The relationship among audit services, attestation services, and assurance services is reflected in Figure 1-3 on page 13 of the text. Show An assurance service is an independent professional service to improve the quality of information for decision makers. An attestation service is a form of assurance service in which the CPA firm issues a report about the reliability of an assertion that is the responsibility of another party. Audit services are a form of attestation service in which the auditor expresses a written conclusion about the degree of correspondence between information and established criteria. The most common form of audit service is an audit of historical financial statements, in which the auditor expresses a conclusion as to whether the financial statements are presented in conformity with generally accepted accounting principles. An example of an attestation service is a report on the effectiveness of an entity�s internal control over financial reporting. There are many possible forms of assurance services, including services related to business performance measurement, health care performance, and information system reliability. An independent audit is a means of satisfying the need for reliable information on the part of decision makers. Factors of a complex society which contribute to this need are: 1. Remoteness of information a. Owners (stockholders) divorced from management b. Directors not involved in day-to-day operations or decisions c. Dispersion of the business among numerous geographic locations and complex corporate structures 2. Biases and motives of provider a. Information will be biased in favor of the provider when his or her goals are inconsistent with the decision maker's goals. 3. Voluminous data a. Possibly millions of transactions processed daily via sophisticated computerized systems b. Multiple product lines c. Multiple transaction locations 4. Complex exchange transactions a. New and changing business relationships lead to innovative accounting and reporting problems b. Potential impact of transactions not quantifiable, leading to increased disclosures Important risks for auditors to understand 1. Risk-free interest rate This is approximately the rate the bank could earn by investing in U.S. treasury notes for the same length of time as the business loan. 2. Business risk for the customer This risk reflects the possibility that the business will not be able to repay its loan because of economic or business conditions such as a recession, poor management decisions, or unexpected competition in the industry. 3. Information risk This risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. A likely cause of the information risk is the possibility of inaccurate financial statements. Auditing has no effect on either the risk-free interest rate or business risk. However, auditing can significantly reduce information risk. The four primary causes of information risk are remoteness of information, biases and motives of the provider, voluminous data, and the existence of complex exchange transactions. The three main ways to reduce information risk are: 1. User verifies the information. 2. User shares the information risk with management. 3. Audited financial statements are provided. The advantages and disadvantages of each are as follows: ADVANTAGES DISADVANTAGES USER VERIFIES INFORMATION 1. User obtains information desired. 2. User can be more confident of the qualifications and activities of the person getting the information. 1. High cost of obtaining information. 2. Inconvenience to the person providing the information because large number of users would be on premises. USER SHARES INFORMATION RISK WITH MANAGEMENT 1. No audit costs incurred. 1. User may not be able to collect on losses. AUDITED FINANCIAL STATEMENTS ARE PROVIDED 1. Multiple users obtain the information. 2. Information risk can usually be reduced sufficiently to satisfy users at reasonable cost. 3. Minimal inconvenience to management by having only one auditor. 1. May not meet needs of certain users. 2. Cost may be higher than the benefits in some situations, such as for a small company.
The primary evidence the internal revenue agent will use in the audit of the A Company's tax return include all available documentation and other information available in A�s office or from other sources. For example, when the internal revenue agent audits taxable income, a major source of information will be bank statements, the cash receipts journal and deposit slips. The internal revenue agent is likely to emphasize unrecorded receipts and revenues. For expenses, major sources of evidence are likely to be cancelled checks, vendors' invoices and other supporting documentation. Distinctions between accounting and auditing The accounting function is the recording, classifying and summarizing of economic events to provide relevant information to decision makers. The rules of accounting are the criteria used by the auditor for evaluating the presentation of economic events for financial statements and he or she must therefore have an understanding of generally accepted accounting principles (GAAP), as well as auditing standards. The accountant need not, and frequently does not, understand what auditors do, unless he or she is involved in doing audits, or has been trained as an auditor.
OPERATIONAL AUDITS COMPLIANCE AUDITS AUDITS OF FINANCIAL STATEMENTS PURPOSE To evaluate whether operating procedures are efficient and effective To determine whether the client is following specific procedures set by higher authority To determine whether the overall financial statements are presented in accordance with specified criteria (usually GAAP) USERS OF AUDIT REPORT Management of organization Authority setting down procedures, internal or external Different groups for different purposes � many outside entities NATURE Highly nonstandard; often subjective Not standardized, but specific and usually objective Highly standardized PERFORMED BY: CPAs Frequently Occasionally Almost universally GAO AUDITORS Frequently Frequently Occasionally IRS AUDITORS Never Universally Never INTERNAL AUDITORS Frequently Frequently Frequently Examples of specific operational audits that could be conducted by an internal auditor in a manufacturing company are: 1. Examine employee time cards and personnel records to determine if sufficient information is available to maximize the effective use of personnel. 2. Review the processing of sales invoices to determine if it could be done more efficiently. 3. Review the acquisitions of goods, including costs, to determine if they are being purchased at the lowest possible cost considering the quality needed. 4. Review and evaluate the efficiency of the manufacturing process. 5. Review the processing of cash receipts to determine if they are deposited as quickly as possible. When auditing historical financial statements, an auditor must have a thorough understanding of the client and its environment. This knowledge should include the client�s regulatory and operating environment, business strategies and processes, and measurement indicators. This strategic understanding is also useful in other assurance or consulting engagements. For example, an auditor who is performing an assurance service on information technology would need to understand the client�s business strategies and processes related to information technology, including such things as purchases and sales via the Internet. Similarly, a practitioner performing a consulting engagement to evaluate the efficiency and effectiveness of a client�s manufacturing process would likely start with an analysis of various measurement indicators, including ratio analysis and benchmarking against key competitors. The major differences in the scope of audit responsibilities for CPAs, GAO auditors, IRS agents, and internal auditors are: 1. CPAs perform audits in accordance with auditing standards of published financial statements prepared in accordance with generally accepted accounting principles. 2. GAO auditors perform compliance or operational audits in order to assure the Congress of the expenditure of public funds in accordance with its directives and the law. 3. IRS agents perform compliance audits to enforce the federal tax laws as defined by Congress, interpreted by the courts, and regulated by the IRS. 4. Internal auditors perform compliance or operational audits in order to assure management or the board of directors that controls and policies are properly and consistently developed, applied and evaluated. The CPA Exam The four parts of the Uniform CPA Examination are: Auditing and Attestation, Financial Accounting and Reporting, Regulation, and Business Environment and Concepts. What is the difference between audit and attest services?Auditors evaluate subject matter or an assertion in accordance with specific criteria. Attest engagements include assurance and non-assurance services. Most importantly, attest services are a set of protected services that only licensed certified public accountants (CPA) who operate within a CPA firm can perform.
What are the difference among audit service attestation and assurance service?The audit is the process of evaluating the accounting entries present in the financial statement of the company. The audit checks the accuracy of the financial reports. Assurance is the process of analyzing and used in the assessment of accounting entries and financial records.
What is an attest service?Attestation services are when a certified public accountant (CPA) expresses a conclusion about the reliability of a company's financial statements.
Is an audit an attest service?An attestation is a type of audit as it provides an opinion. As the scope increases in attestation services, the governing standards continue to parallel those found within the generally accepted auditing standards (GAAS).
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