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Chapter 1

Chapter 1 - Introduction to Auditing

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Ryerson University
ACC 521
Larry Yarmolinsky

Chapter 1 – Introduction toAuditing The Importance of Auditing • Auditing is critical to the proper functioning of capital markets. • Audit Societies – Societies in which there is extensive examination by auditors of economic or politically important activities. • Auditing – The verification of information by someone other than the one providing it. (reduces information risk for a 3 party) • Gives clients assurance (minimizes risk) to base their decision. • Three PartyAccountability – Consists of: 1. An asserter 2. An assurer 3. Auser of the asserted information • Accountability relationship – Where at least one of the parties can justify its actions/claims to another party in the relationship. • Acting in the public interest – Auditors are required to act in the interest of the financial statements’ users (the expected social role). • Audits are part of ‘assurance engagements’class that are licensed. • Agency problems occur when ALL 3 conditions are present: 1. Agent has different objectives than principal 2. Agent has more information that principal 3. Contract between them is incomplete because not every contingency can be anticipated • Agency Theory – Study of using contracts to mitigate the agency problem. • 3 Conditions which affect users’demand for accounting information: 1. Complexity –Accountants must collect/complete information. 2. Remoteness – Users are separated by distance, time, and knowledge. 3. Consequences – Determine investors’and users’wealth Accounting vs.Auditing • Accounting tries to record/summarize economic realty for the benefit of economic decision makers (users). • ExternalAuditor –An outsider/ INDEPENDENT auditor of the entity being audited. (aka objective intermediaries)  Provides assurance – adds credibility • Assurance engagement – When the auditor a
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