Chapter 1 Business risk o The risk an entity will fail to meet its objectives Environmental conditions increase user demand for relevant reliable information o Complexity o Remoteness o Time sensitivity o Consequences Investors may not be able to travel and spend the time to visit a firms operations The ability to promptly obtain high quality information is essential to businesses that want to remain competitive Decisions involve a significant investment in resources reliable information from professionals is vital to a Firm s operations o The probability that the information circulated by a company will be false or Information risk misleading o Conflict of interest The investors want to see strong reliable numbers and the managers are pressured to make timely increases in revenue that attract more investors to invest in their operations o Assurance o Attestation The lending of credibility management o Auditing When the assurance is provided for specific assertions made by When the assertions are embodied in a company s financial statements Refers to the certification of financial statements Auditing is a 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 Defined as a systematic process Involves obtaining and evaluating evidence Evidence consists of all influences that ultimately guide auditors decisions and relates to assertions about economic actions and events Independent Auditor Obtains and evaluates evidence o Knowledge of client s business observation of physical assets inqury of managers confirmations from outsiders inspection of documents o Attestation engagements An engagement in which a practitioner is engaged to issue or does issue a report on subject matter or an assertion about the subject matter that is the responsibility of another party In an assurance engagement an auditor issues a report on assertions that are the responsibility of management o Assurance services Attestation refers to expressing an opinion on an expanded set of financial information Major elements Independence o Preserves integrity and objectivity when performing assurance services Professional services o Defined as professional as long as it involves some element of judgment based on education and experience Improving the quality of information or its context For decision makers o They are the reason the audits are being performed Managements assertions embodied in the financial statements o Existence Relates to account balances To test this auditors count cash and inventory confirm receivables and insurance policies with customers o Occurrence Relates to events and transactions o Rights and obligations Establish that amounts reported as assets of the company represent its property rights and that the amounts reported as liabilities represent its obligations The objective is to obtain evidence about owning and owing o Owing includes account liabilities a company may not yet be legally obligated to pay o Completeness Auditors need persuasive evidence about completeness Cutoff Accounting for revenue in the proper period Fiscal year cutoffs are used primarily when accounting for specific account balances that need adjusted at year end o Valuation and allocation Objective is to determine whether proper values have been assigned to assets liabilities and equities Accuracy refers to the appropriate recording of the transactions involving these items o Presentation and disclosure Disclosures must be relevant Transactions must be classified in the correct accounts Auditors perform audit procedures such as analyzing repair and maintenance expenses to ensure that in fact they should be expensed o Understandability o Importance of assertions The quality of information that enables users to perceive its significance To make sure the financial statements are transparent Which assertions does this procedure produce evidence for Does the list of procedures cover all assertions If a cutoff test shows a delay in recording a liability the liability Is not only incomplete but undervalued as well Professional skepticism o An auditor s tendency not to accept management assertions without collaboration a tendency to ask management to prove it o A potential conflict of interests always exists between the auditors and the management of the enterprise under audit o Due care requires a disposition to question all material assertions made by management whether written or oral Operational auditing o The study of business operations for the purpose of making recommendations about the efficient and effective use of resources effective achievement of business objectives and compliance with company policies o Internal audit services Reviews of internal control systems to ensure compliance with company policies plans and procedures Compliance with laws and regulations Appraisals of the economy and efficiency of operations Reviews of effectiveness in achieving program results in comparison to established objectives and goals A distinct type of management consulting services whose goal is to help a client improve the use of its capabilities and resources to achieve its objectives o AICPA definition Chapter 2 Convergence o Making standards coordinated Generally Accepted Auditing Standards GAAS o Pronouncements issued by PCAOB and AICPA Audit procedures Auditing standards o THE PARTICULAR AND SPECIALIZED ACCOUNTS THAT AUDITORS TAKE TO OBTAIN EVIDENCE IN A SPECIFIC AUDIT ENGAGEMENT o Audit quality guides that remain the same through time and for all audits o Loans are liabilities for most entities but are assets for financial institutions Fundamental Principle Responsibilities o Relates to the personal integrity and professional qualifications of auditors o Auditors responsibilities Having appropriate competence and capabilities to perform the audit Maintaining professional skepticism and exercising professional judgement Complying with relevant ethical requirements throughout the planning and performance of the audit o Competence and capabilities Maintaining the required continuation of education in accounting and understanding the latest changes seen within the accounting field o Independence Auditors must maintain an independence in mental attitude Auditors are expected to be unbiased and impartial with respect to