THE DEMAND FOR AUDIT AND OTHER ASSURANCE SERVICESCHAPTER 1Copyright 2017 Pearson Education, Inc.1-1CHAPTER 1 LEARNING OBJECTIVES1-1 Describe auditing.1-2 Distinguish between auditing and accounting.1-3 Explain the importance of auditing in reducing information risk.1-4 List the causes of information risk, and explain how this risk can be reduced. 1-5 Describe assurance services and distinguish audit services from other nonassurance services provided by CPAs.1-6 Differentiate the three main types of audits.1-7 Identify the primary types of auditors.1-8 Describe the requirements for becoming a CPA.Copyright 2017 Pearson Education, Inc.1-2Copyright 2017 Pearson Education, Inc.1-3OBJECTIVE 1-1Describe auditing.NATURE OF AUDITINGAuditing is 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.Copyright 2017 Pearson Education, Inc.1-4INFORMATION AND ESTABLISHED CRITERIACopyright 2017 Pearson Education, Inc.1-5To do an audit, there must be information in a verifiable form and some standards (criteria) by which the auditor can evaluate the information.FASBIASBCriteriaACCUMULATING AND EVALUATING EVIDENCECopyright 2017 Pearson Education, Inc.1-6Evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with established criteria.Transaction DataCommunications with OutsidersObservationsClient TestimonyCOMPETENT, INDEPENDENT PERSONCopyright 2017 Pearson Education, Inc.1-7CompetenceIndependenceEvaluation of EvidenceProper ConclusionREPORTINGCopyright 2017 Pearson Education, Inc.1-8The final stage in the auditing process is preparing the audit report, which communicates the auditors findings to users.Copyright 2017 Pearson Education, Inc.1-9Figure 1-1 Audit of a Tax Return on this slide.Copyright 2017 Pearson Education, Inc.1-10OBJECTIVE 1-2Distinguish between auditing and accounting.DISTINCTION BETWEEN AUDITING AND ACCOUNTINGAccounting is the recording, classifying, and summarizing of economic events to provide financial information for decision making.Auditors focus on determining whether recorded information properly reflects the economic events that occurred during the accounting period. In addition to understanding accounting, auditors must possess expertise in the accumulation and interpretation of audit evidence. Copyright 2017 Pearson Education, Inc.1-11Copyright 2017 Pearson Education, Inc.1-12OBJECTIVE 1-3Explain the importance of auditing in reducing information risk.ECONOMIC DEMAND FOR AUDITINGInformation risk reflects the possibility that the information upon which a business decision was made was inaccurate.Auditing of financial information reduces information risk to the users of financial information.Copyright 2017 Pearson Education, Inc.1-13Copyright 2017 Pearson Education, Inc.1-14OBJECTIVE 1-4List the causes of information risk, and explain how this risk can be reduced.CAUSES OF INFORMATION RISKRemoteness of information: Decision makers do not have firsthand knowledge and must rely on information provided by others.Biases and motives of the provider: Information is provided by someone whose goals are inconsistent with those of the decision maker and may be biased.Copyright 2017 Pearson Education, Inc.1-15CAUSES OF INFORMATION RISK (CONT.)Voluminous data: Higher volumes of transactions increase the likelihood of undetected errors.Complex exchange transactions: Transactions are increasingly complex and more difficult to record properly. Complex accounting standards are difficult to interpret and apply.Copyright 2017 Pearson Education, Inc.1-16REDUCING INFORMATION RISKUser verifies information: The user may go to the business to verify the information. This is often costly and impractical.User shares information risk with management: Management is responsible for providing reliable information, and may be held responsible in a lawsuit if inaccurate information is provided.Audited financial statements are provided: External auditors are engaged to provide assurance that the financial statements are reliable.Copyright 2017 Pearson Education, Inc.1-17Copyright 2017 Pearson Education, Inc.1-18Copyright 2017 Pearson Education, Inc.1-19OBJECTIVE 1-5Describe assurance services and distinguish audit services from other assurance and nonassurance services provided by CPAs.ASSURANCE SERVICESAn assurance service is an independent professional service that improves the quality of information for decision makers.Assurance services can be provided by CPAs or other professionals.Assurance services by CPAs have been common for years, especially regarding historical financial statement information. Section 404 of the Sarbanes-Oxley Act now requires assurance regarding internal controls for larger public companies.Copyright 2017 Pearson Education, Inc.1-20ATTESTATION SERVICESCopyright 2017