Ch1 (6) - Chapter 1 The Demand for Audit and Assurance...

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Chapter 1 The Demand for Audit and Assurance Services Key Objectives (from text): 1. Describe auditing. 2. Distinguish between auditing and accounting. 3. Explain the importance of auditing in reducing information risk. 4. List the causes of information risk, and explain how this risk can be reduced. 5. Describe assurance services and distinguish audits from assurance and nonassurance services. 1. Demand for Accounting Fueled by Sarbanes–Oxley The Sarbanes–Oxley Act has dramatically changed reporting requirements for public companies. Public accounting is a regulated profession Public companies must report on internal control The result is that the demand for audit services, and the demand for entry level accountants, has never been higher. 2. What is a financial statement audit? An audit provides reasonable assurance that the financial statements are free of material misstatements . Why does auditing exist? ( Discussion ) Key point : We are the good guys – Audits benefit society and the client by facilitating access to capital. 1
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3. Nature of Auditing Auditing 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. (Definition, p. 4) Note : You are not responsible for memorizing this definition, but it will help frame our discussion in following chapters. Competency is addressed through the quality control standards discussed in Ch. 2 Reporting standards are covered in Ch. 3 Independence is the most importance of the ethical standards discussed in Ch. 4 4. Distinction between auditing and accounting A good auditor must be a good accountant (GAAP is the criteria for a financial audit), but a good accountant may not be a good auditor. 5. Economics of auditing – audits and other assurance services provide value by reducing information risk. A. Sources of information risk 1. Remoteness of information 2. Biases of provider 3. Volume of transactions 4. Complex transactions Auditors are valuable because: They are specialists in evaluating transactions. Auditors are independent of the company and provide an unbiased evaluation. 2
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B. Importance of auditor reputation and independence - Third parties rely on the audit report, but the auditor is compensated by the company (note that as required by the Sarbanes–Oxley Act, the audit committee of the board of directors for a public company is responsible
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This note was uploaded on 03/18/2011 for the course ACCT 422 taught by Professor Smith during the Spring '11 term at UMBC.

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Ch1 (6) - Chapter 1 The Demand for Audit and Assurance...

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