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Summary Auditing and Assurance Services
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Exam questions Assurance Services
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Summary Auditing and Assurance ServicesChapter 1: The assurance services market
Auditing: 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.
To do an audit, there must be information in a verifiable form and
standards (established criteria) by which the auditor can evaluate
information. Auditors routinely perform audits of quantifiable
information. The criteria for evaluating information also vary on the
information being audited.
Evidence: any information used by the auditor to determine
whether the information being audited is stated in accordance with
the established criteria. To satisfy the purpose of the audit, auditors
must obtain a sufficient quality and volume of evidence.
Independent auditors: auditors reporting on company financial
statements. Independent auditors are certified public accountants or
accounting firms that perform audits of commercial and non-
commercial financial entities.
Internal auditors: auditors employed by a company to audit for
the company’s board of directors and management.
Audit report: the communication of audit findings to users. The
audit report is the final stage in the auditing process. All reports
must inform readers of the degree of correspondence between the
information audited and established criteria.
Accounting: 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.
Auditing can have a significant effect on information risk.
Information risk reflects the possibility that the information upon
which the business risk decision was made was inaccurate. A likely
cause of the information risk is the possibility of inaccurate financial
statements.
A society becomes more complex; decision makers are more likely
to receive unreliable information. There are several reasons for this:
1. Remoteness of information: in a global economy, it is nearly
impossible for a decision maker to have much firsthand knowledge
about the organization with which they do business. Information
provided by others must be relied upon. When information is
obtained from other, the likelihood of it being intentionally or
unintentionally misstated increases. Resource constraints
, 2. Biases and motives of the providers: 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. Agency problems
3. Voluminous data: As organizations become larger, so does the
volume of their exchange transactions. This increases the likelihood
that improperly recorded information is included in the records –
perhaps buried in a large amount of other information.
Unrecognized materiality
4. Complex exchange transactions: the increasing complexity in
transactions has also resulted in increasingly complex accounting
standards. Transactions and standards
How to respond on the demand for assurance services:
- Avoid
- Accept
- Share
- Reduce
For larger businesses, it is usually practical to incur costs to reduce
information risk. There are three main ways to do so:
1. User verifies information: the user may go to the business
premises to examine records and obtain information about the
reliability of the statements.
2. User shares information risk with management: there is
considerable legal precedent indicating that management is
responsible for providing reliable information to users. If users rely
on inaccurate financial statements and as a result incur a financial
loss, they may have a basis for a lawsuit against management.
3. Audited financial statements are provided: management of
a private company or the audit committee for a public company
engages the auditor to provide assurances to users that the
financial statements are reliable.
Assurance service: an independent professional service that
improves the quality of information for decision makers. Assurance
services are valued because the assurance provider is independent
and perceives as being unbiased with respect to the information
examined.
Assurance services can be done by CPAs or by a variety of other
professionals. One category of assurance services provided by CPAs
is attestation services.
Attestation services: a type of assurance service in which the CPA
firm issues a report about a subject matter or assertion that is made
by another party. Attestation services fall into five categories:
1. Audit of historical financial statements
Management asserts that the statements are fairly stated in
accordance with applicable U.S. or international accounting
2
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