a. Compare the audit reports of The Boeing Company and Starbucks. What type of opinion did Starbucks receive on its financial statements and on the effectiveness of ICFR? b. What are the advantages of having a standard report format for all clients? be eneste from rood. The limited by the nature of financial reporting (2) the nature of audit pondre and the need for the There widesperta they y el franco Il can be difficult to death securred beca documented by the enterprises Ali, topling chaquetas Juances If a sample pie allem for ating amatan dan The nature of audit procedure the concept of material. The Man men of the faciliteit SFAC NOCH In other women in the financial if it maputi, e changes, the decision making these ndihesh me whe en the financements. Therefore, when plig pendures that are designed to detected nancial statements by a certain date, trim dienangpay aditional fosfor dit effort and from within the counting for when there are prese complete rodina on timely basis to medicating chat may be covered. By the time to plan the antit property and can ensure that adequate time is sent where the Compliance Audits A compliance and it is polering video determine whether the persone under review has followed the rules, policies, procedures and reputations with which we they must contem. One of the best camples of compliance with an inte The Internal Send (s) may contains.com determine if tax have been followed and the comment apold Operational (Performance) Audits Operational (performance audits are concerned with the meeting and after to an to'satirties.com ons to the cost of rits, including sagot industrial Eiciency refers to the relationship between in and out the of the minimum out of nowheat. Pinally, the newese the achievement of certain goal the peoduction will out cenation's perspective, it is important to perform welcro all three dimensions 1 CHAPTER : tinand Page 31 / 733 sintomatory 1-8 CHAPTER 1 Introduction and Overview of Audit and Assurance allow one to dominate. For example, if buying cheap inputs results in an inefficient produc- tion process, efficiency is sacrificed to achieve economic goals. Operational audits are gener- ally conducted by an organization's internal auditors (discussed in the next section), or they may be outsourced to an external accounting firm. internal audit a function within an entity which gener ally evaluates and improves risk management, internal control procedures and elements of the governance process those charged with governance persons with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity Internal Audits Internal audits are conducted to provide assurance about various aspects of an organiza- tion's activities. The internal audit function is typically conducted by employees of the orga- nization being audited, but can be outsourced to an external accounting firm. The function of an internal audit is determined by those charged with governance and management within the organization. While the functions of internal audits vary widely from one orga- nization to another, they are often concerned with evaluating and improving risk manage- ment, internal control procedures, and elements of the governance process. The internal auditors often conduct operational audits, compliance audits, internal control assessments, and reviews. Many internal auditors are members of the Institute of Internal Auditors (IIA). The IIA is an international organization with more than 120,000 members that provides guid- ance and standards to aid internal auditors in their work. When conducting the financial statement audit, the external auditor may rely on the work done by internal auditors when evaluating the evidence needed to form an opinion on the financial statements or on ICFR. A more detailed discussion of how internal auditors may assist with the audit is provided in Chapter 5. Cloud 9 - Continuing Case Ron is not concerned about internal audits-his business is too small for a separate internal audit function. He is also not wor ried about compliance and operational audits. His priority at the moment is to close the deal with Chip Masters, and he still does not know what he will do about the financial statement audit Before You Go On 2.1 What is the objective of a financial statement audir? 2.2 Explain the inherent limitations of a financial statement audit. 2.3 What are the three elements of an operational audir? 2.4 What are the most common functions of the internal auditors! statements are free from error or fraud. The limitations of an audit are caused by (1) the nature of financial reporting, (2) the nature of audit procedures, and (3) the need for the audit to be conducted within a reasonable period of time at a reasonable cost (AU-C 200.A49). The nature of financial reporting refers to the use of judgment when preparing financial statements due to the subjectivity required when arriving at accounting estimates. Judgment is also required when selecting and applying accounting methods. For example, depreciating a piece of equipment is an estimate that requires judgment in selecting a depreciation method and determining a useful life and salvage value. The nature of audit procedures refers to the reliance on evidence provided by the client and its management. For example, what if client management withholds or hides important documents from the auditors? If auditors are unaware of this situation, they may arrive at an inappropriate conclusion based on incomplete facts. Evidence may be withheld or modified by perpetrators of fraud. It can be difficult for an auditor to determine whether a fraud has occurred because documents altered by those committing the fraud generally hide evidence. Also, auditors often use sampling techniques when testing some transactions and account balances. If a sample is not representative of all items available for testing an auditor may arrive