Accounting 403:

Chapter 1:
Section 1: User Demand for Reliable Information
 Information risk in a big data world
 Business risk is the risk that an entity will fail to meet its objectives
 For example: the chance a company takes that its own customers will buy from
competitors, that product lines will become obsolete, that taxes will increase,
that government contracts will be lost, or that employees will go on strike
 Internal risks:
 Talent management, strikes, access to credit
 External risks:
 Market risks, inflation, asset expropriation
 To minimize these risks and take advantage of other opportunities presented in today's
competitive business environment, decision makers such as chief executive officers
(CEOs) demand timely, relevant, and reliable information
 Investors and creditors demand this information to make educated financial
decisions
 There are at least four environmental conditions in this big data world that increase user
demand for relevant and reliable information
 Complexity
 Transactions are very complicated and increasing dramatically
 Decision makers do not have the expertise to understand each
transaction
 Remoteness
 Transactions happen far from where the decision needs to be made
 Time Sensitivity
 Decisions need to be made quickly
 Consequences
 Decisions involve a significant investment in resources
 Information risk is the probability that the information circulated by a company will be
false or misleading. Preparers and issuers of financial information may benefit from
providing false, misleading, or overly optimistic information
 The probability is always greater than zero

Section 2: Auditing, Attestation, and Assurance Services

 Assurance (This potential conflict of interest between information providers and users, along
with financial statement frauds such as those of Enron and Theranos, leads to natural skepticism
on the part of users. Thus, they depend on information professionals to serve as independent
and objective intermediaries who will lend credibility to the information.) This lending of
credibility to information is known as assurance
 Attestation (When the assurance is provided for specific assertions made by management, we
refer to the assurance provided as attestation
  A practitioner assesses and reports on "subject matter, or an assertion about subject
matter that is their responsibility of another party"
 Auditing (When the assertions are embodied in a company's financial statements, we refer to
the attestation as auditing)
 American Accounting Association (AAA) definition of auditing: Auditing is a systematic process of
objectively obtaining and evaluation evidence regarding assertions about economic actions and
events to ascertain the degree of correspondence between the assertions and established
criteria and communicating the results to interested users.
 Auditing is a systematic process that involves obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence
between the assertions (Financial Statements) and established criteria (GAAP) and
communicating the results (Auditor's Report) to interested users (Persons who rely on the
financial reports)
 The purpose of an audit is to enhance the degree of confidence that intended users can
place in the financial statements. This is achieved by the expression of an opinion by the
auditor on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework
 In short, auditing enhances confidence in information and is focused on the idea of
materiality
 Auditing does not say that financial statements are completely correct, instead it states
that financial statements are not completely wrong
 Audit -> Assentation -> Assurance
 Evidence consists of all types of information that ultimately guide auditors' decisions
and relate to assertions made by management about economic actions and events
 Generally Accepted Accounting Principles (GAAP)
 International Financial Reporting Standards (IFRS)
 Internal Revenue Services (IRS)
 The AAA definition already presented is broad and general enough to encompass
external, internal, and governmental auditing. The more specific viewpoint of external
auditors in public accounting practice is reflected in the following statement about the
financial statement audit made by the American Institute of Certified Public Accountants
(AICPA), the public accounting community's professional association:
 The purpose of an audit is to enhance the degree of confidence that intended
users can place in the financial statements. This is achieved by the expression of
an opinion by the auditor on whether the financial statements are prepared, in
all material respects, in accordance with an applicable financial reporting
framework. In the case of most general purpose frameworks, that opinion is on
whether the financial statements are presented fairly, in all material respects, in
accordance with the framework. An audit conducted in accordance with
generally accepted auditing standards and relevant ethical requirements
enables the auditor to form that opinion.
 In addition, while analytical tools can rely on data sources that are both internal
and external to the client, our current understanding is that entry-level audit
professionals in today's environment need to first learn how to make the best
use of internal data and information produced by the entity, including system
generated reports used by the client to execute its internal control activities and
produce its financial statements
 Certified Public Accountants (CPAs)
  Attestation engagement is an engagement in which a practitioner is engaged to
issue a report on subject matter, or an assertion about subject matter that is the
responsibility of another party
 By comparing the AAA's earlier definition of auditing with the definition of
attestation, you can see that the auditing definition is a specific type of
attestation engagement
 Although auditing refers specifically to expressing an opinion on financial
statements and attestation refers more generally to expressing an opinion on
any type of information or subject matter that is the responsibility of another
party, assurance services include an even broader set of information, including
nonfinancial information
 Assurance services is defined as independent professional services that improve
the quality of information, or its context, for decision makers
 The major elements, and boundaries, of the definition are:
 Independence
 Professional services
 Improving the quality of information or its context
 For decision makers
 Examples of assurance services:
 Cybersecurity risk assessment and assurance
 XBRL ( eXtensible Business Reporting Language) reporting
 Information risk assessment and assurance
 Regulatory compliance
 Third-party reimbursement maximization
 Customer satisfaction surveys
 Evaluation of investment management policies
 Fraud and illegal acts prevention and deterrence
 Internal audit outsourcing
 Although audits are specific types of assurance engagements and auditors can
be described more generally as information assurors, hereafter we will use the
term auditor instead of information assuror because of the specific
responsibilities that auditors have under Generally Accepted Accounting
Standards (GAAS) as well as under regulatory bodies such as the Securities and
Exchange Commission (SEC) and the Public Company Accounting Oversight
Board (PCAOB)

