organizations in the United

StatesStates

Study BreakStudy Break5. Which organization is considered to

be a private sector organization? A. State Boards of AccountancyB. Securities and Exchange CommissionC. AICPAD. IRS

C. AICPA

Study BreakStudy Break6. This component of regulatory framework

includes the inspection of audits by the PCAOB staff and peers in other accounting firms.

A. Standard settingB. Firm regulationC. Inspection and peer reviewD. Government regulation

C. Inspection and peer review