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Chapter 1 – Auditing and Assurance Services Presentation Outline
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tarix | 31.08.2018 | ölçüsü | 0,82 Mb. | | #65604 |
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Presentation Outline The Demand for Reliable Information Understanding Assurance Services Management Assertions Sarbanes-Oxley Act of 2002 Becoming a CPA
I. The Demand for Reliable Information Understanding a Client’s Business Information Risk
A. Understanding a Client’s Business Business risk is the risk that an entity will fail to meet its objectives. Failing to reach objectives can eventually result in temptation to misstate financial statements to avoid business failure.
B. Environmental Conditions Complexity – Decisions makers are not trained to collect, compile, and summarize the key operating information themselves. Remoteness – Investors are not able to personally visit locations to check on investments. Time sensitivity – Decisions must often be made on a moment’s notice. Consequences – A drop in investment value can wipe out one’s life savings.
C. Information Risk Information risk is the probability that the information circulated by a company will be false or misleading. Client management has an incentive to make the business appear better than it actually may be. This can create a conflict of interest between client management and investors.
II. Understanding Assurance Services Definition of Assurance Services Definition of Attestation Services Definition of Auditing
A. Assurance Service Elements Assurance services are (1) independent (2) professional services that (3) improve the quality of information, or its context, (4) for decision makers. Assurance services include many areas of information, including nonfinancial areas. (See examples on page 7 of text)
B. Definition of Attestation Services Attestation involves an engagement resulting in the issuance of a report on subject matter or an assertion about the subject matter that is the responsibility of another party. Auditing is a specific type of attestation. (See examples on p. 6 of text)
C. Definition of Auditing (See Auditing Insight on p. 5 of text)
D. Overview of Financial Statement Auditing
E. Graphical Representation of Assurance Services The Relationships Among Auditing, Attestation, and Assurance Engagements Assurance Services Any Information
III. Management Assertions Presentation and Disclosure Rights and Obligations Completeness Valuation or Allocation
A. Presentation and Disclosure Footnote disclosure of important accounting policies must be relevant and reliable. Transactions must be classified in the correct accounts. Information must be transparent (i.e., understandable to a reasonably sophisticated person).
B. Existence or Occurrence Assets, liabilities, and equities on the balance sheet actually exist. Each of the revenue and expense transactions actually occurred.
C. Rights and Obligations Amounts reported as assets of the company represent its property rights. Amounts reported as liabilities represent its obligations.
D. Completeness All transactions, events, assets, liabilities, and equities that should have been recorded have been recorded. All disclosures that should have been discussed in the footnotes are there. Cutoff refers to accounting for revenue, expense, and other transactions in the proper period (neither postponing some recordings to the next period (i.e., completeness) nor accelerating next period’s transactions into the current year accounts (i.e., existence or occurrence)). The cutoff date refers to the client’s year-end balance sheet date.
E. Valuation or Allocation Determine whether proper values have been assigned to assets, liabilities, and equities. Examples include collectibility of receivables, recalculating depreciation, obtaining lower of cost or market data, etc.
IV. Sarbanes-Oxley Act of 2002 (SOX) Major Provisions of Sarbanes-Oxley Management Responsibility Under SOX Prohibited Services to Audit Clients
A. Major Provisions of Sarbanes-Oxley Congress passed the Sarbanes-Oxley Act in an attempt to address a number of weaknesses found in corporate financial reporting in the wake of the recent accounting scandals. The Act’s major provisions include: - Requirement of CEO/CFO certification of financial statements (Section 302)
- Requirement of auditor examination of company internal controls
- Creation of the Public Company Accounting Oversight Board (PCAOB) to serve as an auditing profession “watchdog.”
- Prohibition of certain client services by firms conducting a client’s audit.
B. Management’s Responsibility Under SOX One of its most important provisions (Section 302) states that the key company officials must certify the financial statements. Certification means that the company CEO and CFO must sign a statement indicating: - They have read the financial statements.
- They are not aware of any false or misleading statements (or any key omitted disclosures).
- They believe that the financial statements present an accurate picture of the company’s financial condition.
Source: U.S. Congress, Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat/ 745 (2002).
C. Prohibited Services to Audit Clients SOX and the PCAOB prohibit professional service firms from providing any of the following services to an audit client: - bookkeeping and related services
- design or implementation of financial information systems
- appraisal or valuation services
- actuarial services
- internal audit outsourcing
- management or human resources services
- investment or broker/dealer services
- legal and expert services (unrelated to the audit)
Professional service firms may provide client tax services (with some restrictions) and other non-prohibited services to audit clients if the company’s audit committee has approved them in advance. SOX prohibits professional service firms from performing any client services where auditors may find themselves making management decisions or auditing their own firm’s work.
V. Becoming a Education Examination Experience
A. Education Most states require 150 semester hours of college education to sit for the exam. Continuing professional education of 120 contact hours (not college semester or quarter hours) over three year reporting periods with no less than 20 hours in any one year is a common requirement in most states.
B. Examination The AICPA Board of Examiners administers the Uniform CPA Exam as a computer-based examination in four parts - Auditing and attestation—4.5 hrs
- Financial accounting and reporting—4 hrs
- Regulation—3 hrs.
- Business environment—2.5 hrs
Consists of multiple-choice testlets (24-30 questions each) and simulation problems where students electronically research a solution to a problem. Revealing exam material can result in certifications being revoked. Testing is on demand with 75% considered a passing score.
C. Experience Although not a requirement to sit for the CPA exam, accounting experience supervised by a competent accountant is required to become certified. Generally 2 years for persons with a bachelors degree and 1 year for those with a masters. Some states require the experience to be in public accounting.
Summary Audit process considers business risk, information risk. Environmental factors result in need for audits. Understanding assurance, attestation, and auditing The effect of Sarbanes-Oxley on the audit process. CPA requirements include education, examination, and experience.
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