Section 3: Management’s Financial Statement Assertions

 Assertions are NOT financial statements (ON THE EXAM)
 Examples:
 Existence or Occurrence
 Assets and liabilities included in the accounts exist and recorded
transactions are valid and have actually occurred
 Completeness
 All balances and transactions have been recorded in the financial
statements
 Valuation or Allocation
  Assets, liabilities, and recorded transactions have been valued in
accordance with GAAP
 Rights and Obligations
 Entity has a legal claim on all assets and revenues reported and has a
legal responsibility for all liabilities and expenses
 Presentation and Disclosure
 All accounts are presented in the appropriate place and all information
required has been disclosed in the statements and footnotes
 ASB Assertions about transactions (ON THE EXAM)
 Occurrence
 Revenue issue
 Completeness and Cutoff
 Expense issue
 Accuracy
 Both Revenue and Expense issue
 Classification
 Neither Revenue or Expense issue
 ASB Assertions about Account Balances (ON THE EXAM)
 Existence
 Asset issue
 Rights and Obligations
 Asset issue
 Completeness
 Liabilities issue
 Accuracy and Valuation
 Neither Asset or Liability issue
 ASB Assertions about Presentation and Disclosure (ON THE EXAM)
 Occurrence and Rights and Obligations
 Completeness
 Classification and Understandability
 Presentation and Disclosure
 Financial reporting is to provide statements of financial position (balance sheets), results of
operations (income statements, statements of shareholders' equity, and statements of
comprehensive income), changes in cash flows (statements of cash flows), and accompanying
disclosures to outside decision makers who do not have access to management's internal
sources of information
 Existence or Occurrence
 The numbers listed on the financial statements have no meaning to financial statement
users unless the numbers faithfully represent the actual transactions, assets, and
liabilities of the company
 Existence asserts that each of the balance sheet and income statement balances actually
exist
 Occurrence asserts that each of the income statement events and transactions actually
did occur in the proper period
 As a general rue, the occurrence assertion relates to events, transactions, presentations,
and footnote disclosures, and the existence assertion relates to account balances
 Therefore, auditors must test whether the balance sheet amounts reported as assets,
liabilities, and equities actually exist
 Cutoff is a more detailed expression of the completeness assertion and refers to accounting for
revenue, expense, and other transactions in the proper period
 Simple cutoff errors can occur when:
 A company records late December sales invoices for goods not actually shipped until
early January
 A company records cash receipts for the year should have been processed on December
31
 A company fails to record accruals for expenses incurred but not yet paid, thus
understating both expenses and liabilities
 A company fails to record purchases of materials shipped Free On Board (FOB) shipping
point but not yet received and, therefore, not included in the ending inventory, thus
understating both inventory and accounts payable
 A company fails to accrue unbilled revenue through the fiscal year-end for customers on
a cycle billing system, thus understating both revenue and accounts receivable
 The cutoff date generally refers to the client's year-end balance sheet date
 Allocation refers to the appropriate percentage of an asset or liability balance being recorded on
the income statement in accordance with GAAP
 Accuracy refers to the appropriate recording of the transactions at the correct amount
 Significant accounts and disclosure have been identified, the auditor must then consider the
relevance of each financial statement assertion, one at a time
 An assertion is relevant, if there is a "reasonable possibility" that a material
misstatement exists related to that assertion for the significant account being audited
 Relevant assertion for the cash account unless foreign currency translation is involved; however,
the existence of cash is always relevant
Section 4: Professional Skepticism
 Professional skepticism is defined in the professional auditing standards as having an attitude
that "includes a questioning mind and a critical assessment of evidence"
 Refers to a questioning mindset towards management's representations and evidential
matter gathered
 Translation: we can't just ask management if their assertions are appropriate…
for obvious reasons
 The possibility of errors and fraud in financial reports highlights the following basic premise,
which underlies the importance of professional skepticism: A potential conflict of interest
always exists between the auditors and the management of the company being audited
 The properly skeptical auditor asks questions such as the following:
 What do I need to know?
 How well do I know it?
 Does it make sense?
 What could go wrong?
 A professional judgment process:
 Clarify the issues and objectives
 Consider the possible alternatives
 Gather and evaluate the relevant evidence
 Reach an audit conclusion
 Carefully document rationale
 Sarbanes-Oxley prohibits professional service firms from providing any of the following services
to an audit client:
 Bookkeeping and related services
 Implementation of financial information systems
 Appraisal or valuation services
 Actuarial services
 Internal audit outsourcing
 Management resources services
 Investment or broker services
 Legal and expert services
 Professional service firms may provide client tax services and other non-prohibited services to
audit clients if the company's audit committee has approved them in advance
 Services provided as part of internal auditing:
 Reviews of internal control systems
 Compliance with laws and regulations
 Appraisals of the economy and efficiency of operations
 Review of effectiveness in achieving results compared to objectives and goals
 Governmental Auditing:
 U.S. Government Accountability Office (GAO)
 Generally Accepted Government Auditing Standards (GAGAS)
 Regulatory Auditors:
 U.S. IRS auditors
 State and Federal bank examiners (FDIC)
 SEC inspectors
 PCAOB inspectors (EXAM QUESTION: Define the PCAOB)
Section 5: Public Accounting
 Compilation which consists of preparing financial statements from a client's books and records,
without performing any evidence-gathering work
 Review in which limited evidence-gathering work is performed but which is narrower in scope
than an audit
 Local, state, national, and international tax laws are often called "accountant and attorney full-
employment acts"
 The statements on responsibilities in tax practice specifically state that "A CPA has both the right
and responsibility to be an advocate for the client" in arguing tax positions with the IRS

