Auditing Spring 2012 by Jim Peters Table of Contents CHAPTER ONE - EDUCATIONAL APPROACH OVERVIEW, STYLE SHEET, AND BUSINESS MATH OVERVIEW ............ 1-1 SUMMARY ................................................................................................................................................................ 1-1 EDUCATIONAL APPROACH ........................................................................................................................................... 1-1 HOW TO STUDY TEXT MATERIALS AND CASES ................................................................................................................. 1-3 HOW TO STRUCTURE ANSWERS TO DISCUSSION QUESTIONS .............................................................................................. 1-4 Descriptive ........................................................................................................................................................ 1-4 Recommendations for action ........................................................................................................................... 1-5 Evaluation Questions ....................................................................................................................................... 1-5 Diagnosis .......................................................................................................................................................... 1-6 PROFESSIONAL WRITING AND SPEAKING ........................................................................................................................ 1-7 BASIC BUSINESS MATHEMATICAL SKILLS ........................................................................................................................ 1-7 CONTENT GOALS OF THIS AUDITING CLASS ..................................................................................................................... 1-7 APPENDIX A - WRITTEN ASSIGNMENT STYLE SHEET .......................................................................................................... 1-8 Numeric Presentation Formats ........................................................................................................................ 1-8 Numbers in Text ............................................................................................................................................................. 1-8 Financial Statements ...................................................................................................................................................... 1-8 Use of decimal points ..................................................................................................................................................... 1-9 Text Style Issues................................................................................................................................................ 1-9 Document Structure ....................................................................................................................................................... 1-9 Writing Style ................................................................................................................................................................. 1-11 APPENDIX B - BUSINESS MATHEMATICAL APPLICATIONS ................................................................................................. 1-13 Ratios, Fractions, Times, and Percentages ..................................................................................................... 1-13 Interpreting Ratios with Small Denominators ................................................................................................ 1-13 Increasing/Decreasing Numerators and Denominators by the Same Amount .............................................. 1-14 Working with Negative Numbers ................................................................................................................... 1-14 Calculating Percentage Changes or Differences............................................................................................. 1-14 Calculation of Weighted Averages ................................................................................................................. 1-15 APPENDIX C - UNIFORM CPA EXAMINATION CONTENT SPECIFICATIONS ............................................................................. 1-16 CHAPTER TWO - DEFINITION AND NEED FOR AUDITING ...................................................................................... 2-1 SUMMARY ................................................................................................................................................................ 2-1 DEFINITION OF AUDITING, ATTESTATION, AND ASSURANCE ............................................................................................... 2-1 Auditing ............................................................................................................................................................ 2-1 Assurance and Attestation ............................................................................................................................... 2-3 Assurance ....................................................................................................................................................................... 2-3 Attestation ..................................................................................................................................................................... 2-3 ECONOMIC JUSTIFICATION FOR AUDITING ....................................................................................................................... 2-4 Moral Hazard of Financial Statement Preparers .............................................................................................. 2-4 Information Complexity .................................................................................................................................... 2-5 REGULATORY ENVIRONMENT ....................................................................................................................................... 2-5 Types of Auditors .............................................................................................................................................. 2-6 Regulating CPAs ............................................................................................................................................... 2-6 Requirements for Certification ....................................................................................................................................... 2-6 Registration of Firms Auditing Public Companies ........................................................................................................... 2-7 Membership in the AICPA .............................................................................................................................................. 2-8 Auditing Standards ........................................................................................................................................... 2-8 Financial Reporting Standards ........................................................................................................................................ 2-8 Auditing Standards ....................................................................................................................................................... 2-10 Source of Auditing Standards .................................................................................................................................. 2-10 Generally Accepted Auditing Standards (GAAS) ...................................................................................................... 2-11 International Standards on Auditing ....................................................................................................................... 2-12 AICPA Code of Professional Conduct ........................................................................................................................... 2-13 i APPENDIX A - NEW MEXICO CPA LICENSING REQUIREMENTS .......................................................................................... 2-14 APPENDIX B - GRADUATING WITH A CP-YAY ................................................................................................................ 2-29 APPENDIX C - EXTRACT OF KEY PROVISIONS FROM SARBANES-OXLEY ................................................................................ 2-32 CHAPTER THREE - AUDITING RISK AND THE AUDIT PROCESS ............................................................................... 3-1 SUMMARY ................................................................................................................................................................ 3-1 RISK MODEL ............................................................................................................................................................. 3-1 Goals of a Financial Statement Audit ............................................................................................................... 3-1 Structure and Use of the Audit Risk Model ...................................................................................................... 3-2 Audit Risk ......................................................................................................................................................................