Objective 1.1 Describe 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.
The criteria for evaluating information vary depending on the information being audited. In the audit of historical financial statements by CPA firms, the criteria may be U.S. generally accepted accounting principles (GAAP) or the International Financial Reporting Standards (IFRS). For an audit of internal control over financial reporting, the criteria will be a recognized framework for establishing internal control, such as Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (also known as COSO). For the audit of tax returns by the Internal Revenue Service (IRS), the criteria are found in the Internal Revenue Code.
The auditor must have an independent mental attitude. 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. Even though such auditors are paid fees by the company, they are normally sufficiently independent to conduct audits that can be relied on by users. 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.
Audit reports communicate the auditor’s findings to users.
Objective 1.2 Distinguish between auditing and accounting.
Accounting is the recording, classifying, and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making. To provide relevant information, accountants must have a thorough understanding of the principles and rules that provide the basis for preparing the accounting information.
In addition to understanding accounting, the auditor must possess expertise in the accumulation and interpretation of audit evidence. It is this expertise that distinguishes auditors from accountants.
Objective 1.3 Explain the importance of auditing in reducing information risk.
Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. An example is a misstated financial statement. When information is obtained from others, the likelihood of the information being intentionally or unintentionally misstated increases. If information is provided by someone whose goals are inconsistent with those of the decision maker, the information may be biased in favor of the provider. As organizations become larger, the likelihood of recording a transaction wrong may be very possible. One the best ways to minimize information risk, is to let the auditors audit a company’s financial statement and allow some comfort to management and its stockholders.
Objective 1.5 Describe assurance services and distinguish audit services from other assurance and nonassurance services provided by CPAs.
An assurance service is an independent professional service that improves the quality of information for decision makers. Such services are valued because the assurance providers is independent and perceived as being unbiased with respect to the information examined. Assurance services can be done by CPAs or by a variety of other professionals. Recently, CPAs have expanded the types of assurance services they perform to include forward-looking and other types of information, such as…