The Demand for audit and other assurance services
This chapter introduces auditing and other assurance services
provided by auditors, as well as auditors’ role in society. These
service provide value by offering assurance on financial
statement, the effectiveness of internal control, and other
information. There is a discussion of the types of audits and
auditors, including the requirements for becoming a certified
public accountant (CPA).
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.
Information and established criteria: to an audit, there
must be information in a verifiable form and some standards
{criteria}-by which the auditor can evaluate information.
Auditors routinely perform audits of quantifiable information,
including: 1-companies’ financial statements 2- individuals'
income tax returns. Auditors also audit more subjective
information, such as 1- the effectiveness of a computer system
2- the efficiency of manufacturing operations.
The criteria for evaluating information also vary depending on
the information being audited. 1- In the audit of historical
financial statements, the criteria are usually generally accepted
accounting principles (GAAP).
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This means in an audit of Rashedy's financial statements, the CPA
firm will determine whether Rashedy's financial statements have
been prepared in accordance with GAAP.
2- For the audit of fax returns, the criteria are found in the tax
law; the tax investigator uses the tax law as the criteria for
correctness, rather than GAAP.
3- For more subjective information, it is more difficult to
establish criteria, typically, auditor and the entities being audited
agree on the criteria will before the audit starts.
Evidence: is any information used by the auditor to determine
whether the information being audited is stated in accordance
with the established criteria. Evidence takes many different
forms, including:
• Oral testimony of the auditee.
• Written communication with outsiders.
• Observations by the auditor.
• Electronic md other data about transactions.
The auditor must be qualified to understand the criteria used
and must be competent to know the types and amount of
evidence to accumulate to reach the proper conclusion after
examining the evidence. The auditors must have an independent
mental attitude.
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The final stage in the auditing process is preparing the audit
report, which communicates the auditor’s findings to users.
Reports differ in nature, but all must inform readers of the
degree of correspondence between information and established
criteria.
Distinction between accounting and auditing
Accounting: is the recording, classifying, and summarizing of
economic events in a logical manner for the purpose of providing
financial information for decision making. To develop relevant
information, accountants must have a well understanding of the
principles and rules that provide the basis for preparing the
accounting information.
In auditing: auditors focus on determining whether recoded
information reflects the economic events that occurred during
the accounting period, so auditors must well understand GAAP.
Types of Audits
1. Financial Statement audit.
2. Operational audit.
3. Compliance audit.
A finical statement audit is conducted to determine whether the
financial statements are stated in accordance with GAAP. In
determining whether financial statements are fairly stated in
accordance with GAAP, the auditor gathers evidence to
determine whether the statements contain material errors or
other misstatements. 3
An operational audit evaluates the efficiency and effectiveness
of any part of an organization’s operating procedures and
methods. At the completion of an operational audit,
management normally expects recommendations for improving
operations. They can include: 1- the evaluation of organizational
structure 2- computer operations 3- production methods, and 4-
marketing. In this sense, operational audit is more like
management consulting that what is usually considered
auditing.
A compliance audit is conducted to determine whether the
auditee is following specific procedures, rules, or regulation set
by the higher authority. Following are examples of compliance
audits:
• Review wages rates for compliance with minimum wage
laws.
• Examine contractual agreements with bankers and other
lenders.
Types of Auditors
1. Certified public accounting firms are responsible for
auditing the published historical financial statements of all
1- publicly traded companies 2- many smaller companies 3-
noncommercial organizations. CPA firms are often called
external auditors or independent auditors to distinguish
them from internal auditors.
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2. General accounting office auditors (governmental
accountability office auditors) is an auditor working for the
Government Accountability Office (GAO), a nonpartisan
agency in the legislative branch of the government.
The GAO’s responsibility is to perform the audit function for
the government.
3. Internal revenue agents the IRS is responsible for
enforcing the federal tax law as they have been defined by
government. A major responsibility of the IRS is to audit
taxpayers’ returns to determine whether they have
complied with the tax laws, the auditors who perform these
examinations are called internal revenue agent (IRS).
4. Internal auditors are employed by companies to audit for
management. Internal auditors’ responsibility varies
depending on the employer. Some internal audit staff
consists of only one or two employees doing routine
compliance auditing.
• Users from outside the entity are unlikely to want to rely on
information verified solely by internal auditors because of
their lack of independence. This lack of independence is the
major difference between internal auditors and CPA firms.
