EXAM #1 STUDY GUIDE (CHAPTER 1-5)

*Chapter 1—Introduction to Assurance & Financial Statement Auditing
Auditing: analytical and logical skills; much more conceptual in nature; risk based assessments (RBA)
Why is Auditing Necessary?
House inspector analogy
Provides reasonable assurance that financial statements are free from material misstatement
Information asymmetry & conflicts of interest lead to information risk for the principal (absentee owner)
Principal (Absentee Owner) provides capital & hires agent (MGR) to manage resources
Agent (MGT) is accountable to principal (absentee owner) and provides financial reports
Agent (MGR) hires auditor to report on fairness of agent’s (MGR) financial reports; Agent (MGT) pays auditor to reduce principal (absentee owner) information risk
Auditor gathers evidence to evaluate fairness of agent’s (MGR) financial reports; Auditor issues audit opinion to accompany agent’s (MGR) financial reports, adding credibility to the reports and reducing principal’s (absentee owner) information risk
What are We Up Against?
Incredibly complex business environment: globalization, technology, and regulation
Huge pressure to compete
Increased public scrutiny
More responsibilities than ever
Persistent Expectations Gap: Difference in what public and financial statement users believe auditors are responsible for and what auditors themselves believe their responsibilities are
Auditing: A systematic process of (1) objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and (2) communicating the results to interested users
Attest: A service when a practitioner is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party; Encompasses financial statement audits
Ex: Agreed-upon procedures
Assurance Services: Independent professional services that improve the quality of information, or its context, for decision makers; Encompasses attest services and financial statement audits
Ex: Reviewing a potential vendor contract
Relationship Among Assurance, Attest, and Auditing
*Auditing services are a subset of attest services
*Attest services are a subset of assurance services
*All auditing services are attest services
*All attest services fall into broader category of assurance services
*Assurance services may include report about relevance & timeliness, not just reliability, of info

Financial Statement Process Overview:
Client Acceptance

Planning

Planning and Fieldwork

Fieldwork

Fieldwork and Reporting

Reporting

Financial Statement Audit: Specialized form of an attest service; Represents major assurance service offered by most public accounting firms
Three Fundamental Concepts: The auditor’s judgment of materiality and audit risk impact the auditor’s decision about the nature, timing, and extent of evidence to be gathered
Materiality: The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced
Audit Risk: The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
Audit Evidence: All the information used by the auditor in arriving at the conclusions on which the audit opinion is based; Includes the information contained in the accounting records underlying the financial statements, as well as other information
Materiality: The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or