Assurance, Attestation, and Audit Services

Question 1

What are the two primary types of audit services?

Answer 1

1. Audit of financial statements
2. Audit of internal controls over financial reporting (ICFR)

Question 2

What is the purpose of an audit of financial statements?

Answer 2

It is to provide statement users with an opinion by the auditor on whether the financial statements are presented fairly in accordance with an applicable financial reporting framework.

Question 3

What is the purpose of an audit of ICFR?

Answer 3

It is to provide financial statement users with an opinion by the auditor on the design and operating effectiveness of ICFR.

Question 4

What do audit services do for the intended users?

Answer 4

It enhances the degree of confidence that users can place in the financial statements.

Question 5

What are attestation services?

Answer 5

They are performed when an independent practitioner, or CPA, is engaged to issue a report on subject matter that is the responsibility of another party.

Example: Companies produce financial information that goes beyond historical financial statements. Financial forecasts, and detailed schedules for specific accounts. When a CPA is hired to report on the integrity of this type of financial information, it is called attestation services.

Question 6

What is a review of financial statements under attestation?

Answer 6

The practitioner expresses limited assurance that no material modifications need to be made to the financial statements.

A review is less extensive and less expensive.

Question 7

What are assurance services?

Answer 7

They are independent professional services that improve the quality of information, or its context, for decision makers.

It encompasses any service that a professional provides that involves improving the quality of information that was prepared by someone else.

Question 8

Who are intended users of assurance services?

Answer 8

They are decision makers, such as investors, creditors, and regulators.

Question 9

What does “independent” mean in the context of assurance services?

Answer 9

It means that the person performing the service is not involved with the creation of the information and is objective in the evaluation of the information.

Question 10

What are examples of an “applicable financial reporting framework?”

Answer 10

Examples are GAAP, IFRS, and a federal income tax basis of accounting

Question 11

What are the different types of assurance services that a practitioner can provide?

Answer 11

• Financial statement audits
• Compliance audits
• Operational (performance) audits
• Internal audits

Question 12

What is the reason for requiring an audit of internal controls (ICFR)?

Answer 12

It is because effective internal controls provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes.

Question 13

What is an integrated audit?

Answer 13

An audit that combines the financial statement audit with an audit of the effectiveness of ICFR.

Question 14

What are the limitations of an audit caused by?

Answer 14

1. The nature of financial reporting
2. The nature of audit procedures
3. The need for the audit to be conducted within a reasonable period of time at a reasonable cost.

Question 15

What does the nature of financial reporting mean?

Answer 15

It refers to the use of judgment when preparing financial statements due to the subjectivity required when arriving at accounting estimates.

Question 16

What does the nature of audit procedures mean?

Answer 16

It refers to the reliance on evidence provided by the client and its management.

It also refers to the concept of materiality. Materiality means information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity.

Question 17

What is a compliance audit?

Answer 17

It involves gathering evidence to determine whether the person or entity under review has followed the rules which they must conform.

Question 18

What is an operational (performance) audit?

Answer 18

Is an assessment of the economy, efficiency, and effectiveness of an organization’s audit.

Economy refers to the cost of inputs, including wages and materials.
Efficiency refers to the relationship between inputs and outputs, or the use of the minimum amount of inputs to achieve a given output.
Effectiveness refers to the achievement of certain goals or the production of a certain level of outputs.

Question 19

What is an internal audit?

Answer 19

A function within an entity which generally evaluates and improves risk management, internal control procedures and elements of the governance process.

Question 20

What is the objective of a financial statement audit?

Answer 20

It is to provide financial statement users with an opinion by the auditor on whether the statements are presented fairly in accordance with an applicable financial reporting framework.

Question 21

Explain the inherent limitations of a financial statement audit.

Answer 21

• It is the nature of financial reporting whereby auditors use judgment when preparing financial statements due to the subjectivity required when arriving at accounting estimates.
• It is also the nature of audit procedures which refers to the reliance on evidence provided by the client and its management. (Auditors inherent often use sampling techniques rather than auditing an entire population of items, therefore there is a risk of arriving at an incorrect conclusion.)
• The need for the audit to be conducted within a reasonable period of time at a reasonable cost.

Question 22

What are the three elements of an operational audit?

Answer 22

Economy, efficiency, and effectiveness of an organization’s activities.

Question 23

What are the most common functions of the internal auditors?

Answer 23

Are evaluating and improving risk management, internal control procedures, and elements of the governance process.

Question 24

Who are financial statement users?

