Chapter 1 - The role of the public accountant in the American economy. After studying this chapter, you should be able to: Describe the character of assurance services, identify assurance services that involve attestation, describe the nature of financial statement audits, explain why audits are demanded by society,. | The Role of the Public Accountant in the American Economy Chapter 1 1 The Attest Function Management Subject Matter Suitable Criteria The CPA Gathers Evidence Subject Matter* The Attest Report Issues Report *May be management’s assertion about the subject matter. 1- 2 2 Attestation Engagements Type of Engagement Level of Assurance Nature of Report Procedures Examination Review Agreed-upon procedures Highest Moderate or Limited Varies with procedures Expresses opinion Expresses negative assurance States findings Sufficient to limit attestation risk to low level Generally limited to inquiry & analytical procedures Procedures agreed- upon with the specified users 1- 5 3 Audit of Financial Statements Management Prepares Financial Statements Criteria (., GAAP) The Auditors Gathers Evidence Financial Statements The Auditors’ Report Issues Report 1- 6 4 What Creates the Demand for Audits? Audits lend credibility to information by reducing information risk, the risk that . | The Role of the Public Accountant in the American Economy Chapter 1 1 The Attest Function Management Subject Matter Suitable Criteria The CPA Gathers Evidence Subject Matter* The Attest Report Issues Report *May be management’s assertion about the subject matter. 1- 2 2 Attestation Engagements Type of Engagement Level of Assurance Nature of Report Procedures Examination Review Agreed-upon procedures Highest Moderate or Limited Varies with procedures Expresses opinion Expresses negative assurance States findings Sufficient to limit attestation risk to low level Generally limited to inquiry & analytical procedures Procedures agreed- upon with the specified users 1- 5 3 Audit of Financial Statements Management Prepares Financial Statements Criteria (., GAAP) The Auditors Gathers Evidence Financial Statements The Auditors’ Report Issues Report 1- 6 4 What Creates the Demand for Audits? Audits lend credibility to information by reducing information risk, the risk that information is materially misstated Financial statement misstatements arise due to-- Accidental errors Lack of knowledge of accounting principles Unintentional bias Deliberate falsification Audits do not directly address business risk, the risk that a company will not be able to meet its financial obligations due to economic conditions or poor management decisions 1- 7 5 History of the Attest Function Period Developments Audit Objective Nature of Audit Ancient - 1850 Audits of city states, individuals & ventures Detection of fraud Detailed; No reliance on controls 1850-1905 Industrial revolution resulted in the need for corporate audits Detection of fraud & clerical errors Some testing; No reliance on controls 1905-1940 Development of stock markets - increased emphasis on earnings Determination of fairness; detection of fraud & errors Increased emphasis on testing; Slight reliance on controls 1940-1975 Development of auditing standards Determination of fairness Substantial reliance on .
