Introduction to Assurance and Financial Statement Auditing
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firm acquired 40 percent of the company and thus provided capital for expansion. Conway Computer’s revenues and profits increased by 25 percent in each of the last two years, and the Steinbuker brothers and the venture capital firm decided to take the company public through a stock sale. However, they knew that the company’s financial statements needed to be audited by a reputable public accounting firm before a registration statement could be filed with the Securities and Exchange Commission and in order for inves- tors to trust the stock offering. The company hired a major public accounting firm to perform its audits and the company successfully sold stock to the public.
These situations show the importance of auditing to both private and public enter- prise. By adding an audit to each situation, the users of the financial statements have addi- tional assurance that the financial statements report honestly and accurately, and they will be more willing to rely on those statements. Auditors can also provide valuable assurance for operating information, information systems reliability and security, and the effective- ness of an entity’s internal control. Consider the following example:
EarthWear Clothiers is a successful mail-order retailer of high-quality clothing for outdoor sports. Over the last few years the company has expanded sales through its Internet site. EarthWear’s common stock is listed and traded on NASDAQ. Securities laws require company officials to cer-
tify that they have properly designed, implemented, and tested internal control over their accounting and reporting information systems. EarthWear’s public accounting firm, Willis & Adams, examines the design and documentation of EarthWear’s internal control on a yearly basis and conducts independent tests to ver- ify that EarthWear’s controls are operating effectively. Willis & Adams issues a report to the public express- ing its opinion as to whether EarthWear’s internal control is well designed and operating effectively. Thus, stockholders, creditors, and other stakeholders can have greater confidence in the financial reports issued by EarthWear’s management.
Most readers of an introductory auditing text initially have little understanding of what auditing and assurance services entail. Thus, we start by helping you understand in gen- eral terms why there is a demand for auditing and assurance services. We then compare auditing to other well-known forms of assurance to provide an intuitive understanding of the economic role auditing plays. Finally, we define auditing, attestation, and assurance services and give you an overview of the financial statement auditing process.