THE AUDITING PROFESSION

CHAPTER 1

WHAT IS AUDITING?

• THE ACCUMULATION AND EVALUATION OF EVIDENCE ABOUT INFORMATION TO DETERMINE AND REPORT ON THE DEGREE OF CORRESPONDENCE BETWEEN THE INFORMATION AND ESTABLISHED CRITERIA.

• GATHERING EVIDENCE ABOUT THE CORRESPONDENCE BETWEEN REPRESENTATIONS OF ANOTHER AND ESTABLISHED CRITERIA FOR MAKING SUCH REPRESENTATIONS AND ISSUING A REPORT

AUDITING AND ACCOUNTING

• ACCOUNTING IS CONSTRUCTIVE– CREATING REPORTS

• AUDITING IS ANALYTICAL– DETERMINE “FAIRNESS” OF REPORTS

TYPES OF AUDITS• AUDITS OF FINANCIAL INFORMATION

– PRESENTATION COMPARED TO CRITERIA

• OPERATIONAL AUDITS– EFFICIENCY AND EFFECTIVENESS– IMPROVE OPERATIONS

• COMPLIANCE AUDITS– FOLLOWING RULES

• TAX AUDITS

• LAWS, REGULATIONS

TYPES OF AUDITORS

• EXTERNAL– CPAS– GAO– IRS– BUREAU OF STATE AUDITS

• INTERNAL– EMPLOYEES OF ENTITIES BEING

AUDITED

WHY HAVE AUDITS?

• CONTROL MECHANISM– COMPLIANCE WITH RULES

• REDUCE LOSSES– FRAUD– INEFFICIENCIES

• ENHANCE CONFIDENCE– ADD CREDIBILITY TO NUMBERS– REDUCE INFORMATION RISK

INFORMATION RISK

• RISK THAT INFORMATION IS UNRELIABLE– REMOTENESS OF INFORMATION– BIASES OF PROVIDER– VOLUMINOUS DATA– COMPLEXITY

• REDUCTION IN RISK– USER VERIFIES INFO– AUDITED INFORMATION

CERTIFIED PUBLIC ACCOUNTANT

• EDUCATIONAL REQUIREMENT– IN CALIFORNIA

• BS IN SOMETHING

• 30 SEMESTER UNITS OF ACCT, LAW, BUS

• EXAM– UNIFORM IN ALL STATES

• EXPERIENCE– IN CALIFORNIA

• 2 YEARS WORKING FOR CPA

• 500 HOURS OF ATTESTATION WORK

PROFESSION OF PUBLIC ACCOUNTING

• WHAT IS A PROFESSION?– OCCUPATIONAL GROUPING– GENERAL CHARACTERISTICS

• SPECIALIZED KNOWLEDGE BASED ON THEORY

• LICENSE

• RESPONSIBILITY TO PUBLIC

• CODE OF ETHICS

• CULTURE OF PROFESSIONAL

STRUCTURE OF PROFESSION

• INTERNATIONAL CPA FIRMS– “BIG-5”

• ARTHUR ANDERSEN

• KPMG PEAT MARWICK

• PRICEWATERHOUSECOOPERS

• DELOITTE AND TOUCHE

• ERNST AND YOUNG

– AUDIT 95% OF PUBLIC COMPANIES

• NATIONAL FIRMS– GRANT THORNTON– BDO SIEDMAN

• REGIONAL FIRMS– MOSS ADAMS

• LOCAL FIRMS– PERRY-SMITH– TATE, PROPP, BEGGS & SUGIMOTO

WHAT DO CPAS DO?

• ATTESTATION ENGAGEMENTS– AUDITS– REVIEWS– OPINIONS ON OTHER INFO

• ACCOUNTING AND BOOKKEEPING

• TAX

• CONSULTING

AMERICAN INSTITUTE OF CPAS

• ESTABLISH STANDARDS– AUDITING STANDARDS– ETHICS STANDARDS– ACCOUNTING AND REVIEW SERVICES

STANDARDS– TAX PRACTICE STANDARDS– CONSULTING PRACTICE STANDARDS

GENERALLY ACCEPTED AUDITING STANDARDS

• GENERAL STANDARDS– ADEQUATE TECHNICAL TRAINING– INDEPENDENCE IN MENTAL ATTITUDE– DUE PROFESSIONAL CARE

• FIELD WORK STANDARDS– PLANNING AND SUPERVISION– INTERNAL CONTROL– SUFFICIENT, COMPETENT EVIDENCE

• REPORTING STANDARDS– REPORT SHALL STATE WHETHER

STATEMENTS ARE IN ACCORD WITH GAAP

– REPORT SHALL IDENTIFY INCONSISTENCIES

– REPORT SHALL INDENTIFY INADEQUATE DISCLOSURES

– REPORT SHALL EXPRESS OPINION OR TELL WHY NO OPINION WAS FORMED

STATEMENTS ON AUDITING STANDARDS

• INTERPRETATIONS OF GAAS

• GUIDANCE ON APPLICATION

• 87 SASs

• SOPs

• AUDITING PROCEDURES

INSURING QUALITY• ELEMENTS OF QUALITY CONTROL• DIVISION OF FIRMS

– SEC PRACTICE SECTION• ADHERE TO QUALITY CONTROL

• MANDATORY PEER REVIEW

• CONTINUING EDUCATION

• PARTNER ROTATION

• CONCURRING PARTNER REVIEW

• PROSCRIPTION OF SERVICES

• REPORT ON DISAGREEMENTS

• REPORT ON CONSULTING

– PRIVATE COMPANIES PRACTICE SECTION• PEER REVIEW

SECURITIES AND EXCHANGE COMMISSION

• REGULATE SECURITIES MARKETS

• ESTABLISH REPORTING STANDARDS FOR REGISTERED COMPANIES

• REQUIRES AUDITS BY CPAS

• ESTABLISHED BY SEC ACTS OF 1933 AND 1934