Business Assurance and Risk Management

User Demand for Reliable Information

• Business risk is the risk an entity will fail to meet its objectives.
• Today's environment is complex with information demanded by remote users and in a timelier manner, having far-reaching consequences.
• Information risk is the probability that information circulated by a company will be false or misleading.
• Users demand independent third-party assessments of the information.

Relationships Among Assurance, Attestation, and Audit Engagements

• Assurance engagements are a broader category encompassing attestation engagements.
• Attestation engagements are a service where a practitioner examines whether management's assertions about a subject matter can be relied upon.
• Financial statement audit engagements are a type of attestation engagement.

Assurance Services

• Assurance services are independent professional services that improve information quality or context for decision-makers.
• Examples include cybersecurity risk assessment, XBRL reporting, investment management policy evaluation, internal audit outsourcing, and fraud prevention.

Assurance Elements

• Independence is crucial, eliminating conflicts of interest.
• Professional service relies on education and experience.
• Improving information quality is the key objective.
• Relevance and reliability/credibility reflect the usefulness and trustworthiness of the information.
• Services benefit decision-makers, the beneficiaries.
• Assurance focuses on using information for decision-making, not providing recommendations.

Attestation Engagements

• Attestation engagements, as defined by the AICPA, examine whether assertions made about a subject matter are reliable.
• These engagements can cover financial forecasts/projections, examination of management discussion and analysis, and pro-forma financial information.
• They can also include non-financial aspects like internal control system effectiveness, environmental compliance, and sustainability reporting.

AAA Definition of Financial Statement Auditing

• Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the correspondence between the assertions and established criteria.
• Auditors communicate their findings to interested users (e.g., creditors, investors).
• GAAP and generally accepted auditing standards are relevant concepts.

Audits

• Audits are logical, not haphazard, processes focused on collecting and evaluating evidence.
• Management assertions about activities and balances form the basis of financial statements.
• The audit's goal is to provide an opinion on whether the financial statements fairly present their subject matter in accordance with an applicable financial reporting framework.
• This enhances user confidence and is based on GAAS and ethical requirements.

Sarbanes-Oxley Act of 2002

• Management is responsible for financial reporting.
• Key officials (CEO and CFO) must certify financial statements, stating they are truthful, without false/misleading elements, and accurately depict the company's financial condition.

Sarbanes-Oxley and Management's Responsibility for Financial Reporting

• Management must assert the effectiveness of internal controls over financial reporting.
• Auditors assess internal controls and issue an attestation report (Section 404) to guarantee these controls are correctly designed and function effectively.

Management Financial Statement Assertions (PCAOB)

• Existence/occurrence asserts asset and liability existence and valid transactions occurred.
• Completeness ensures all balances/transactions are recorded in the financial statements.
• Valuation/allocation signifies valuation according to GAAP.
• Rights and obligations confirm the entity's ownership/responsibility for reported assets/liabilities.
• Presentation/disclosure dictates correct presentation in financial statements and footnotes.

Management's Financial Statement Assertions (ASB)

• Assertions about classes of transactions ensure events are valid.
• Cutoff mandates correct period recording of transactions.
• Completeness means all transactions are recorded in the proper period.
• Accuracy ensures transactions are recorded correctly.
• Rights and obligations confirm entity ownership/responsibility (similar to PCAOB assertion).
• Classification ensures proper account posting.
• Presentation mandates GAAP-compliant disclosures.

Management Assertions

• PCAOB and ASB assertions about classes of transactions and events, and related disclosures (occurrence, cutoff, completeness, accuracy, rights/obligations, classification, presentation).
• Assertions about account balances and related disclosures (existence, completeness, accuracy/allocation, rights/obligations, presentation).

Professional Skepticism

• Professional skepticism involves a critical approach to evidence.
• Inquiry alone isn't enough, requiring corroborating evidence.
• Unusual financial trends warrant further investigation.
• Documents should be thoroughly checked and verified.
• Auditors should ask questions, get answers, and verify solutions.
• Potential conflicts of interest between the auditor and the client necessitate skepticism in audits.

A Professional Judgment Process

• A structured five-step professional judgment process clarifies issues and objectives, considers possible alternatives, gathers evidence, reaches audit conclusions, and documents the rationale for the chosen conclusion.

Public Accounting Services

• Public accounting services encompass auditing and assurance services, including financial statement audits, non-audit/attestation engagements, compilations, reviews, tax services, and advisory services.

Baseball Hall of Fame

• The Baseball Writers' Association of America (BBWAA) conducts the Hall of Fame vote.
• An external audit firm (e.g., EY) verifies voter eligibility and voting process accuracy.

Public Accounting Firm Organization

(Illustrative organizational charts)

• A typical structure shows a hierarchical arrangement from Chair and CEO to partnering, managerial, senior, and staff levels across various service areas within the firm.

Revenues for the Big Four CPA Firms

(Data in billions of dollars)

• Revenues for Deloitte, EY, KPMG, and PwC are presented, specifying auditing and assurance, tax, and advisory services revenues, expressed both in absolute amounts and as percentages of total revenue.

Prohibited Professional Services

• Sarbanes-Oxley prohibits certain non-audit services for audit clients, including bookkeeping, financial information system design/implementation, appraisal/valuation services, actuarial services, internal audit outsourcing, management/human resources services, investment/broker/dealer services, and unrelated legal/expert services.

No Audit?

• Tax consulting on aggressive tax law interpretations or certain listed transactions is prohibited.
• Contingent fees are prohibited, as are tax services for executives.
• However, corporate tax returns are generally allowable.

Is There Room for Public Accounting Firms?

• Some predict public accounting firms expanding into legal services.
• The American Bar Association encourages examining non-lawyer firm ownership.
• The Big 4 are expanding into legal service delivery; however, rigorous regulatory issues, including independence checks, persist.

Learning Objectives (Chapter 1)

• Internal auditing, governmental, and operational auditing are covered.
• Describing audits and auditors in these areas is a primary objective.
• Requirements for becoming a CPA (Certified Public Accountant) and other accounting professional certifications are addressed.

Become a Professional and Get Certified!

• Education requirements (150 hours or more) and an examination are mandatory.
• At least one year of public or two years of private-sector experience is necessary.
• A state certificate/license is required.
• Relevant skill sets and education combine to complete requirements.

Certification Requirements

• Certification requirements vary by certification type (CPA, CISA, CIA, etc.)
• Education (degree requirements), experience (public/private sector or relevant), and examinations (specific content) are all pivotal elements.

Uniform CPA Examination

• The Uniform CPA exam comprises four sections: Auditing and Attestation (AUD), Financial Accounting and Reporting (FAR), Regulation (REG), and Business Environment and Concepts (BEC).
• Each section has a specific format with multiple-choice and task-based simulations.

Auditing and Attestation Section (AUD)

• The AUD section focuses on ethics, professional responsibilities, risk assessment, audit procedures, obtaining evidence, and forming audit conclusions.
• Specific knowledge and application of specific skills form the foundation for this section.

The New Uniform CPA Examination

• New sections are anticipated for the 2024 CPA exam (Business Analysis and Reporting (BAR), Information and Systems Control (ISC), and Tax Compliance and Planning (TCP)), signifying a broader focus and structure.