Chapter 1
The Demand for Audit and Other Assurance Services
Concept Checks
P. 8
1. To do an audit, there must be information in a verifiable form and some standards
(criteria) by which the auditor can evaluate the information. Determining the degree
of correspondence between information and established criteria is determining
whether a given set of information is in accordance with the established criteria.
For an audit of a company’s financial statements the criteria are U.S. generally
accepted accounting principles or International Financial Reporting Standards.
2. The four primary causes of information risk are remoteness of information, biases
and motives of the provider, voluminous data, and the existence of complex exchange
transactions.
The three main ways to reduce information risk are:
1. User verifies the information.
2. User shares the information risk with management.
3. Audited financial statements are provided.
P. 17
1. The three main types of audits are operational audits, compliance audits, and
financial statement audits. The table below summarizes the purposes and nature of
each type of audit.
, AUDITS OF
OPERATIONAL COMPLIANCE FINANCIAL
AUDITS AUDITS STATEMENTS
PURPOSE To evaluate To determine whether To determine
whether operating the client is following whether the overall
procedures are specific procedures set financial
efficient and by a higher authority statements are
effective presented in
accordance with
specified criteria
(usually GAAP)
,Concept Checks (continued)
AUDITS OF
OPERATIONAL COMPLIANCE FINANCIAL
AUDITS AUDITS STATEMENTS
USERS OF Management of Authority setting down Different groups for
AUDIT organization procedures, internal or different purposes
REPORT external — many outside
entities
NATURE Highly Not standardized, but Highly
nonstandard; often specific and usually standardized
subjective objective
PERFORMED
BY:
CPAs Frequently Occasionally Almost universally
GAO
AUDITORS Frequently Frequently Occasionally
IRS
AUDITORS Never Universally Never
INTERNAL
AUDITORS Frequently Frequently Frequently*
* Internal auditors may assist CPAs in the audit of financial statements. Internal auditors
may also audit internal financial statements for use by management.
2. The major differences in the scope of audit responsibilities for CPAs, GAO auditors,
IRS agents, and internal auditors are:
• CPAs perform audits of financial statements prepared using U.S. GAAP or
IFRS in accordance with auditing standards.
• GAO auditors perform compliance or operational audits in order to assure the
Congress of the expenditure of public funds in accordance with its directives
and the law.
• IRS agents perform compliance audits to enforce the federal tax laws as
defined by Congress, interpreted by the courts, and regulated by the IRS.
, • Internal auditors perform compliance or operational audits in order to assure
management or the board of directors that controls and policies are properly
and consistently developed, applied, and evaluated.
The Demand for Audit and Other Assurance Services
Concept Checks
P. 8
1. To do an audit, there must be information in a verifiable form and some standards
(criteria) by which the auditor can evaluate the information. Determining the degree
of correspondence between information and established criteria is determining
whether a given set of information is in accordance with the established criteria.
For an audit of a company’s financial statements the criteria are U.S. generally
accepted accounting principles or International Financial Reporting Standards.
2. The four primary causes of information risk are remoteness of information, biases
and motives of the provider, voluminous data, and the existence of complex exchange
transactions.
The three main ways to reduce information risk are:
1. User verifies the information.
2. User shares the information risk with management.
3. Audited financial statements are provided.
P. 17
1. The three main types of audits are operational audits, compliance audits, and
financial statement audits. The table below summarizes the purposes and nature of
each type of audit.
, AUDITS OF
OPERATIONAL COMPLIANCE FINANCIAL
AUDITS AUDITS STATEMENTS
PURPOSE To evaluate To determine whether To determine
whether operating the client is following whether the overall
procedures are specific procedures set financial
efficient and by a higher authority statements are
effective presented in
accordance with
specified criteria
(usually GAAP)
,Concept Checks (continued)
AUDITS OF
OPERATIONAL COMPLIANCE FINANCIAL
AUDITS AUDITS STATEMENTS
USERS OF Management of Authority setting down Different groups for
AUDIT organization procedures, internal or different purposes
REPORT external — many outside
entities
NATURE Highly Not standardized, but Highly
nonstandard; often specific and usually standardized
subjective objective
PERFORMED
BY:
CPAs Frequently Occasionally Almost universally
GAO
AUDITORS Frequently Frequently Occasionally
IRS
AUDITORS Never Universally Never
INTERNAL
AUDITORS Frequently Frequently Frequently*
* Internal auditors may assist CPAs in the audit of financial statements. Internal auditors
may also audit internal financial statements for use by management.
2. The major differences in the scope of audit responsibilities for CPAs, GAO auditors,
IRS agents, and internal auditors are:
• CPAs perform audits of financial statements prepared using U.S. GAAP or
IFRS in accordance with auditing standards.
• GAO auditors perform compliance or operational audits in order to assure the
Congress of the expenditure of public funds in accordance with its directives
and the law.
• IRS agents perform compliance audits to enforce the federal tax laws as
defined by Congress, interpreted by the courts, and regulated by the IRS.
, • Internal auditors perform compliance or operational audits in order to assure
management or the board of directors that controls and policies are properly
and consistently developed, applied, and evaluated.
