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Auditing: integral to the economy

Auditing A Risk-Based Approach To Conducting A Quality Audit 10 th edition. Karla M. Johnstone | Audrey A. Gramling | Larry E. Rittenberg. Chapter 1. Auditing: integral to the economy. Learning Objectives.

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Auditing: integral to the economy

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  1. AuditingA Risk-Based Approach To Conducting A Quality Audit 10th edition Karla M. Johnstone | Audrey A. Gramling | Larry E. Rittenberg Chapter 1 Auditing: integral to the economy

  2. Learning Objectives • Define the objective of external auditing and describe its role in meeting society’s demands for reliable financial and internal control information • Identify parties involved in preparing and auditing financial statements and briefly describe their roles • List the types of audit service providers and the skills and knowledge needed by professionals entering the external auditing profession • Identify organizations that affect the external auditing profession and the nature of their effects • Define audit quality and identify drivers of audit quality as specified by the Financial Reporting Council’s Audit Quality Framework • Identify professional requirements that help to achieve audit quality and minimize auditor exposure to lawsuits • Describe the process by which audit firms make client acceptance and continuance decisions

  3. Learning Objective 1 DEFINE THE OBJECTIVE OF EXTERNAL AUDITING AND DESCRIBE ITS ROLE IN MEETING SOCIETY’S DEMANDS FOR RELIABLE FINANCIAL AND INTERNAL CONTROL INFORMATION

  4. External Auditing Profession • Objective of external auditing is to provide an opinion on the reliability of financial statements • Intended to enhance confidence that users can place on management-prepared financial statements • and on the effectiveness of internal control • Sometimes the auditor will also provide an opinion on the effectiveness of internal control over financial reporting • Integrated audit: Provided when an external auditor is engaged to perform an audit of the effectiveness of internal control over financial reporting that is integrated with an audit of financial statements • Unqualified audit report: When the auditor issues this type of report, it implies that the auditor has no reservations about management’s financial statements or internal controls • This is the most common outcome of the audit

  5. External Auditing: A Special Function • Public expects auditors to: • Find fraud • Require that management use accounting principles that best portray the spirit of the concepts adopted by accounting standard setters • Be independent of management • Auditing profession faces many pressures • Keeping fees down • Making careful decisions regarding independence • Conducting a quality audit

  6. Need for Unbiased Reporting andIndependent Assurance - FACTORS Why is there a risk that information provided by management may not always be reliable? • Potential bias by management • Remoteness of users from the organization • Complexity of transactions and processing systems • Consequences are very severe

  7. Exhibit 1.3 - The Audit Opinion Formulation Process

  8. Learning Objective 2 Identify Parties Involved in Preparing Audited Financial Statements and Briefly Describe Their Roles

  9. Exhibit 1.4 - Parties Involved in Preparing and Auditing Financial Statements

  10. Learning Objective 3 List the Types of Audit Service Providers and the Skills and Knowledge Needed by Professionals Entering the External Auditing Profession

  11. Providers of External Auditing Services • External auditing profession includes sole-practitioner firms, local and regional firms, and large multinational firms • Organizational hierarchy of audit firms • Responsible for overall conduct of each audit • Responsible for many audit engagements being conducted simultaneously Partners/Owners • Review audit work of seniors and staff • Responsible for fewer audit engagements being conducted simultaneously Managers • Responsible for overseeing day-to-day activities on a specific audit • Oversee performance of auditing procedures Seniors

  12. Skills and Knowledge Needed for External Auditing Profession • Technical knowledge and expertise • Leadership, teamwork, communication, decision making and other professional skills • Ethics

  13. Learning Objective 4 Identify Organizations that Affect the External Auditing Profession and the Nature of Their Effects

  14. Organizations affecting the profession • Congress • Due to various failures in auditing profession during early 2000s Congress passed the Sarbanes-Oxley Act of 2002 • PCAOB • Private sector, nonprofit organization that oversees audits of public companies • SEC • Governmental body established by Congress in 1934 to regulate the capital markets • AICPA • Primary governing organization of the public accounting profession • Develops standards for audits of nonpublic companies • CAQ • Affiliated with AICPA, and dedicated to enhance investor confidence and trust in financial markets

  15. Organizations affecting the profession • IAASB • Sets international auditing standards • COSO • Provider of thought leadership and guidance on internal control, enterprise risk management, and fraud deterrence • Provides the internal control framework used in virtually all audits (called the COSO framework) • Financial Accounting Standards Setters • FASB: GAAP • IASB: IFRS • State Boards of Accountancy • Administer CPA exam and provide licensing • Court system

  16. Learning Objective 5 DEFINE AUDIT QUALITY AND IDENTIFY DRIVERS OF AUDIT QUALITY AS SPECIFIED BY THE FINANCIAL REPORTING COUNCIL’S AUDIT QUALITY FRAMEWORK

  17. Audit Quality • Performing an audit in accordance with accepted auditing standards (GAAS) • Providing assurance that audited financial statements and disclosures are presented in accordance with GAAP • Providing assurance that those financial statements are not materially misstated whether due to errors or fraud

  18. Exhibit 1.5 - Drivers of Audit Quality • Primary drivers of audit quality included in Audit Quality Framework developed by Financial Reporting Council (FRC)

  19. Learning Objective 6 Identify Professional Requirements that Help to Achieve Audit Quality and Minimize Auditor Exposure to Lawsuits

  20. Achieving Audit Quality and Minimizing Lawsuits • Professional requirements that help to achieve audit quality • Maintaining auditor independence • Threats to independence • Self-review threat • Advocacy threat • Adverse interest threat • Familiarity threat • Undue influence threat • Financial self-interest threat • Management participation threat

  21. Achieving Audit Quality and Minimizing Lawsuits • Other professional requirements that help to achieve audit quality • Participating in review programs • External inspections (PCAOB or peer reviews by AICPA), engagement quality reviews (concurring partner), inter-office reviews (within-audit firm) • Issuing engagement letters • Evaluating the audit firm’s limitations • Maintaining quality audit documentation • The PCAOB’s perspective is “not documented…not done!”

  22. Learning objective 7 Describe the process by which audit firms make client acceptance and continuance decisions

  23. Exhibit 1.6Audit firm portfolio management

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