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Chapter 1

BU477 Chapter Notes - Chapter 1: Financial Audit, Financial Statement, Tax Avoidance

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Helena Keirstead

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Chapter 1: The Demand for Audit and Other Assurance Services
Nature and Relevance of Auditing:
Both an art and science
Takes auditor’s professional judgement and rules and procedures
Auditing: Accumulation and evaluation of evidence about information to
determine and report on the degree of correspondence between information and
established criteria.
Information and Established Criteria:
To do an audit, must be information in a verifiable form Where auditor can
evaluate the information
Auditors evaluate quantifiable data like income statements, tax returns as well
subjective data like efficiency or effectiveness
Subjective audits must establish criteria
Objective audits must use standards that are already established
Accumulation and Evaluation of Evidence:
Evidence: Defined information auditor to assess whether information being
audited is in accordance with criteria
o Can take on different forms
o Can be oral, written and observation
o Can use evidence from third party
Audit Strategy: Planned approach to conduct audit testing based on assessed
Must determine the amount of evidence needed to support established criteria
Competent, Independent Person:
Auditor must be qualified to perform audit and understand engagement risks and
criteria used
Need to be able to determine the amount and the type of evidence needed to
create a conclusion
Professional Judgement: Objective judgement carried out with integrity and
recognition of responsibility that your judgement has consequences
Integrity: Quality of being honest and courageous
Independence in Mind: Auditor’s ability to be objective
Internal Auditors: Are auditors employed by the company to audit for the BOD
Independent Auditors: People that are paid a fee to audit a company’s financial
Independent Auditor’s Report: Communicating the audit findings to users
Report can different but the meaning is the same Want to communicate
findings to end users
Want to emphasize whether the audited material meets standards
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Distinction between Auditing and Accounting:
Accounting is recording economic events in accordance to certain standards
Auditing is more evaluating recorded data to make sure they reasonably reflect
the economic event
Materiality: Amount of misstatement that would like influence economic
decisions of users
Auditors must determine proper audit procedures, mitigate risks, decide number
and types of items to test and evaluate results that are unique to auditor.
Economic Demand for Auditing:
Information Risk Potential for information that was based on to make a
business decision was inaccurate. It is the auditor’s job to reduce information risk
Causes of Information Risk:
Society becomes more complex which increases the likelihood that unreliable
information will be provided to decision makers
Complex Exchange Transactions:
o More complex and more difficult to record
o Complexity resulted in more complex accounting standards
o Example: Making estimates for certain acquisitions
Biases and Motives of Provider:
o Information can be bias to the information provider
o If the goals are different than provider and decision maker it can lead to
potential misstatements
Remoteness of Information:
o Information provided by others must to be relied on since it’s so difficult for
a decision maker to have first-hand knowledge of what the business does.
o When information is relied on by others it leads to unintentional/intentional
Voluminous Data:
o Organizations have become larger and larger which results in increased
amount of transactions
o Since there are more transactions involved it increases the amount of data
o Verify Information:
User should go to the business premise to examine records and
obtain information about the reliability of the statements
o User Shares Information Risk with Management:
Management is responsible to provide reliable information to users
If users incur a loss due to the inaccurate data, there can be lawsuit
o Provider Submits Audited Financial Statements:
Most common way to get reliable information because public
company engages with external auditors to make sure f/s are
Assurance Engagement: Engagement in which professional obtains evidence
to express a conclusion to users
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