ADMS 4551: CHAPTER 1 (WEEK 1)
Professional accountants assess risks of errors or fraud, provide examinations of controls, audit
financial statements, and help businesses be more successful.
Auditors provide assurance on information other than financial statements and provide business
advisory and tax services.
Auditors make and help implement recommendations that improve profitability by enhancing
revenue or reducing costs, by reducing risks of errors and fraud, and by improving operational
Nature and Relevance of Auditing
Auditing is the accumulation and evaluation of evidence about information to determine and report
on the degree of correspondence between the information and established criteria.
To do an audit, there must be information in a verifiable form and some standards by which the
auditor can evaluate the information.
Auditors routinely perform audits of quantifiable information, including companies' financial
statements and individuals' federal income tax returns.
Auditors also perform audits of more subjective information such as the effectiveness of computer
systems and the efficiency of manufacturing operations.
Evidence is defined as any information used by the auditor to assess whether the information being
audited is stated in accordance with the established criteria, and may take many forms including
oral representation of the auditee (client), written communication with outsiders, and observations
by the auditor.
Auditors reporting on company financial statements are often called independent auditors.
The final stage in the audit process is the independent auditor's report-the communication of the
audit findings to users.
Reports must inform readers of the degree of correspondence between information and established
o When auditing a tax return of an individual, the auditor first considers the potential risk of
incorrect or fraudulent tax reporting by comparing the stats of the tax return with other tax
returns by considering factors such as the taxpayer's industry and past income.
o The auditor next examines supporting records provided by the taxpayer and from other
sources, such as the taxpayers employer or bank.
Distinction between auditing and accounting
Accounting is the recording, classifying, and summarizing of economic events in a logical manner
for the purpose of providing financial information for decision making
Publicly accountable organizations, listed on securities exchanges or large not-for-profit
organizations, are legally required to have an annual financial statement audit.
In addition to understanding accounting, the auditor must also possess expertise in risk assessment
processes and the accumulation and interpretation of audit evidence.
It is this expertise that distinguishes auditors from accountants
Assurance and non-assurance services
Assurance engagements/services are independent professional services that improve the quality of
information for decision makers
o The auditor issues a report about the reliability of an assertion (financial statements) prepared
by another party (management)
o The assurance engagement provider is independent and is perceived as unbiased with respect
to the information examined
Attestation services are a large category of assurance services provided by accounting firms
o this service or engagement is a particular form of assurance service in which the auditor
evaluates the information provided by one party, using suitable criteria, and issues a report
about the reliability of this information to another party. Attestation services include 5 categories:
Audit of historical financial statements
In such audits, management states that the statements are fairly stated in conformity with an
applicable financial reporting framework.
External users of financial statements rely on the auditor's report for their decision making
Publicly traded companies in Canada are required to have audits of their financial statements
Many privately held companies also have annual financial statement audits to obtain financing from
banks and other institutions.
Government and non-for-profit organizations have audits to meet requirements of lenders and
Review of historical financial statements
Many smaller, private companies that want to issue financial statements to various users at a lower
cost than an audit use a review, which provides a much lower degree of assurance than an audit.
Management also states that the financial statements are fairly stated in conformity with an
applicable financial reporting framework.
A review provides moderate assurance, with the result that the public accountant provides a
conclusion rather than an opinion regarding the financial statements produced.
Attestation services on IT
growth of the internet and e-commerce, specifically concern over privacy and security of
information on the internet, is affecting the demand for other assurance services.
The volume of real time information available on the internet is calling for assurances about the
privacy and reliability of processes generating information in a real time format.
To respond to the growing demand for assurance related to business transactions over the internet,
the AICPA and CICA have developed 2 products