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Auditing and Accounting Information Systems - Summary of all lectures

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Course
Auditing And Accounting Information Systems (320060B6)

Institution
Tilburg University (UVT)

Complete summary of all lectures of the course Auditing and Accounting Information Systems at Tilburg University, written in 2020. It includes all the content for the exam!

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Uploaded on December 3, 2020
Number of pages 91
Written in 2020/2021
Type Class notes
Professor(s) Unknown
Contains All classes

auditing
bedrijfseconomie
auditing and accounting information systems
accounting information systems
tilburg university
uvt

Institution
Tilburg University (UVT)
Education
Bedrijfseconomie
Course
Auditing And Accounting Information Systems (320060B6)

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AUDITING & ACCOUNTING
INFORMATION SYSTEMS

,LECTURE 1
INTRODUCTION
Accounting is the process of identifying, measuring and communicating economic information to
permit informed judgments and decisions by users of the information.
The environment within which accounting exists is known as the accounting information system.

Accounting is an information-providing activity, so accountants need to understand:
• How the system that provides that information is designed, implemented and used.
• How financial information is reported.
• How information is used to make decisions.

LECTURE 2
Pre-lecture readings
Why corona makes the audit more complex and risky (different reasons).
Not able to have personal interaction, not able to observe and make assessments in the workplace,
not able to visit clients, etc. You are not sure if managers/CEO are speaking the truth when they tell
you about stock for example. Auditors can’t sign off reports if they not sure the information is
completely true. Auditor can’t give insurance that the information is true and fair. They can’t give a
‘clean’ opinion (= nothing wrong in the company) because of the risk.

Auditors must also look at predictions managers make for the future. This is however very difficult in
these times of corona. How can we make good predictions in these uncertain times? How can the
auditor agree with these predictions?

One (easy) solution for the auditor would be to indicate this risk in the final audit report. However, why
is it often difficult/hard to make a remark in the audit opinion (and thus not give a “clean” audit
opinion)?
The auditor could give an unclean opinion, saying there are some issues, the company will have issues
→ could lead to delisting. Authorities abandon you, don’t want to take the risk for their investors.
Companies will simply look for a different auditor that will give them a clean opinion.

WHAT IS AUDITING?
WHY DO WE NEED AUDITS?
Companies have a huge impact on (and responsibilities for) society. Companies need to follow
different sets of rules/regulations. But companies are also guided by humans and if there is no control
on following these rules, this would lead to bad practices. For this, there are audits.

Audits provide insurance on the financial statements, to make sure people in the stock market have
the right information. An auditor gives insurance that they did checks and that they think that the
results/information the company provides may give a fair presentation of reality. However, they can
never prove that this is correct.

Auditing is a process in which a business requests an audit firm to examine its accounting records and
certify whether the numbers reported in the financial statements are accurate.
➔ During the year preparation activities and in the end of the year they make their final opinion

,Firm selects auditor that will check the numbers → compare with: It’s like choosing the person that
will check your exam. The business requests the auditor to provide access to financial data… and also
pays for it.

This is related with the way audits are organized in society. It’s the business that asks an audit firm for
their service and reports on numbers. These parties together make the audit work.

Involved in publication of the numbers are:
▪ Management of the company
▪ The audit committee hires the external auditor(s) and supervises within the company what is
going on.
▪ Internal auditor

PARTIES INVOLVED IN ORGANIZATION
Internal: Management
▪ Prepares and presents Financial Statements
▪ Designs, implements and maintains internal control over financial reporting
▪ Provides information (on FS & IC) to auditors

Internal audit function
▪ Gives assurance on internal controls to managers and the audit committee

Internal: Audit committee
▪ Subcommittee of Board of Directors.
▪ Oversees managers and the internal auditor
▪ Hires external auditor

External auditor
▪ Provides independent audit of internal control and financial statements

Interaction between internal & external: management and auditors are closely related to each other.

Formal definition of Auditing
A Statement of Basic Audit Concepts (1971)
An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between these
assertions and established criteria (assurance role of the auditor), and communicating the results to
interested users (reporting).

ROLES OF AUDITING
Audit is a service that receives and evaluates evidence pertaining to
management assertions regarding economic activities within the
organization.

ASSURANCE AND ATTESTATION
Assurance role of auditing
Financial statements: information that managers indicate that is the
reality of the business.
Auditors must check if this is the case → assurance role of the auditor.
The auditor improves the quality of the information that is needed for

, decision making. By checking the numbers, the auditors add some insurance, some quality to them →
assurance service
The assurance service is to improve the quality of information for decision makers, completed by an
independent party. E.g., on the internet people express their opinion about a new cell phone, but
none of them issue a certificate about the actual quality of a cell phone.

Attestation role of auditing
Auditors are a third party that checks the information of a company and provides information to
investors. Auditors are just one part of attestation services. It’s only about economic financial
information. Attestation services are provided when a certified public accountant (CPA) expresses a
conclusion about the reliability of a company's financial statements.
An audit differs from regular assurance services as it also includes attestation services.

In the audit report the auditor communicates his/her opinion for those that are interested.

INFORMATION
Information role of auditing
An audit improves the quality of financial information. Credible information reduces risk (risk-return
trade off) and improves decision making (noise-reduction).
E.g., An auditor can solve information problems by providing valuable information about a borrowing
firm to a lending bank, potentially lowering the monitoring costs of debtholders.
Pittman and Fortin (2004): Young companies (i.e., facing strong information problems) with a high
quality auditor pay significantly lower interest rates (→ low Q auditor).

INSURANCE
Insurance role of auditing
Auditors provide reasonable assurance about the accuracy of the financial statements of a company.
Users rely on these audited financial statements to make their decisions.
Auditors may identify any material misstatements in the financial statements.
Users can sue auditors to recover their losses. An auditor can be held reliable if something goes
wrong.

Managers, investment bankers, etc. have incentives to insure themselves via auditor participation. The
auditor (and the auditee) are jointly and severally liable to third parties for losses attributable to
defective financial statements (→ proportionate liability)

SIGNALING
Signaling role of auditing
Audit is indication of transparency, this enhances the perception of a company and shows that you are
a low risk company.

MANDATORY AUDITS
We have auditors because it’s mandatory, but there are also other reasons. There are rules about
which companies need to be audited, how frequent they need to change from auditor, etc.

Mandatory Audits
In the US, audits are only required for public companies and certain other regulated entities.
PCAOB oversees the work of the auditor, the audits of public companies. This is very strict, more strict
than in the Netherlands.

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Auditing and Accounting Information Systems - Summary of all lectures

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