Auditing: Analytical and Logical Skills
ACG 4632
Introduction to Financial
Statement Auditing
Spring 2015 Section 422
Instructor: Devin Williams, CPA
1-1
Chapter 1
An Introduction to Assurance and
Financial
Statement
Auditing
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
LO# 1
The Study of Auditing
The study of auditing is different from other accounting courses that you have taken in college because …
OTHER COURSES
Rules, techniques and computations to prepare and analyze financial information AUDITING
Analytical and logical skills
Much more conceptual in nature 1-3
LO# 2
Principals and Agents
A public company is a company that sells its stocks or bonds to the public, giving the public a valid interest in the proper use of the company’s resources.
Managers
Stockholders
Agents
Principals
1-4
Why pay for audits?
Demand for reliable information
– In 1926, before audits were required by law,
82% of NYSE firms paid for audits.
– Increased when companies needed to raise capital
Capital market
– Owners (stockholders, aka “principals”) need to monitor managers (aka “agents”)
– Information asymmetry problem
Agent
may use information advantage to maximize self-interest at the expense of the owner (happens at accounting firms too)
The Role of Auditing
LO# 2
Figure 1-1 Overview of the Principal-Agent Relationship Leading to the Demand for Auditing
1-6
Lennox & Pittman 2011
Signaling with a voluntary audit.
Companies in the UK went from mandatory audits to voluntary audits
Firms remaining audited get upgrades to their credit ratings
(2pts) while firms no longer being audited get downgraded (4 pts). This is due to both the loss of the signal and the loss of assurance.
Costly auditing permits a separating equilibrium in which only the low-risk types appoint auditors
They look at 2 years (before and after) 67% of private firms remained audited! That says
Introduction to Financial
Statement Auditing
Spring 2015 Section 422
Instructor: Devin Williams, CPA
1-1
Chapter 1
An Introduction to Assurance and
Financial
Statement
Auditing
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
LO# 1
The Study of Auditing
The study of auditing is different from other accounting courses that you have taken in college because …
OTHER COURSES
Rules, techniques and computations to prepare and analyze financial information AUDITING
Analytical and logical skills
Much more conceptual in nature 1-3
LO# 2
Principals and Agents
A public company is a company that sells its stocks or bonds to the public, giving the public a valid interest in the proper use of the company’s resources.
Managers
Stockholders
Agents
Principals
1-4
Why pay for audits?
Demand for reliable information
– In 1926, before audits were required by law,
82% of NYSE firms paid for audits.
– Increased when companies needed to raise capital
Capital market
– Owners (stockholders, aka “principals”) need to monitor managers (aka “agents”)
– Information asymmetry problem
Agent
may use information advantage to maximize self-interest at the expense of the owner (happens at accounting firms too)
The Role of Auditing
LO# 2
Figure 1-1 Overview of the Principal-Agent Relationship Leading to the Demand for Auditing
1-6
Lennox & Pittman 2011
Signaling with a voluntary audit.
Companies in the UK went from mandatory audits to voluntary audits
Firms remaining audited get upgrades to their credit ratings
(2pts) while firms no longer being audited get downgraded (4 pts). This is due to both the loss of the signal and the loss of assurance.
Costly auditing permits a separating equilibrium in which only the low-risk types appoint auditors
They look at 2 years (before and after) 67% of private firms remained audited! That says