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Chapter 1

The Demand for Audit and Other Assurance Services

Concept Checks

C1-1     What is meant by determining the degree of correspondence between information and established criteria? What are the criteria for the audit of a company’s financial statements?

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 International Financial Reporting Standards, Accounting Standards for Private Enterprises, Accounting Standards for Not-for-Profits.

C1-2    What are the major causes of information risk. How can information risk be reduced?

Information risk reflects the possibility that the information upon which the business risk decision was made was inaccurate. The major causes of information risk are: remoteness of information, biases and motives of the provider, voluminous data, and complex exchange transactions. Users can reduce information risk by examining the information directly, sharing the risk with the information preparer, or requesting some assurance over the information (either an audit or a review engagement).

C1-3    Explain how and why the auditor makes information trustworthy and credible.

External users value the auditor’s assurance because of the auditor’s integrity, independence, expertise, and knowledge of the subject matter. This makes the information credible and trustworthy.

C1-4    Describe and explain the differences and similarities between financial statement, compliance, and operational audits.

Differences—are based upon the information and criteria being audited: a financial statement audit (e.g., historical financial statements) assesses evidence with respect to potential material misstatements; a compliance audit (e.g., compliance with environmental legislation) assesses the organization’s ability to comply with legislation; and an operational audit (e.g., effective factory production) helps to provide good quality control and manage costs.

Similarities—The auditor is acting with due care, meaning that he/she is following some type of systematic process governed by auditing standards (financial statements: CPA Canada Handbook (GAAS); compliance: CPA Canada Handbook or IIA standards, depending upon whether a public accountant is conducting the audit; and operational: most likely IIA standards). The auditor is also independent and competent (although the degree of independence will vary according to who is conducting the audit).

C1-5    Describe and explain the difference and similarities among the various types of auditors.

Review Questions

1-1       You will be looking at his accounting records (evidence) and evaluating and collecting information about those records. Your evaluation process will be done using relatively standard audit procedures (part of GAAS – generally accepted auditing standards). Your objective is to compare the evidence (his accounting records) to the financial statements that he has prepared (which will become information available to others, such as the Canada Revenue Agency). To help you evaluate his records (the evidence) you will use criteria (likely ASPE – Accounting Standards for Private Enterprises). You are able to add value to the financial statements because you are an independent professional, qualified accountant.