Answer 24

Current and potential investors, suppliers, customers, lenders, employees, governments, and the general public.

Question 25

What are the reasons financial statement users demand an audit of the financial statements?

Answer 25

Remoteness - most users do not have access to the company under review.
Complexity - financial statements are complex, and require significant knowledge and experience to evaluate.
Competing incentives - hard to determine when managers are presenting biased information
Reliability - Because they make decisions based on the information, it is important to users to rely on the financial statements.

Auditors have the knowledge and expertise to assess the fairness of information being presented by the prepares, and help users address the issues they face with financial statements.

Question 26

What does the financial statement preparer do?

Answer 26

• Ensure that the information included in the statements are presented fairly and complies with GAAP
• Designing, implementing, and maintaining internal controls relevant to the preparation and fair presentation of the statements.
• Providing the auditors with access to all records, documentation, and personnel relevant to the preparation and fair presentation of the financial statements.

Question 27

What do financial statement auditor’s do?

Answer 27

• Conducting the audit in accordance with the appropriate auditing standards.
• Planning and performing the audit with professional skepticism. It means auditors remain independent of the entity, its management, and its staff when completing the audit work.
• Planning and performing the audit with professional judgement. It relates to the application of relevant training, knowledge, and experience that auditors use while making informed audit decisions in conducting an audit.

Question 28

What are non-audit services?

Answer 28

Are not assurance services, therefore, the CPA does not need to be independent. Examples include management consulting, business valuation, mergers and acquisitions, tax, and accounting.

Question 29

What is the Securities and Exchange Commission (SEC)?

Answer 29

It is a federal government agency whose mission is to protect investors, maintain fair and efficient markets, and facilitate capital formation. They enforce and interpret securities laws (SOX Act).

Question 30

What is the Public Company Accounting Oversight Board (PCAOB)?

Answer 30

A non-profit corporation established through the SOX Act. Its mission is to oversee the audits of public companies to protect the interests of investors. They also created their own auditing standards.

Question 31

What is the American Institute of Certified Public Accountants (AICPA)?

Answer 31

It is a private professional membership organization of CPAs representing the accounting profession. They represent the profession before rule making bodies, act as advocates before legislative bodies, provide educational materials to members, and sets ethical standards for the profession. They create and grade the CPA exam.

Question 32

Audit standard setting diagram

Answer 32

Question 33

What is the Financial Accounting Standards Board (FASB)?

Answer 33

It is a privately funded organization whose mission is to establish financial accounting and reporting standards for nongovernmental entities with the goal of providing information that is useful for decision making.
They maintain the Accounting Standards Codification (ASC) which represents the authoritative standards of financial reporting recognized by the SEC, PCAOB, and AICPA.

Question 34

What is the Committee on Sponsoring Organizations of the Treadway Commission (COSO)?

Answer 34

It is an independent private sector group that focuses on providing guidance to management and expertise in the areas of internal control, enterprise risk management, and fraud deterrence.

Question 35

What is the National Association of State Boards of Accountancy (NASBA)?

Answer 35

It is a professional organization whose mission is to enhance the effectiveness an advance the common interests of its members, which are the state boards of accountancy.

Question 36

What are the main functions of a state board of accountancy?

Answer 36

Are issuing CPA licenses to individuals who meet all the requirements, adopting and enforcing rules of professional conduct for CPAs, adopting and enforcing rules regarding continuing professional education requirements, investigating complaints against CPAs, conducting hearings, and taking appropriate disciplinary actions, such as suspension or revocation of the CPA license.

Question 37

What is reasonable assurance?

Answer 37

A high, but not absolute, level of assurance. The auditor does not “guarantee” or “certify” that the financial statements are 100% accurate.

Question 38

What is audit risk?

Answer 38

Since judgement in involved in an audit, there will always be a risk auditors will give the wrong opinion.

Question 39

What is a material weakness?

Answer 39

A deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis.

Question 40

What is management’s responsibility for internal controls stated in the audit report on the effectiveness of internal controls?

Answer 40

Maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.

Question 41

What date is used on the audit report on the effectiveness of internal controls, and what does the date represent?

Answer 41

It represents the end of fieldwork. It is the conclusion of gathering and evaluating evidence for the audit and it should be the same date as the audit report on the financial statements.

Question 42

What is the audit expectation gap?

Answer 42

It occurs when there is a difference between the expectation of auditor and financial statement users. IT occurs when the user beliefs do not align with an auditor’s professional responsibilities. The gap is caused by unrealistic user expectations.