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Chapter 01: The Demand for Audit and Assurance Service

   

Added on  2020-11-02

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B-402Chapter 01: The Demand for Audit and Assurance ServiceContentsReview of historical financial statement............................................................................................................2Other Assurance Services..................................................................................................................................2Non-Assurance Services....................................................................................................................................2Economic Demand for Auditing........................................................................................................................3a.Remoteness of Information.........................................................................................................................4b.Biases and Motives of the Provider............................................................................................................4c.Voluminous Data........................................................................................................................................4d.Complex Exchange Transactions................................................................................................................4Reducing Information Risk................................................................................................................................4Verify Information.............................................................................................................................................4Shares Information Risk with Management.......................................................................................................4Nature of Audit..................................................................................................................................................4Accounting vs. Auditing....................................................................................................................................5Types of audit.....................................................................................................................................................5Types of auditor.................................................................................................................................................5Page 1 of 6
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Review of historical financial statementReview of Historical Financial Statements For a review of historical financial statements, managementasserts that the statements are fairly stated in accordance with accounting standards, the same as for audits.Other Assurance Services Other Assurance ServicesService ActivitiesControls over and risks relatedto investmentsAssess the processes in a company’s investment practices to identify risks and to determine the effectiveness of those processesMystery shoppingPerform anonymous shopping to assess sales personnel dealings with customers and procedures they followAssess risks of accumulation, distribution & storage of digital informationAssess security risks and related controls over electronic data, including the adequacy of backup and off-site storageFraud and illegal acts risk assessmentDevelop fraud risk profiles, and assess the adequacy of company systems and policies in preventing and detecting fraud and illegal actsCompliance with trading policies and proceduresExamine transactions between trading partners to ensure that transactions comply with agreements; identify risks in the agreementsCompliance with entertainment royalty agreementsAssess whether royalties paid to artists, authors, and others comply with royalty agreementsISO 9000 certificationsCertify a company’s compliance with ISO 9000 quality control standards, which help ensure company products are of high qualityCorporate responsibility and sustainabilityReport on whether the information in a company’s corporate responsibility report is consistent with company information and established reporting criteriaPage 2 of 6Assurance serviceAn assurance service is an indep endent pr ofessional service th at improves the quality of info rmation fo r decision makers. Individu als seek assurance ser vices to h elp improve th e r eliability and relevance of the inf ormation u sed as th e b asis fo r their d ecisions.Assurance serviceAn assurance service is an independent professional service that improves the quality of information for decision makers. Individuals seek assurance services to help improve the reliability and relevance of the information used as the basis for their decisions.Attestation serviceAn attestation service is a type of assurance ser vice in which the CPA fir m issues a repor t about t he reliabilit y o f an asser tion that is made by anoth er party.Attestation serviceAn attestation service is a type of assurance service in which the CPA firm issues a report about the reliability of an assertion that is made by another party.Audit if historical financial statementAudit of Historical Financial Statements In an audit of historical financial statements, management assert s that t he st at ements are fairly stated in accor dance wit happlicable U.S. or int ernation al accou nting st an dards.Audit if historical financial statementAudit of Historical Financial Statements In an audit of historical financial statements, management asserts that the statements are fairly stated in accordance withapplicable U.S. or international accounting standards.
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Non-Assurance ServicesCPA firms perform numerous other services that generally fall outside the scope of assurance services. Three specific examples are:1. Accounting and bookkeeping services2. Tax services3. Management consulting servicesWhile the primary purpose of an Assurance Serviceis to improve the quality of information, the primarypurpose of a Management ConsultingService is to generate a recommendation to management. CPA may be engaged to design and install a new information technology system for a client as a consulting engagement. The purpose of that engagement is to install the new system, with the goal of improved information being a by-product of that engagement.Economic Demand for AuditingRate of interest determined primarily by three factors:1.Risk-free interest rate: This is approximately the rate the bank could earn by investing in U.S. treasury notes for the same length of time as the business loan.2.Business risk for the customer:This risk reflects the possibility that the businesswill not be able to repay its loan because of economic or business conditions, such as a recession, poor management decisions, or unexpected competition in the industry.3.Information risk: Information riskreflects the possibility that the information uponwhich the business risk decision was made was inaccurate. A likely cause of the information risk is the possibility of inaccurate financial statements.Auditing has no effect on either the risk-free interest rate or business risk, but it can have a significant effect on information risk.Page 3 of 6
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