at an incorrect conclusion. The nature of audit procedures also refers to the concept of materiality. The Financial Accounting Standards Board (FASB) defines materiality as follows: Information is material i omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity (SFAC No 8, para OCHI) In other words, an error or misstatement in the financial statements is considered material if it impacts, or changes, the decision-making process of those individuals or groups who are using the financial statements. Therefore, when planning an audit, auditors select audit procedures that are designed to discover material misstatements. Because of time and cost constraints, it would be impractical for an audit to focus on finding all misstatements. The timeliness and cost of a financial statement audit refer to the pressures auditors face to complete their audit within a certain time frame at a reasonable cost. While it is important that auditors do not omit procedures in an effort to meet time and cost constraints, they may be under some pressure to do so. This pressure will come from clients wanting to issue their fi- nancial statements by a certain date, from clients refusing to pay additional fees for additional audit effort, and from within the accounting firm where there are pressures to complete all audits on a timely basis to avoid incurring costs that may not be recovered. By taking the time to plan the audit properly, auditors can ensure that adequate time is spent where the risks of a material error or fraud are greatest materiality the ability of infor mation to influence decisions that en make on the basis of the financial information of a specific reporting entity Compliance Audits A compliance audit involves gathering evidence to determine whether the person or entity under review has followed the rules, policies, procedures, laws, and regulations with which they must conform. One of the best examples of a compliance audit is an income tax audit The Internal Revenue Service (IRS) may conduct an audit of an individual or a company to determine if tax laws have been followed and the correct amount of tax paid. compliance audit an audit to determine whether the entity has .conformed with regulations rules, or processes Operational (Performance) Audits Operational (performance) audits are concerned with the economy, efficiency, and effec tiveness of an organization's activities. Economy refers to the cost of inputs, including wages and materials. Efficiency refers to the relationship between inputs and outputs, or the use of the minimum amount of inputs to achieve a given output. Finally, effectiveness refers to the achievement of certain goals or the production of a certain level of outputs. From an organization's perspective, it is important to perform well across all three dimensions and not operational performance) audit an assessment of the coonomy efficiency and effectiveness of an organisations operations a. Compare the audit reports of The Boeing Company and Starbucks. What type of opinion did Starbucks receive on its financial statements and on the effectiveness of ICFR? b. What are the advantages of having a standard report format for all clients? be eneste from rood. The limited by the nature of financial reporting (2) the nature of audit pondre and the need for the There widesperta they y el franco Il can be difficult to death securred beca documented by the enterprises Ali, topling chaquetas Juances If a sample pie allem for ating amatan dan The nature of audit procedure the concept of material. The Man men of the faciliteit SFAC NOCH In other women in the financial if it maputi, e changes, the decision making these ndihesh me whe en the financements. Therefore, when plig pendures that are designed to detected nancial statements by a certain date, trim dienangpay aditional fosfor dit effort and from within the counting for when there are prese complete rodina on timely basis to medicating chat may be covered. By the time to plan the antit property and can ensure that adequate time is sent where the Compliance Audits A compliance and it is polering video determine whether the persone under review has followed the rules, policies, procedures and reputations with which we they must contem. One of the best camples of compliance with an inte The Internal Send (s) may contains.com determine if tax have been followed and the comment apold Operational (Performance) Audits Operational (performance audits are concerned with the meeting and after to an to'satirties.com ons to the cost of rits, including sagot industrial Eiciency refers to the relationship between in and out the of the minimum out of nowheat. Pinally, the newese the achievement of certain goal the peoduction will out cenation's perspective, it is important to perform welcro all three dimensions 1 CHAPTER : tinand Page 31 / 733 sintomatory 1-8 CHAPTER 1 Introduction and Overview of Audit and Assurance allow one to dominate. For example, if buying cheap inputs results in an inefficient produc- tion process, efficiency is sacrificed to achieve economic goals. Operational audits are gener- ally conducted by an organization's internal auditors (discussed in the next section), or they may be outsourced to an external accounting firm. internal audit a function within an entity which gener ally evaluates and improves risk management, internal control procedures and elements of the governance process those charged with governance persons with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity Internal Audits Internal audits are conducted to provide assurance about various aspects of an organiza- tion's activities. The internal audit function is typically conducted by employees of the orga- nization being audited, but can be outsourced to an external accounting firm. The function of an internal audit is determined by those charged with governance and