Chapter 2 The financial statement auditing environment, in this chapter you will be familiar with the different types of auditors; be familiar with the various services offered by assurance providers; understand the organization and composition of public accounting firms; understand the significant changes that have taken place in the auditing profession over the past decade;...
Chapter Two The Financial Statement Auditing Environment © The McGraw-Hill Companies, 2010 A Time of Challenge and Change 1990 2000 During the economic boom of the late 1990s and the early 2000s, accounting firms aggressively sought opportunities to market a variety of high-margin non-audit services to their audit clients © The McGraw-Hill Companies, 2010 A Time of Challenge and Change © The McGraw-Hill Companies, 2010 A Series of Scandals Enron WorldCom Parmalat Lernout & Hauspie Ahold Arthur Andersen © The McGraw-Hill Companies, 2010 Regulation Self-regulation by the profession versus government regulation Stricter regulation and more public oversight International Standards on Auditing more comprehensive © The McGraw-Hill Companies, 2010 Auditors’ Legal Liability Threat of legal liability: Main deterrent to auditor’s misconduct Legal doctrines: •Joint and several liability •Proportional liability •Liability caps Litigation exposure and audit markets: •Concentration •Barriers to entry •Liability reforms © The McGraw-Hill Companies, 2010 International Federation of Accountants (IFAC) © The McGraw-Hill Companies, 2010 International Organisations that Affect the Accounting Profession International Federation of Accountants International Accounting Standards Board IFAC IASB International Organization of Securities Commissions International Organization of Supreme Audit Institutions IOSCO European Union EU EU 8th Directive on Statutory Audits © The McGraw-Hill Companies, 2010 INTOSAI United States Securities and Exchange Commission (SEC) Public Company Accounting Oversight Board (PCAOB) Financial Accounting Standards Board (FASB) American Institute of Certified Public Accountants (AICPA) International Auditing and Assurance Standards Board (IAASB): Standards © The McGraw-Hill Companies, 2010 Auditing Standards Auditing standards serve as guidelines for and measures of the quality of the auditor’s performance IAASB issues International Standards on Auditing (ISAs) IFAC members © The McGraw-Hill Companies, 2010 ISAs are considered to be minimum standards of performance for auditors Ethics, Independence, and IFAC Code of Ethics for Professional Accountants IFAC Code of Ethics Conceptual Framework Approach Principles •Integrity •Objectivity •Professional competence and due care •Confidentiality • Professional behaviour © The McGraw-Hill Companies, 2010 Application to specific situations, including situations that threaten independence of mind or independence in appearance Audit Firms Audit firms range in size from a single proprietor to thousands of owners (or “partners”) and thousands of professional and administrative staff employees Big Mid-Tier PwC BDO Deloitte EY KPMG Grant Thornton RSM Praxity Baker Tilly Crowe Horwath © The McGraw-Hill Companies, 2010 National Local Annual Global Revenue of Major Audit Network Firms © The McGraw-Hill Companies, 2010 Audit Teams © The McGraw-Hill Companies, 2010 Types of Services Offered by Audit Firms Assurance Services: Audit of financial statements, review of financial information, and other assurance services (e.g assurance on a entity’s reporting on sustainability performance) Related Services: Agreed-upon procedures regarding financial information and compilation of financial information Other Services: Tax services, advisory services, accounting services and specialised services (e.g forensic audit) © The McGraw-Hill Companies, 2010 Global Practice Mix of Services by Major Audit Network Firms (Revenue) © The McGraw-Hill Companies, 2010 Types of Auditors External Auditors Internal Auditors Government Auditors Forensic Auditors © The McGraw-Hill Companies, 2010 Context of Financial Statement Auditing The primary context with which an auditor is concerned is the industry or business of his or her audit client In other words, the context provided by the client’s business impacts the auditor and the audit, and is thus a primary component of the environment in which financial statement auditing is conducted How would your concerns about the inventory account differ for a Computer Hardware Manufacturer and a Jewellery Store? What assertions would you be most concerned about and why? © The McGraw-Hill Companies, 2010 A Model of Business 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 Board of Directors Audit Committee © The McGraw-Hill Companies, 2010 A Model of Business Objectives Strategies Processes (5 broad categories) Transactions Controls Reports © The McGraw-Hill Companies, 2010 A Model of Business Processes: Five Components Financing Process Purchasing Process Human Resource Management Process Inventory Management Process © The McGraw-Hill Companies, 2010 Revenue Process An Overview of Business © The McGraw-Hill Companies, 2010 Management Assertions Financial statements issued by management contain explicit and implicit assertions © The McGraw-Hill Companies, 2010 Management Assertions – An Example with Inventory Which specific assertion from the relevant category is being described in the three examples below? Transactions Account Balances Presentation & Disclosure Management asserts that transactions related to inventory actually occurred Management asserts that the entity owns the inventory represented in the inventory account Management asserts that the financial statements properly classify and present the inventory Occurrence Rights and Obligations © The McGraw-Hill Companies, 2010 Classification End of Chapter © The McGraw-Hill Companies, 2010 ... (AICPA) International Auditing and Assurance Standards Board (IAASB): Standards © The McGraw-Hill Companies, 20 10 Auditing Standards Auditing standards serve as guidelines for and measures of the. .. In other words, the context provided by the client’s business impacts the auditor and the audit, and is thus a primary component of the environment in which financial statement auditing is conducted... ISA 22 0 Quality Control for an Audit of Financial Statements • ISA 23 0 Audit Documentation • ISA 24 0 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements • ISA 25 0