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Unit 1 Notes
- Course
- AC503
- Institution
- Purdue University
completed notes for the first Unit
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Unit 1 Notes1. Describe the common attributes of activities defined as auditing.
o Auditing definition:
The process involves objectively obtaining and evaluating evidence about
economic actions and events, ensuring correspondence with established
criteria, and communicating the results to interested users.
o A systematic process connotes a logical, structured, and organized series of steps
or procedures.
o Objectively obtaining and evaluating evidence means examining the bases for the
assertions and judiciously evaluating the results without bias or prejudice either
for or against the individual (or entity) making the assertions.
o Assertions about economic actions and events are the representations made by the
entity or individual. They comprise the subject matter of auditing. Assertions
include information contained in financial statements, internal operating reports,
and tax returns.
o Degree of correspondence refers to the closeness with which the assertions can be
identified with established criteria. The expression of correspondence may be
quantified, such as the amount of a shortage in a petty cash fund, or it may be
qualitative, such as the fairness of financial statements.
o Established criteria are the standards against which the assertions or
representations are judged. Criteria may be specific rules prescribed by a
legislative body, budgets and other measures of performance set by management,
or generally accepted accounting principles (GAAP) established by the Financial
Accounting Standards Board (FASB) and other authoritative bodies.
o Communicating the results is achieved through a written report that indicates the
degree of correspondence between the assertions and established criteria. The
communication of results either enhances or weakens the credibility of the
representations made by another party. The goal of the audit process is to add
credibility to management’s representations so that interested users can use the
information with reasonable assurance that it is free of material misstatement.
o Interested users are individuals who use (rely on) the auditor’s findings. In a
business environment, they include stockholders, management, creditors,
governmental agencies, and the public.
2. Explain the differences between the different types of audits and auditors.
o Types of Audits:
Financial Statement Audit:
A financial statement audit is a process that evaluates an entity's
financial position, results of operations, and cash flows to ensure
they are fair and in line with GAAP. In most states, only CPAs can
perform these audits, with the company hiring an external audit
firm. The results are shared with various stakeholders, including
stockholders, creditors, regulatory agencies, and the public. High-
, quality audits reduce the risk of poor-quality information in
investment decisions.
Compliance Audit:
Compliance audits assess an entity's financial or operating
activities to ensure they comply with specific conditions, rules, or
regulations. They can be based on sources like the Sarbanes-Oxley
Act of 2002, creditors' criteria, or government regulations.
Companies must comply with income tax and other regulations,
while defense contractors must adhere to government contracts.
Operational Audit:
An operational audit evaluates the efficiency and effectiveness of
an entity's activities in relation to specified objectives. It can be a
performance or management audit, and may cover various business
units or federal agencies. The audit may include criteria specified
by management or legislation, or the auditor may assist in
specifying them. Reports typically include an assessment of
efficiency and recommendations for improvement.
o Types of Auditors:
Independent Auditors:
Independent auditors are CPAs who provide professional auditing
services to clients, including profit-making businesses, not-for-
profit organizations, and governmental agencies. They work on a
fee basis and are expected to be independent of the client in
making and reporting the results, unlike attorneys who advocate
for clients. Users value the auditor's independence and derive value
from their unbiased approach to the client under audit.
Internal Auditors:
Internal auditors are employees of organizations who perform
independent evaluations of evidence, primarily in compliance and
operational audits. They assist management in fulfilling their
responsibilities and may supplement independent auditors in
financial statement audits. Many hold CIA or CPA credentials, and
the Institute of Internal Auditors (IIA) regulates certification
criteria, examinations, practice standards, and ethics.
Government Auditors:
Government auditors are employed by various local, state, and
federal agencies, including the General Accounting Office (GAO),
Internal Revenue Service (IRS), and Defense Contract Audit
Agency (DCAA). They perform audit activities for Congress,
taxpayers, and defense contractors. The Association of
Government Accountants (AGA) is the national organization for
government accountants, and most hold CPA or CIA certificates.
3. Discuss the factors that influence the need for financial statement audits.
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