management within the organization. While the functions of internal audits vary widely from one orga- nization to another, they are often concerned with evaluating and improving risk manage- ment, internal control procedures, and elements of the governance process. The internal auditors often conduct operational audits, compliance audits, internal control assessments, and reviews. Many internal auditors are members of the Institute of Internal Auditors (IIA). The IIA is an international organization with more than 120,000 members that provides guid- ance and standards to aid internal auditors in their work. When conducting the financial statement audit, the external auditor may rely on the work done by internal auditors when evaluating the evidence needed to form an opinion on the financial statements or on ICFR. A more detailed discussion of how internal auditors may assist with the audit is provided in Chapter 5. Cloud 9 - Continuing Case Ron is not concerned about internal audits-his business is too small for a separate internal audit function. He is also not wor ried about compliance and operational audits. His priority at the moment is to close the deal with Chip Masters, and he still does not know what he will do about the financial statement audit Before You Go On 2.1 What is the objective of a financial statement audir? 2.2 Explain the inherent limitations of a financial statement audit. 2.3 What are the three elements of an operational audir? 2.4 What are the most common functions of the internal auditors! statements are free from error or fraud. The limitations of an audit are caused by (1) the nature of financial reporting, (2) the nature of audit procedures, and (3) the need for the audit to be conducted within a reasonable period of time at a reasonable cost (AU-C 200.A49). The nature of financial reporting refers to the use of judgment when preparing financial statements due to the subjectivity required when arriving at accounting estimates. Judgment is also required when selecting and applying accounting methods. For example, depreciating a piece of equipment is an estimate that requires judgment in selecting a depreciation method and determining a useful life and salvage value. The nature of audit procedures refers to the reliance on evidence provided by the client and its management. For example, what if client management withholds or hides important documents from the auditors? If auditors are unaware of this situation, they may arrive at an inappropriate conclusion based on incomplete facts. Evidence may be withheld or modified by perpetrators of fraud. It can be difficult for an auditor to determine whether a fraud has occurred because documents altered by those committing the fraud generally hide evidence. Also, auditors often use sampling techniques when testing some transactions and account balances. If a sample is not representative of all items available for testing an auditor may arrive at an incorrect conclusion. The nature of audit procedures also refers to the concept of materiality. The Financial Accounting Standards Board (FASB) defines materiality as follows: Information is material i omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity (SFAC No 8, para OCHI) In other words, an error or misstatement in the financial statements is considered material if it impacts, or changes, the decision-making process of those individuals or groups who are using the financial statements. Therefore, when planning an audit, auditors select audit procedures that are designed to discover material misstatements. Because of time and cost constraints, it would be impractical for an audit to focus on finding all misstatements. The timeliness and cost of a financial statement audit refer to the pressures auditors face to complete their audit within a certain time frame at a reasonable cost. While it is important that auditors do not omit procedures in an effort to meet time and cost constraints, they may be under some pressure to do so. This pressure will come from clients wanting to issue their fi- nancial statements by a certain date, from clients refusing to pay additional fees for additional audit effort, and from within the accounting firm where there are pressures to complete all audits on a timely basis to avoid incurring costs that may not be recovered. By taking the time to plan the audit properly, auditors can ensure that adequate time is spent where the risks of a material error or fraud are greatest materiality the ability of infor mation to influence decisions that en make on the basis of the financial information of a specific reporting entity Compliance Audits A compliance audit involves gathering evidence to determine whether the person or entity under review has followed the rules, policies, procedures, laws, and regulations with which they must conform. One of the best examples of a compliance audit is an income tax audit The Internal Revenue Service (IRS) may conduct an audit of an individual or a company to determine if tax laws have been followed and the correct amount of tax paid. compliance audit an audit to determine whether the entity has .conformed with regulations rules, or processes Operational (Performance) Audits Operational (performance) audits are concerned with the economy, efficiency, and effec tiveness of an organization's activities. Economy refers to the cost of inputs, including wages and materials. Efficiency refers to the relationship between inputs and outputs, or the use of the minimum amount of inputs to achieve a given output. Finally, effectiveness refers to the achievement of certain goals or the production of a certain level of outputs. From an organization's perspective, it is important to perform well across all three dimensions and not operational performance) audit an assessment of the coonomy efficiency and effectiveness of an organisations operations