Section 6: Other Kinds of Engagements and Information Professionals

 The AAA and the AICPA definitions of auditing clearly apply to the independent financial
statement auditors who work in public accounting firms
 The word audit, however, is also used in other contexts to describe broader types of work
 The Board of Directors of the Institute of Internal Auditors (IIA) defines Internal auditing and
states its objective as follows:
 Internal auditing is an independent, objective assurance and consulting activity designed
to add value and improve an organization's operations. It helps an organization
accomplish its objectives by bringing a systematic, disciplined approach to evaluate and
improve the effectiveness of risk management, control, and governance processes
 Operational auditing refers to the study of business operations for the purpose of making
recommendations about the efficient and effective use of resources, effective achievement of
business objectives, and compliance with the company policies
 The goal of operational auditing is to help managers discharge their management
responsibilities and improve profitability
 The services provided by internal auditors include:
 Reviews of internal control systems to ensure compliance with company policies, plans,
and procedures
 Compliance with laws and regulations
 Appraisals of the economy and efficiency of operations
 Reviews of effectiveness in achieving program results in comparison to established
objectives and goals
 Government Accountability Office (GAO)
 Generally Accepted Government Auditing Standards (GAGAS)
 Performance audits refer to a wide range of governmental audits that include:
 Economy and efficiency audits
 Program audits

Section 7: Become a Professional and Get Certified

 Chartered Accountant (CA)
 Information Technology (IT)
 Certified Information Systems Auditor (CISA)
 Certified Fraud Examiner (CFE)
 Certified Forensic Accountant (CFA)
 Certified Information Systems Security Professional (CISSP)
 Certified Internal Auditor (CIA)
 Certified Management Accountant (CMA)
 Certified Information Technology Professional (CITP)
 Continuing Professional Education (CPE)
 Indeed, once certified, accounting professionals obtain CPE hours in a variety of ways:
 Continuing education courses
 In-house training
 College courses
 The CPA exam now has an increased emphasis on higher-order skills like problem solving, critical
thinking, and analytical ability
 The exam still covers auditing and attestation (AUD), Financial Accounting and Reporting
(FAR), Regulation (REG), and Business Environment and Concepts (BEC)
 Core Competencies listed by the AICPA:
 Association of Certified Fraud Examiners (ACFE)
 Information of Internal Auditors (IIA)
 Institute of Management Accountants (IMA)
 Information Systems Audit and Control Association (ISACA)