Chapter 1: Demand for Audit & Assurance Services

Question 1

Auditing definition

Answer 1

Accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria

Performed by a competent, independent person

Must understand the accumulation and interpretation of audit evidence

Question 2

4 keys to auditing

Answer 2

1. Information and established criteria
2. Accumulating and evaluating evidence
3. Competent, independent person
4. Reporting

Question 3

Auditing vs. Accounting

Answer 3

Accounting is the recording, classifying, and summarizing of economic events in a logical manner for the purpose of providing financial information for decision making

Auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period

Question 4

Economic demand for auditing

Answer 4

Information risk reflects the possibility that the information upon which the business risk decision was made inaccurate (likely in the financial statements)

Auditing can have a significant effect on information risk

Question 5

4 causes of information risk

Answer 5

1. Remoteness of information
2. Biases and motives of the provider
3. Voluminous data
4. Complex exchange transactions

Question 6

3 ways to reduce information risk

Answer 6

1. User verifies information
2. User shares information risk with management
3. Audited financial statements are provided

Question 7

Assurance services definition

Answer 7

An independent professional service that improves the quality of information for decision makers

Relevance & Reliability

Results reported verbally

Can be done by CPAs or a variety of other professionals

Question 8

Sarbanes-Oxley Act (2002)

Answer 8

Require CPA firms to provide assurance on internal control over financial reporting for larger public companies

Established the PCAOB

Question 9

Attestation services definition

Answer 9

Type of assurance service in which the CPA firm issues a report about the reliability of an assertion that is made by another party

Question 10

4 types of attestation reports

Answer 10

1. Audit of historical financial statements
2. Audit of internal control over financial reporting
3. Review of historical financial statements
4. Other attestation services that may be applied to broad range of subject matter

Question 11

Other assurance services definition

Answer 11

Services that do not meet the definition of attestation services

CPA is NOT required to issue a written report

Question 12

Nonassurance services definition

Answer 12

Services rendered by CPA firms that generally fall outside the scope of assurance services

Question 13

Types of non assurance services

Answer 13

1. Accounting and bookkeeping (primarily for smaller clients)
2. Tax (individual and corporate returns)
3. Management consulting (help clients operate their business more effectively)

Question 14

3 types of Audits

Answer 14

1. Operational audit
2. Compliance audit
3. Financial audit

Question 15

Operational audit

Answer 15

Efficiency and effectiveness of procedures and methods in order to evaluate efficiency and effectiveness

Make recommendations for improving performance

Question 16

Compliance audit

Answer 16

Determine whether the auditee is following specific procedures, rules, or regulations

Accordance with GAAP (private Co) and PCAOB (public Co)

Question 17

Financial statements audit

Answer 17

Whether financial statements are stated in accordance with specific criteria (US or international standards)

Auditor gathers evidence to determine whether the statements contain material errors or other misstatements

Statement of Income, Financial Position, and Cash flows

Question 18

3 requirements to becoming a CPA

Answer 18

1. Educational requirements
2. Uniform Examination Requirement
3. Experience Requirement

Question 19

Educational Requirement

Answer 19

Undergrad or Grad degree in Accounting (150 credits)

Depends on state

Question 20

Uniform Exam Requirement

Answer 20

CPA exam (4-hours each section)
Each state regulates the use of the title of CPA
- Auditing and Attestation (AUD)
- Financial Accounting and Reporting (FAR)
- Regulation (REG)
- Business Environment and Concepts (BEC)
Some states require ethics exam

Question 21

Public Company Accounting Oversight Board (PCAOB)

Answer 21

Established July 30, 2002 under Sarbanes-Oxley

• Provide oversight for auditors of public companies and broker dealers
• Establish auditing, attestation, and quality control standard for public company audits
• Perform inspections of audit engagements and the quality controls at audits firms performing those audits

Question 22

Types of evidence

Answer 22

1. oral responses
2. written communication
3. observations

Question 23

Companies that get audited

Answer 23

Public companies
Private companies
Publicly traded companies

Question 24

Primary concern when auditing financial accounting data

Answer 24

Information properly reflects the economic events that occurred

Question 25

Experience requirement

Answer 25

Varies from no experience to 2 years

Some states require experience in governmental units or industry, including internal audit