THE DEMAND
FOR AUDIT AND
OTHER ASSURANCE
SERVICES
CHAPTER 1
Chapter 1 Auditing 1 1-1
CHAPTER 1 LEARNING OBJECTIVES
1-1 Describe auditing.
1-2 Distinguish between auditing and accounting.
1-3 Explain the importance of auditing in reducing information risk.
1-4 List the causes of information risk, and explain how this risk can
be reduced.
1-5 Describe assurance services and distinguish audit services from
other non-assurance services provided by CPAs.
1-6 Differentiate the three main types of audits.
1-7 Identify the primary types of auditors.
1-8 Describe the requirements for becoming a CPA.
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OBJECTIVE 1-1
Describe auditing.
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NATURE OF AUDITING
• 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.
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THIS DEFINITION INCLUDES SEVERAL
KEY WORDS AND PHRASES AS
FOLLOWS:
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1- INFORMATION AND 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.
Criteria
FASB IASB
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2- Information can and does take many forms
which are:
1. Quantifiable information, including companies’ financial
statements and individuals’ federal income tax returns.
2. Subjective information, such as the effectiveness of computer
systems and the efficiency of manufacturing operations.
For more subjective information, it is more difficult to establish
criteria. Typically, auditors and the entities being audited agree
on the criteria well before the audit starts.
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3- The criteria for evaluating information also vary
depending on the type information being audited as follows:
➢ In the audit of historical financial statements by CPA firms, the criteria
may be U.S. Generally Accepted Accounting Principles (GAAP) or
International Financial Reporting Standards (IFRS).
➢ For the audit of tax returns by the Internal Revenue Service (IRS), the
criteria are found in the Internal Revenue Code.
➢ For an audit of Internal Control over Financial Reporting, the criteria will
be a framework such as COSO internal control integrated framework
(Committee of Sponsoring Organizations of the Treadway Commission).
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4- ACCUMULATING AND EVALUATING EVIDENCE
Evidence is any information used by the auditor to
determine whether the information being audited is
stated in accordance with established criteria.
Evidence takes many different forms, including:
Communications Client
with Outsiders Testimony
Transaction Observations
Data
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➢ To satisfy the purpose of the audit, auditors must
obtain a sufficient quality and volume of evidence.
➢ Auditors must determine the types and amount of
evidence necessary and evaluate whether the
information corresponds to the established
criteria.
➢ This is a critical part of every audit.
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Even, Internal auditors—those employed by the companies they audit— usually
report directly to top management and the board of directors, keeping the
auditors independent of the operating units they audit.
Competence Independence
Evaluation of
Evidence
Proper Conclusion
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REPORTING
The final stage in the auditing process is preparing the
audit report, which communicates the auditor’s findings to
users.
Reports differ in nature, but all must inform readers of the
degree of correspondence between the information audited
and established criteria.
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5- COMPETENT, INDEPENDENT PERSON
The auditor must be qualified to understand the criteria used
and must be competent to know the types and amount of
evidence to accumulate to reach the proper conclusion after
examining the evidence.
The auditor must also have an independent mental
attitude. The competence of those performing the audit
is of little value if they are biased in the accumulation
and evaluation of evidence.
Auditors strive to maintain a high level of
independence to keep the confidence of users relying
on their reports. Auditors reporting on company
financial statements are often called independent
auditors.
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