Lecture 1: Demand for Audit and Assurance Services

University:
California State University, Northridge
Course:
FIN 303 | Financial Management
Academic year:

2024
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0

Pages:

13
Author:

customer-7758888

09-Jan-24 THE DEMAND FOR AUDIT AND OTHER ASSURANCE SERVICES C H A P T E R 1 ADAPTED FROM 2014 PEARSON EDUCATION 1 LEARNING OBJECTIVES • Information risk • Auditing vs. accounting • Nature of auditing • Assurance services • Types of audit • Types of auditors 2 1 09-Jan-24 1. WHY WE NEED AUDIT? 3 Tax authorities Investors Prospective owners Bankers Customers Suppliers vv.. Company Information (FS/Biz plan) $ External Stakeholder 4 2 09-Jan-24 INFORMATION RISK The possibility that the information upon which the business risk decision was made was inaccurate. 5 CAUSES OF INFORMATION RISK • Remoteness of information • Biases and motives of the provider • Voluminous data • Complex exchange transactions 6 3 09-Jan-24 SOLUTION • User verifies information • User shares information risk with management • Audited financial statements are provided 7 ECONOMIC DEMAND FOR AUDITING Information risk Demand for audit Auditing can have a significant effect on information risk. 8 4 09-Jan-24 AUDITOR – CLIENT- EXTERNAL USER Company or audit committee hires auditor Auditor Provides capital Company Client Issues report relied upon by users to reduce information risk External Users Provides FS 1-9 9 ACCOUNTING VS AUDITING Accounting is the recording, classifying, and summarizing of economic events for the purpose of providing financial information used in decision making. Auditing is determining whether recorded information properly reflects the economic events that occurred during the accounting period. 10 5 09-Jan-24 2. WHAT IS AUDITING? 11 NATURE OF AUDIT • 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 done by a competent, independent person. 12 6 09-Jan-24 INFORMATION & ESTABLISHED CRITERIA To do an audit, there must be information in a verifiable form and some standards (criteria) by which the auditor can evaluate the information. List of students doing thesis FMT students list , GPA Class Participation mark Attendance check Financial statement Accounting standard Tax return Tax regulations GAAP, IFRS, VAS… 13 ACCUMULATING EVIDENCE & EVALUATING EVIDENCE Evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria. Client Testimony Transaction data Written and electronic Communications with outsiders Observations 14 7 09-Jan-24 COMPETENT, INDEPENDENT PERSON Competence Independence Judgment and Experience Evaluation of Evidence Proper Conclusion 15 https://cafef1.mediacdn.vn/Images/Uploa ded/DuLieuDownload/2021/VNM_21CN_ BCTC_HNKT.pdf 16 8 09-Jan-24 3. ASSURANCE SERVICE & TYPE OF AUDIT 17 ASSURANCE SERVICE An independent professional service: improve the quality of information for decision makers. Can be performed by CPAs or by a variety of other professionals 18 9 09-Jan-24 19 ATTESTATION SERVICES • A type of assurance service • CPA reports on the reliability of an assertion • That is the made by another party. 20 10 09-Jan-24 AT T E S TAT I O N S E RV I C E 5 categories 1. Audit (Historical FS) 2. Internal Control over Financial Reporting 3. Review (Historical FS) 4. Information technology 5. Other 21 TYPE OF AUDITS • Operational • Compliance • Financial statement 22 11 09-Jan-24 OPERATIONAL AUDIT Example Evaluate computerized payroll system for efficiency and effectiveness Information Number of records processed, costs of the department, and number of errors Established Criteria Company standards for efficiency and effectiveness in payroll department Available Evidence Error reports, payroll records, and payroll processing costs 23 COMPLIANCE AUDIT Example Determine whether bank requirements for loan continuation have been met Information Company records Established Criteria Loan agreement provisions Available Evidence Financial statements and calculations by the auditor 24 12 09-Jan-24 AUDIT OF FINANCIAL STATEMENT Example Annual audit of Boeing’s financial statements Information Boeing's financial statements Established Criteria Generally accepted accounting principles (GAAP) Available Evidence Documents, records, and outside sources of evidence 25 TYPE OF AUDITORS • Certified public accounting firms • Governmental accountability office auditors • Internal Revenue agents • Internal auditors 26 13