Auditing Attest Assurance
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Chapter 1 An Introduction to Assurance and Financial Statement Auditing 13
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While different types of “criteria” might be available in various settings, generally accepted accounting principles usually serve as the basis for evaluating management’s assertions in the context of a financial statement audit.
The last key phrase in the definition, “communicating the results to interested users,” relates to the report the auditor provides to the intended users of the reported information. The communication will vary depending on the type and purpose of the audit, and the nature of the auditor’s findings. In the case of financial statement audits, very specific types of reports are prescribed by auditing standards to communicate the auditor’s findings. We will show you what an audit report relating to financial statements looks like later in this chapter.
Attestation Auditors have a reputation for independence and objectivity. As a result, it has always been common for various parties to request that auditors attest to information beyond historical financial information. However, professional standards did not allow for such services until the profession established a separate set of attestation standards in 1986. These standards pro- vide the following definition for attest services:
Attest services occur when a practitioner is engaged to issue . . . a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
Notice that this definition is broader than the one previously discussed for auditing because it is not limited to economic events or actions. The subject matter of attest services can take many forms, including prospective information, analyses, systems and processes, and even the specific actions of specified parties. Note that financial statement auditing is a particular, specialized form of an attest service.
Assurance In the late 1990s, the accounting profession expanded the potential breadth of auditors’ activi- ties beyond auditing and attest services to include a broader set of assurance services. Extend- ing auditors’ activities to assurance services allows reporting not only on the reliability and credibility of information but also on the relevance and timeliness of that information. Assur- ance services are defined as follows:
Assurance services are independent professional services that improve the quality of information, or its context, for decision makers.
This definition captures some important concepts. First, the definition focuses on decision making. Making good decisions requires quality information, which, in the context of the broad set of assurances services, can be financial or nonfinancial. Second, it relates to improving the quality of information or its context. An assurance service engagement can improve quality through increasing confidence in the information’s reliability and relevance. Context can be improved by clarifying the format and background with which the information is presented. Third, the definition includes “independence,” which relates to the objectiv- ity of the service provider. Last, the definition includes the phrase “professional services,” which implies the application of professional judgment and due care by the provider. To sum- marize, assurance services can include almost any service provided by accounting profession- als that involves capturing information, improving its quality, or enhancing its usefulness for decision makers.
This text focuses primarily on financial statement auditing because it represents the major type of assurance service offered by most public accounting firms. In addition, in many instances, the approach, concepts, methods, and techniques used for financial statement audits also apply to other attest and assurance service engagements. While this text focuses primarily on financial statement auditing, Chapters 2 and 21 describe various examples of audit, attest, and assurance services commonly offered by different kinds of auditors, including internal auditors who are often directly employed by the company for which they provide services.
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14 Part 1 Introduction to Assurance and Financial Statement Auditing
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Figure 1–3 presents a simplified overview of the process for a financial statement audit. Take a moment to think through the steps in this figure. The auditor gathers evidence about the business transactions that have occurred and about the account balances into which the trans- actions have been accumulated. The auditor uses this evidence to compare the assertions con- tained in the financial statements to the criteria used by management in preparing them (i.e., GAAP). The auditor’s report communicates to the user the degree of correspondence between the assertions and the criteria. Be sure you understand Figure 1–3 before you continue read- ing! Taking a moment to think through these concepts will help you make sense of the three fundamental concepts underlying a financial statement audit, which we will explain next.
The conceptual and procedural details of a financial statement audit build on three fun- damental concepts: materiality, audit risk, and evidence relating to management’s financial statement assertions. The auditor’s assessments of audit risk and materiality influence the nature, timing, and extent of the audit evidence to be gathered. This section briefly discusses the concepts of materiality, audit risk, and audit evidence. Chapters 3 through 5 cover each of these concepts in greater depth, but your study of those chapters will be easier and more effective if you take the time now to understand the concepts of materiality, audit risk, and audit evidence at a general level.
Materiality Materiality refers to the amount by which a set of financial statements could be misstated without affecting the judgment of reasonable people. For example, suppose a company’s earnings per share (EPS) is $4.50 but due to an unintentional error the company mistakenly
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