Chapter 1 – Audi

Assurance Se

Presentation O

I. The Demand for Reliab

II. Understanding Assura
III. Management Ass
IIII. Sarbanes-Oxley Ac
V. Becoming a
 I. The Demand for
Information

A. Understanding a Clien
B. Environmental Co
C. Information R

A. Understanding a
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 C
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C. Information
● 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 A
Services

A. Definition of Assuranc
B. Definition of Attestatio
C. Definition of Au
D. Overview of Financial Sta
E. Graphical Representation
Services

A. Assurance Servic

Assurance services are (1) in

professional services that
quality of information, or
for decision makers. Assu
include many areas of inform
nonfinancial are
(See examples on page
 B. Definition of Attestat
● 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 A
(See Auditing Insight on
Auditing is a systemati
objectively obtain
evaluating evidence
Financial Statements
assertions about econo
(including
footnotes) and events to ascertain
of correspondence be
assertions and establis
and communicating th
Persons who rely on interested use
the financial reports
•Creditors
Source: American Accounting Associatio
•Investors Auditing Concepts. 1973. A Statement
Concepts, American Accounting Associa
 D. Overview of Financia
Auditing

E. Graphical Representation of As

The Relationships Among Aud

Assurance Engag
Assurance Services
Any Information

Attestation Services
Primarily Financial Information

Auditing
Financial Statements
 III. Management A

A. Presentation and D
B. Existence or Occ
C. Rights and Obli
D. Completene
E. Valuation or Allo

A. Presentation and
● Footnote disclosure o
accounting policies must b
reliable.
● Transactions must be cla
correct accoun
● Information must be tran
understandable to a re
sophisticated per
 B. Existence or Oc

● Assets, liabilities, and eq

balance sheet actua
● Each of the revenue an
transactions actually

C. Rights and Ob

● Amounts reported as a
company represent its pr
● Amounts reported as liabi
its obligations
 D. Completen
All transactions, events, assets, lia
that should have been recorded h
All disclosures that should have b
footnotes are the

Cutoff refers to accounting for reve

other transactions in the prope
postponing some recordings to t
completeness) nor accelerati
transactions into the current ye
existence or occurrence)). The c
the client’s year-end balanc

E. Valuation or Al

● Determine whether prope

been assigned to assets,
equities.
● Examples include coll
receivables, recalculating
obtaining lower of cost or m
 IV. Sarbanes-Oxley A
(SOX)

A. Major Provisions of Sa
B. Management Responsibi
C. Prohibited Services to

A. Major Provisions of Sar

Congress passed the Sarbanes-Oxl
to address a number of weak
corporate financial reporting in the
accounting scandals. The Act’s
include:
• Requirement of CEO/CFO cert
statements (Sectio
• Requirement of auditor examinatio
controls
Creation of the Public Company Acco
(PCAOB) to serve as an auditing p
• Prohibition of certain client services
client’s audit.
 B. Management’s Responsib

One of its most important provisions (Sec

key company officials must certify th
Certification means that the compan
sign a statement indi
1. They have read the finan
They are not aware of any false o
(or any key omitted di
3. They believe that the financial s
accurate picture of the company
Source: U.S. Congress, Sarbanes-Oxle
107-204, 116 Stat/ 745

C. Prohibited Services to A
SOX and the PCAOB prohibit profess
providing any of the following servic
➢ bookkeeping and rel
➢ design or implementation of
systems
➢ appraisal or valuati
➢ actuarial ser
➢ internal audit ou
➢ management or human re
➢ investment or broker/d
➢ legal and expert services (un
● Professional service firms may prov
(with some restrictions) and other non
audit clients if the company’s audit co
them in advanc
SOX prohibits professional service fir
client services where auditors may fi
management decisions or auditing t
 V. Becoming

CPA

A. Education
B. Examinatio
C. Experienc

Note that successful candidates actually

from their State Board of Account
CPA certificates for other states a

A. Educatio
● 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. Examinati
● The AICPA Board of Examine
Uniform CPA Exam as a co
examination in fou
• Auditing and attestat
• Financial accounting and
• Regulation—
• Business environme
Consists of multiple-choice testl
each) and simulation problem
electronically research a solu
Revealing exam material can re
being revoke
● Testing is on demand with 7
passing score

C. Experien
● Altho
to s
ac
supe
acc

● G
pers
degre

● Som
expe
 Summary
● Audit process considers b
information risk
● Environmental factors result in
● Understanding assurance, a
auditing
● The effect of Sarbanes-Oxle
process.
● CPA requirements includ
examination, and exp