An Introduction to Assurance and Financial Statement Auditing
You will learn in this chapter that auditing consists of a set of practical conceptual tools that help accounting professionals to find, organize, and evaluate evidence about the assertions of another party. The demand for capable accountants and auditors of high integrity has never been greater. Opportunities for auditors are plentiful and rewarding and can lead to attractive career opportunities in other areas. Those who practice as auditors often later go into financial management, becoming controllers, chief financial officers (CFOs), and even chief executive officers (CEOs). But even those who do not plan to become an auditor can benefit greatly from an understanding of financial statement auditing and its underlying concepts. Learning these tools is valuable to any business decision maker.
The past decade has been challenging for the auditing profession. In the early 2000s, a series of high-profile accounting frauds began to cause inves- tors to doubt the integrity of the nation’s financial reporting system, includ- ing the role of the external auditor. To restore investor confidence, Congress passed the Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act in July 2002—the most significant legislation related to finan- cial statement audits of public companies since the Securities Acts of 1933 and 1934. The implications of the Sarbanes-Oxley Act are discussed throughout the text in appropriate places. While the public scrutiny, government reforms, and establishment of a regulated process for creating auditing standards for public companies have been challenging for accountants and auditors, the events of the last several years have also served as powerful reminders of just how critical the roles of accounting and auditing are in our society.
We live in a time when the amount of information available for decision makers via electronic databases, the Internet, and other sources is rapidly expanding, and there is a great need for the information to be reliable, cred- ible, relevant, and timely. High-quality information is necessary if managers, investors, creditors, and regulatory agencies are to make informed decisions. Auditing and assurance services play an important role in ensuring the reliabil- ity, credibility, and relevance of business information.
The following examples present situations that illustrate how auditing increases the reliability and credibility of an entity’s financial statements:
Sara Thompson, a local community activist, has been operating a not-for-profit center that provides assistance to abused women and their children. She has financed most of her operations from private contributions. Ms. Thompson applied to the State Health and Human Services Department requesting a large grant to expand her two shelters to accommodate more women. In completing the grant application, Ms. Thompson discovered that the state’s laws for government grants require that recipients be audited to ensure that existing funds are being used appropriately. Ms. Thompson hired a CPA to audit the center’s financial state- ments. Based on the center’s activities, the intended use of the funds, and the auditor’s clean report, the grant was approved.
Conway Computer Company is a wholesaler of computer products. The company was started by George and Jimmy Steinbuker five years ago. Two years ago, a venture capital
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