Arens Audit C10e Ch01

8/13/2019 Arens Audit C10e Ch01

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Copyright 2007 Pearson Education Canada

1

Chapter 1: The Demand for

Auditing and Assurance Services


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Copyright 2007 Pearson Education Canada1-2

Chapter 1 objectives

Learn about thedifferent types ofaccountants and whatthey do

Explain the differencebetween accounting,auditing, assuranceand non-assuranceservices

Describe how publicaccounting firms areorganized

List the market forces

that help ensure highquality audit andassurance engagements

Explain how standards

are developed andquality assurancemonitored


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1.1 Professional accountants and

their work Professional accounting/auditing organizations

represented in Canada (p. 3):

Canadian Institute of Chartered Accountants Certified General Accountants Association of

Canada

Society of Management Accountants of Canada

Institute of Internal Auditors

Information Systems Audit and Control

Association


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What is an audit? (text, p. 4)

Auditing is the accumulation

and evaluation of evidence

about information to

determine and report on thedegree of correspondence

between the information and

established criteria.

Auditing is done by a

competent, independent

person.


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Five key components of auditing

1. Quantifiable information (related to entity)

2. Criteria: normally generally accepted

accounting principles (GAAP)

3. Evidence gathering and evaluation

4. Competent, independent person

5. Report


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Figure 1-1 Audit of a tax return

illustrates these principles


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Practice question 1-19 (p. 29)

Review the components of an

auditA PA (public accountant) can

even audit truckslets discuss

how this is done!


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Factors that affect demand for

audits Remoteness of information

Bias and motives of provider

Voluminous data

Complex exchange transactions

Perceived cost/benefit


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Economic demand for auditing:

illustrates why auditing is necessary Auditing can reduce information risk

associated with financial statements (the

risk that the financial statements areinaccurate)

The independent audit provides assurance

to users with respect to the reliability of thefinancial statements


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Compare an unusual service to the work

done by PAs

Discuss the nature of information risk

Compare the risks of using financial

statements to the risks of buying a vehicle


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Distinctionbetweenaccounting

andauditing What is accounting?

What is auditing?

Who is responsible for accounting or

auditing?

Can an auditor do both for the same

company?


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Types of audits

Financial statement audit: Conducted todetermine whether the overall financialstatements are stated in accordance with specifiedcriteria.

Compliance audit: To determine whether theauditee is following specific procedures or rulesset down by a higher authority.

Operational audit: A review of any part of an

organizations operating procedures and methodsfor the purpose of evaluating economy, efficiencyand effectiveness.


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Assurance services, attestation

services, and nonassurance services


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Types of auditors

What type of auditor would you like to be?

Public accountant

Government auditor

Canada Revenue Agency auditor

Internal auditor


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Practice problem 1-20 (p. 29)

Lets familiarize ourselves with the

different activities completed by auditors

This question provides a list of activitiesfor us to examine

Which type of auditor does what kind of

work?


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What type of public accounting firms

are present in your city or town? Go through the local business pages of

your telephone directory and see how

many of the following types of firms youcan identify:

International firms

National firmsLarge local and regional firms

Small local firms or sole proprietorships


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Encouraging professional conduct

among PAs


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Generally Accepted Auditing Standards

(GAAS) (p. 18)

These are broad guidelines that helpauditors in fulfilling their professional

responsibilities.General: qualifications and conduct

Examination: performance of the

audit

Reporting: describing the results


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Structure of GAAS


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Copyright 2007 Pearson Education Canada 1-20

General: qualifications and conduct

Adequate technical training and

proficiency in auditing

Due care

Objective state of mind


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Examination: performance of the

audit Adequate planning

Proper execution

Proper supervision

Sufficient understanding of environment

and internal control

Sufficient appropriate audit evidence


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Reporting: results

Prepare a standardized report

Identify the financial statements

State responsibilities of management and

the auditor

Explain the scope of the engagement

Provide the appropriate type of opinion (or

state why you could not do so)


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Practice problem 1-26 (p. 31)

This practice problem shows you what can

go wrong when GAAS is not followed.

Take a look at this problem and identifywhat Holmes did wrong (or simply did not

do!) in the context of GAAS.


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Sources of auditing standards

Canadian CICA Assurance Handbook:Recommendations and Guidelines

U.S. have both the AICPA (AmericanInstitute of Certified Public Accountants)and the PCAOB (Public CompanyAccounting Oversight Board)

IFAC (International Federation ofAccountants)


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Quality control

Why is it important for the public

accounting firm to have quality control

procedures? What could go wrong without them?


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Quality control

Consists of the methods used to make sure

that the firm meets its professional

responsibilities Includes the organizational structure of the

PA firm and its procedures

Helps to ensure that GAAS is follows onevery audit


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Elements of quality control

1. Leadership and responsibilities within the firm.

E.g. An organizational culture that promotes

audit quality; quality control procedures that aredeveloped, documented, implemented, and

communicated.

2. General ethical requirements. E.g. Address at

the policy level general ethical principles ofintegrity, objectivity, professional competence

and due, confidentiality


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Elements of quality control (contd)

3. Independence. E.g. develop, communicate and

monitor policies and procedures to ensure that the

firm complies with the independence guidelines. 4. Client acceptance or continuance. E.g.

Document annual risk assessment processes,

including evaluation of a clients management

integrity and auditor competence andindependence.


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5. General human resource policies. E.g. Have

adequate hiring policies that ensure competence

and integrity of personnel. 6. Extent of professional development. E.g.

Employees adequately trained in the skills

needed to conduct audits.

7. Engagement performance. E.g. Have adequate

processes and procedures to ensure that the audit

is conducted in accordance with GAAS.


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8. Engagement quality control review. E.g.

Ensure that quality control review takes place

during the engagement and that monitoringoccurs after the engagement is completed.

9. Documentation. E.g. Have policies that

address the extent of documentation (hard copy

or electronic) including retention, storage,security and back-up.


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Enforcement of quality control

Quality control is enforced by means of

practice inspection

A practice inspection can occur by any oneof:

One owns firm quality control staff

By the provincial institute or ordre

By the CPAB (Canadian Public

Accountability Board)


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Lets look at the differences between

conducting an audit for a private company

and for a public company How are the audit standards involved?

How are quality control procedures and

quality control enforcement different forthe audit of a public company?

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Arens Audit C10e Ch01