Chapter 2

Numerous scandals involving corporate giants, brokerage firms, stock exchanges, mutual fund managers, and several of the large public accounting firms were uncovered. at firms such as

- Enron, - WorldCom, - Tyco, - Arthur Andersen, & - Lehman Brothers.

Audit Team Members

- Partner, - Manager, - Senior/ In-charge, & - Associate/ Staff

Types of Auditors

1) External, 2) Internal, 3) Government, & 4) Forensic

Non-audit services performed by auditors include

1) Tax Preparation and Planning Services 2) Management Advisory Services 3) Compilation and Review Services

Types of Assurance Services

1. Attestation: to provide assurance as to information's reality. 2. Other Assurance, 3. Non Assurance: includes Tax Services, Management Consulting and other services.

Three different organizations set auditing standards that are relevant for financial statement auditors in the U.S. and internationally:

1.) ASB- Non-public company audits, 2.) PCAOB- Public company audits, 3.) IAASB- Used in over 125 international jurisdictions.

Organizations that Affect Auditing Internationally

1.) International Accounting Standards Board (IASB), & the 2.) International Auditing and Assurance Standards Board (IAASB).

Auditors typically organize a financial statement audit into five basic processes:

1.) Revenue Process, 2.) Financing Process, 3.) Purchasing Process, 4.) Human Resource Management Process, and 5.) Inventory Management Process.

Organization That Affect Auditing in the United States

1.) Securities and Exchange Commission (SEC), 2.) American Institute of Certified Public Accountants (AICPA), 3.) Public Company Accounting Oversight Board (PCAOB), 4.) Financial Accounting Standards Board (FASB), & the 5.) Auditing Standards Board (ASB).

Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in

2010

Types of Attest Services

Reporting on nature and quantity of inventory stored in a company's warehouse so that the company can obtain a bank loan

Ethics

a system or code of conduct based on moral duties and obligations that indicate how we should behave.

Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not

absolute, assurance that material misstatements are detected.

The AICPA's Code of Professional Conduct establishes guidance for

acceptable behavior for auditors.

The AICPA's Code of Professional Conduct applies to

all auditors, including those auditing public companies.

The SEC oversees the formulation of

auditing standards for publicly traded companies, by grants over sight of regulation to the PCAOB.

internal auditors

company employees who continuously evaluate the effectiveness of the company's internal control systems

Business organizations exist to create value for their stakeholders. Due to the way resources are invested and managed in the modern business world, a system of

corporate governance is necessary, through which managers are overseen and supervised.

While auditors have important responsibilities, management is primarily responsible for maintaining

effective internal control and for ensuring the fairness of the company's financial statements

Forensic Auditors

employed by corporations, government agencies, public accounting firms, and consulting and investigating firms. They are trained in detecting, investigating, and deterring fraud and white collar crime

Government Auditors

employed by federal, state and local agencies. Generally used by the IRS( compliance audits ensuring that individuals and organizations are complying with federal tax laws) or Government Accountability Office ( conduct audits of activities, financial transactions and accounts of the federal government). Also, army audit agency and FBI.

The business or entity being audited is the primary context that shapes the

external auditor's environment. How you apply auditing tools on any particular engagement will depend greatly on the nature of the entity's business.

The auditor's responsibility is to provide reasonable assurance that the financial statements are

free of material misstatement, whether caused by error, fraud, or illegal acts.

External Auditors

independent accounting firms that provide auditing services for public companies

The audit committee, consisting of a subset of independent board members, oversees the

internal and external auditing work done for the organization.

Types of Audit Services

internal control audits, compliance audits, operational audits, forensic audits

ACIPA sets auditing standards for

privately traded companies, and oversight of the standards is handled by the ASB.

While businesses in different industries can have strikingly different characteristics, most have

some fundamental conceptual characteristics in common.

The body primarily responsible for management oversight in U.S. corporations is

the board of directors.

Professionalism

the conduct, aims, or qualities that characterize a profession or professional person.

Duties of Audit Team Senior

• Assist in the development of the audit plan. • Prepare budgets. • Assign tasks to associates and direct the day-to-day performance of the audit. • Perform procedures, gather and evaluate audit evidence. • Supervise and review the work of associates. • Inform the manager about any auditing or accounting problems encountered.

Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act

• Congress passed in 2002, • Regulation of the audit profession, & • Creation of the Public Company Accounting Oversight Board (PCAOB)

Duties of Audit Team Manager

• Ensure that the audit is properly planned, including scheduling of team members. • Supervise the preparation of and approve the audit program. • Review the working papers, financial statements, and audit report. • Recommend key audit judgments to partner, oversee the work of seniors and staff. • Deal with invoicing and ensure collection of payment for services. • Inform the partner about any auditing or accounting problems encountered.

Duties of Audit Team Associate

• Perform the audit procedures assigned to them. • Prepare adequate and appropriate documentation of completed work. • Inform the senior about any auditing or accounting problems encountered.

"The principles underlying an audit conducted in accordance with generally accepted auditing standards" is the preface to the ASB's auditing standards. These principles are grouped into four categories:

• Purpose and premise of an audit, • Responsibilities of the auditor, • Performance of the audit, & • Reporting

Duties of Audit Team Partner

• Reach agreement with the auditee on the scope of the service to be provided. • Ensure that the audit is properly planned and that the audit is conducted in accordance with applicable auditing standards. • Assemble an audit team that has the required skills and experience. • Supervise the audit team and review the working papers. • Conclude on the adequacy of audit evidence and sign the audit report