Chapter 1 - Intro To Auditing.docx

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16 Apr 2012
Chapter 1 Intro to Auditing
Auditing verification of information by someone other than the one providing it
- Auditors verify the reliability of raw transactions which, over a period of time, comprise
financial statements, thereby reducing the information risk for investors
- The recent failures of assurance (Enron, WorldCom) have brought auditing into the
limelight and so investors are more cautious of the risks of investing giving rise to the
demand for reliable and trustworthy audits
- Client is the person (company, board of directors, agency)that pays for the audit
services to be conducted upon a company
- Auditee is the organization who’s financial statements are being audited
- Three Party Accountability the auditor is called the first party and the seller of
investments the second party. The investor is considered the third party.
o The auditor is an independent party hired to verify the information that the
second party has provided because the third party does not trust the
information provided by the second party
o Third party feels the information risk is too high therefore first party provides
independent verification
- Accounting is the process of recording, classifying, and summarizing into financial
statements a company’s transactions that create assets, liabilities, equities, revenues,
and expenses
- The auditing function is to verify this information through external professional auditors
o This is called assurance engagement
- Conditions for Accounting Information Demand
o Complexity users are not trained to collect and compile transactions
o Remoteness users are usually separated from a company’s accounting records
by distance and time and lack of expertise
o Consequences financial decisions made based on financial reports are
important to the state of investors’ and users’ wealth
- A more simpler definition of auditing process of reducing (to a socially acceptable
level) the information risk to users of financial statements
- Business Risk result from significant conditions, events, circumstances, or actions that
might adversely affect the entity’s ability to achieve its objectives and execute its
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