CHAPTER 2: THE FINANCIAL STATEMENT AUDITING ENVIRONMENT

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1. Types of Auditors

a. External Auditor: Independent auditors

- Not employees of the entity ebeing audited

- Conduct FS, compliance, operational, forensic audit

b. Internal Auditor

- Employees of individual companies, government agencies, and other entities

- Conduct FS, internal control, compliance, operational, forensic audits within organizations.

- Assist external auditors with annual FS audit.

- Assurance and consulting engagement for their entities

c. Government Auditor

- A type of internal auditor

- Government Accountability Office: (GAO) conduct audits of activities, FS, accounts of federal government 
Compliance and operational audit

- Internal Revenue Service: (IRS) examine and audit books and records of organizations and individuals to determine
their tax liability  Compliance

d. Forensic Auditor

- Employed by corporations, government agenices, public accounting firms, consulting and investigative services firm

- Detect, deter fraud and white-collar crime.

- Association of Certified Fraud Examination (ACFE)

2. Types of Other Audit, Attest, and Assurance Services

a. Other Audit Service

- Internal control Audits: Public companies are required to engage an external auditor to provide opnion on effectivenes of
internal control  Integrated audit of internal control and FS.

- Compliance Audits: determine the extent to which rules, policies, laws, covenats, or government regulations are followed.

- Operational Audits: review of part or al of org’s activities to evaluate whether resources are being used effectively and
efficiently. Purpose: assess performanc, identify areas for improvement, and develop recommendations  Performance
audit/managemet audit.

- Forensic Audits: Dectect and deter fraudulent activities

b. Attest Service

c. Assurance Service

- Consulting activities

d. Other nonaudit Service: prohibit external auditors from proving nonaudit assurance and consulting work to
public companies for which the auditor also provides FS audit.

- Tax preparation and Planning Services: Prepare and file tax returns, advice on tax and estate planning, represent
clients on tax issues.

- Management Advisory Services: Advice and assist entity’s organization, HR, finanes, operations, IT systems for whom
they do not provide FS audit.

- Compilation and Review Services: bookkeeping, payroll processing, preparing FS  Compilations/Review

3. Public Accounting Firms

a. Organization and Composition

- Public accounting firm is organized as proprietorships, general or limited liability partnerships, corporations.

- Audits are usually conducted by teams of auditors. The typical audit team is composed of, in order of authority, a partner, a
manager, one or two seniors, and several staff members.

4. A Decade of Challenges and Change for Financial statement Auditors

a. Government Regulation

- Prohibiting auditors from providing many types of nonaudit services to public company auditees.

- Audit firms rotate audit partners on audit engagements every five years

- Public companies obtain an integrated audit (including audits of both financial statements and internal control over financial
reporting).

5. Societies’ Expectations and the Auditor’s Responsibilities

- Society expects auditors to exercise due care in their work.

- Due professional care requires that the auditor exercise professional skepticism, which is an attitude that includes a
questioning mind and a critical assessment of audit evidence.

- While auditors have important responsibilities, management is primarily responsible for maintaining effective internal
control and for ensuring the fairness of the company’s FS.

6. The Context of FS Auditing

- Context that shapes the external auditor’s environment: the business or entity being audited.

a. The Context of Financial statement Auditing

7. A model of Business

a. Corporate Governance:

- Managers are overseen, supervised to help ensure proper stewardship over an entity’s assets.

- Strong corporate governance ensures that those managing an entity properly utilize their time, talents, and the entity’s
resources in the best interest of absentee owners, and that they faithfully report the economic condition and performance of
the enterprise.

- Audit Committee: oversees the internal and external auditing work done for the organization.
 b. Objectives, Strategies, Processes, Controls, Transactions, and Reports

- Management, with guidance and direction from the board of directors, decides on a set of objectives, along with
strategies designed to achieve those objectives. The organization then undertakes certain processes in order to
implement its strategies. Most business enterprises establish processes that fit in five broad business process categories,
sometimes known as business cycles.

- Information Systems and Internal controls to ensure transactions are properly executed, captured, and processed.

c. A model of Business Processes: Five Components

- Financing process: obtain capital, invest in assets, repay loans.

- Purchasing process: acquire g&s to support operations

- HRM process: hire personnel to perform functions

- Inventory Management process: accumulating and allocating costs to inventory and making adjustments to record
inventory at the lower of cost or market

- Revenue process: generate revenue through sales of goods or services to customers.

8. Organizations that Affect the Public Accounting Profession

- Securities and Exchange Commission (SEC)

- Public Company Accounting Oversight Board (PCAOB)

- International Auditing and Assurance Standards Board (IAASB)

- Financial Accouting Standards Board (FASB)

- International Accouting Standards Board (IASB)