Understanding Audit Principles and Elements

• Auditing involves gathering and assessing evidence to ascertain and communicate the degree of agreement between data and established standards.

Elements of an Audit

• Information in a verifiable format.
• Standards for evaluation.
• Accumulating and Evaluating Evidence: Evidence aids the auditor in determining if the information adheres to established criteria, including transaction data, communications with outsiders, observations, and client testimony.
• A competent, independent person evaluates evidence and forms a proper conclusion.

Reporting

• Preparing the audit report, which tells users the auditor's findings, is the final step in the auditing process.

Distinction Between Auditing and Accounting

• Accounting involves recording, categorizing, and summarizing financial events to provide data for decision-making.
• Auditors concentrate on assessing whether reported information accurately depicts the economic activities within a reporting period, requiring expertise in both accounting and evidence interpretation.

Economic Demand for Auditing

• Information risk refers to the potential for inaccuracies in information used for business decisions.
• Auditing financial data lowers information risk for its users.

Causes of Information Risk

• Remoteness of information: Decision makers depend on information from others, lacking firsthand knowledge.
• Biases and motives of information provider: Information may be skewed by conflicting goals.
• Voluminous data: High transaction volumes raise the probability of errors going unnoticed.
• Complex exchange transactions: These are harder to record accurately, compounded by complex accounting standards.

Reducing Information Risk

• Verifying the information by the user, but it's often expensive and impractical.
• Sharing the information risk with management who is responsible for providing reliable information, is crucial to prevent potential legal accountability for inaccuracies.
• Supplying audited financial statements by external auditors enhances the reliability of financial statements.

Boards & Standards

• IASB (International Accounting Standards Board): Deals with the creation of International Financial Reporting Standards and promotes their use; located in London.
• FASB (Financial Accounting Standards Board): A non-profit dedicated to formulating GAAP; based in the US having replaced the Accounting Principles Board (APB) and the Committee on Accounting Procedure (CAP).

Assurance Services

• Intended to enhance the quality of information for better decision-making.
• Assurance services can come from CPAs or other experts and have traditionally focused on historical financial data.
• Sarbanes-Oxley Act Section 404 requires that the internal controls of large public companies are assured.

Attestation Services

• CPAs preparing a report about a subject or assertions made by another party.
• Primary categories: Audits of historical financial statements, audits of internal control over financial reporting, reviews of historical financial statements and other agreed upon procedures.

Other Assurance and Nonassurance Services

• Assurance services that don't meet the attestation definition do not need a written report and do not pertain to reliability or compliance.
• CPA firms provide nonassurance services like accounting, bookkeeping, tax, and management consulting services.

Types of Audits by CPA Firms

• Operational audit: Assesses the efficiency and effectiveness of an organization's operations.
• Compliance audit: Checks if the auditee is following rules or regulations from a higher authority.
• Financial statement audit: Determines if financial statements comply with GAAP or international financial reporting standards.

Primary Types of Auditors

• Certified public accounting firms
• Government accountability office auditors
• Internal revenue agents
• Internal auditors

Certified Public Accounting Firms

• Auditors expressing audit opinions must be licensed as Certified Public Accountants (CPAs) and often called external or independent auditors.
• They audit financial statements for publicly traded companies, as well as other large, small, and noncommercial entities.

Government Accountability Office (GAO) Auditors

• The U. S. Government Accountability Office (GAO) employs these auditors, who report to Congress and focus on governmental agency spending.

Internal Revenue Agents

• These agents enforce federal tax laws by auditing tax returns.
• Their work also requires extensive knowledge of tax laws and auditing skills, including understanding individual income tax, corporate income tax, estate tax, and gift tax.

Internal Auditors

• Employed by organizations and reporting to the board for independence. The most commonly perform compliance auditing, but may also be involved in operational audits.

Requirements for Becoming a CPA

• State law regulates the licensing of CPAs by state licensing boards.
• The general requirements are education, passing the Uniform CPA examination, and gaining experience.