- Topic 1: What Is Auditing and Why Does It Matter?
- 1.1 Introduction
- 1.2 The Need for High-Quality Information
- 1.3 The Market for Lemons
- 1.4 The Role of Auditors
- 1.5 Audit DefinedThis is the current section.
- 1.6 Attest Services
- 1.7 Assurance Services
- 1.8 Other Services Performed by CPAs
- 1.9 Importance of Audit Quality
- 1.10 Indicators of Audit Quality
- 1.11 Size and Scope of the Public Accounting Firm
- 1.12 Legal and Organizational Structure of the Firm
- 1.13 Conclusion
- Assessment
- CPA Test Prep
1.5 Audit Defined
Certified Public Accountants (CPAs) perform several types of services that provide assurance to information users regarding the quality of that information. While the focus of this book is on auditing, we will briefly discuss both auditing and some other services commonly provided by CPAs.
According to the American Accounting Association’s Committee on Basic Auditing Concepts, auditingauditing: A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.
A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.1
This definition contains several key elements that we will break down.
Systematic Process
Auditing is a systematic process. Auditing standards require that auditors go to great lengths to plan and prepare for the audit. Significant work is put into planning well in advance of performing any audit procedures. Auditors follow this detailed plan, which is called an audit programaudit program: The plan or outline followed by an auditor in the conduct of his or her audit.
Objectively Obtaining and Evaluating
Auditors must be objective as they obtain and evaluate audit evidence. In order for the public to trust the auditor’s opinion regarding the fairness of the reported information, the auditor should not be biased in one direction or the other. Consider the used car purchase discussed earlier. If you discovered that the mechanic you asked to verify the seller’s information was the seller’s brother, you would probably be less assured by the mechanic’s opinion, regardless of how knowledgeable he was. Standard setters and lawmakers have created very detailed rules regarding the expectation for independence and objectivity of auditors as they carry out their audits.
Evidence
Note that the definition of auditing indicates that auditors obtain and evaluate evidence. The gathering and evaluation of this evidence is what allows auditors to form an opinion regarding the reliability of the company’s financial statements. Auditors are required to obtain sufficient appropriate evidence during the course of their audit before drawing any conclusions regarding the accuracy of the reported information.
Assertions
The evidence that auditors obtain relates to assertionsassertions:
The implicit or explicit claims and representations made by the management responsible for the preparation of financial statements regarding the appropriateness of the various elements of financial statements and disclosures.
Economic Actions and Events
An audit deals with economic actions and events. While other services provided by auditors can offer assurance regarding information that is not financial in nature, such as compliance with royalty contracts, audits deal exclusively with economic actions and events.
Established Criteria
In order to provide an opinion on the reliability of a company’s financial statements, the auditor needs a standard to compare the company’s financial statements to. For example, auditor’s opinions often include a phrase indicating that the company’s financial statements are fairly stated in accordance with Generally Accepted Accounting Principles (GAAP). Thus, GAAP is the established criteriaestablished criteria: The standard of comparison used in the conduct of an audit.
The framework for quality internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSOCOSO: Committee of Sponsoring Organizations of the Treadway Commission
Communicating the Results to Interested Users
The purpose of an audit, according to auditing standards, is to “enhance the degree of confidence of intended users in the financial statement” (ISA 200). This is done by issuing a written report to users of the financial statements that provides information regarding the auditor’s findings and her opinion regarding the fair presentation of the financial statements. When an auditor believes the financial statements are fairly stated in all material respects, she issues a report containing an unmodified audit opinionunmodified audit opinion: An auditor’s opinion that financial statements are in accordance with applicable financial reporting regulations.
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