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INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING

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An Introduction to Assurance and Financial Statement Auditing

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The Financial Statement Auditing Environment

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CHAPTER 1

LEARNING OBJECTIVES
Upon completion of this chapter you will [1] Understand why studying auditing can be valuable to you and why it is different from studying accounting. [2] Be able to explain why there is a demand for auditing and assurance. [3] Understand intuitively the demand for auditing and the desired characteristics of auditors and audit services through an analogy to a house inspector and a house inspection service. [4] Understand the relationships among auditing, attestation, and assurance services. [5] Know the basic definition and three fundamental concepts of a financial statement audit. Understand why on most audit engagements an auditor tests only a sample of transactions that occurred. Be able to describe the basic financial statement auditing process and the phases in which an audit is carried out. Know what an audit report is and the nature of an unqualified report. Understand why auditing demands logic, reasoning, and resourcefulness.

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R E L E VA N T A C C O U N T I N G A N D AUDITING PRONOUNCEMENTS AU 110, Responsibilities and Functions of the Independent Auditor AU 150, Generally Accepted Auditing Standards AU 311, Planning and Supervision AU 312, Audit Risk and Materiality in Conducting an Audit AU 314, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement AU 315, Communications between Predecessor and Successor Auditors AU 318, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained AU 326, Audit Evidence AU 508, Reports on Audited Financial Statements

An Introduction to Assurance and Financial Statement Auditing

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s you will learn in this chapter, auditing consists of a set of practical conceptual tools that help a person to find, organize, and evaluate evidence about the assertions of another party. The demand for capable accountants and auditors of high integrity has never been greater. Opportunities for auditors are plentiful and rewarding, and can lead to attractive career opportunities in other areas. Those who practice as auditors often later go into financial management, becoming controllers, chief financial officers (CFOs), and even chief executive officers (CEOs). But even those who do not plan to become an auditor can benefit greatly from an understanding of financial statement auditing and its underlying concepts. Learning these tools will be valuable to any business decision maker. While opportunities in auditing are great, the last several years have been challenging for the auditing profession. In the early 2000s, a series of highprofile accounting frauds began to cause investors to doubt the integrity of the nation’s financial reporting system, including the role of the external auditor. To restore investor confidence, Congress passed the Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act in July 2002—the most significant legislation related to financial statement audits of public companies since the Securities Acts of 1933 and 1934. The implications of the Sarbanes-Oxley Act are discussed throughout the text in appropriate places. While the scandals, public scrutiny, government reforms, and a new regulated process for establishing auditing standards for public companies have been painful for accountants and auditors, the events of the last several years have also been a powerful reminder of just how critical the roles of accounting and auditing are in our society. We live in a time when the amount of information available for decision makers via electronic databases, the Internet, and other sources is rapidly expanding, and there is a great need for the information to be reliable, credible, relevant, and timely. High quality...
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