Auditing - Report Example

Requirement Accounting has been defined as “recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in the financial statements” (Accounting Terminology Guide, para 14). Accounting encompasses all the financial records and book keeping of an organization including simple vouchers, journals, ledgers and financial statements. Accounting helps an organization to keep track of all its financial transactions that are to be reported in a company’s financial statements. Auditing refers to the “systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users” (Levels of Service, para. 1). Put simply, auditing is the examination and scrutiny of a company’s financial statements by independent auditors or CPAs who express their opinion on the accuracy and integrity of information presented in the financial statements. “Assurance services are defined as independent professional services that improve the quality of information, or its context, for decision makers” (Elliott and Pallais, 1997, para. 3). Assurance services are provided by auditors to ensure that all the information provided in the financial statements and most importantly the auditors report is published with accuracy ((Jeffreys & Kirkwood, 2003). Hence assurance service is another duty of an auditor in relation to the accuracy and quality of a company’s financial statements presented in its annual report. Accounting, auditing and assurance services are closely interlinked with each other. Each process acts as a basis for functioning of another process. Accounting provides all the information encompassing a company’s financial transactions and presents this information to various users in the form of financial statements. Auditing uses the accounting records to verify, examine and scrutinize the company’s financial statements from vouchers to ledgers. The work of auditor does not finish with preparation of auditor’s report and expression of audit opinion. The auditors are responsible to ascertain that the information being presented in the financial statements and auditor’s report is accurate and conforming exactly to the audit process (Jeffreys & Kirkwood, 2003). Audit can only be performed once all the accounting records from vouchers to financial statements for a specific year are presented to the auditors for financial statements. It can also be said that accounting provides basis or foundation for auditing. On the other hand, accounting information in the form of financial statements cannot be termed as true and valid unless auditors express a true and fair opinion in the audit report. Auditing is therefore very significant for the verification of accounting information. Assurance service is provided on the basis of accounting and audit both to ensure the quality of financial information being presented in the annual report. Hence accounting, auditing and assurance service share a very close relationship with each other. An example of accounting records for TPC’s all three divisions could be its ledgers, income statement, balance sheet and cash flow statements from which necessary information about sales, receivables, purchases, payments and cash flows can be obtained. These records would be verified by the external auditors. Auditors would also ensure the quality and accuracy of all the information that is provided to TPC’s management by its three divisions. Reference Accounting Terminology Guide. NYSSCPA The Web Site of the New York Society of CPAs. Retrieved January 12, 2007 from the World Wide Web: http://www.nysscpa.org/prof_library/guide.htm Elliott, R.K. and Pallais, D.M. (1997). Assurance Services. AICPA. Retrieved January 12, 2007 from the World Wide Web: http://www.aicpa.org/pubs/jofa/july97/elliot.htm Jeffreys, D. & Kirkwood, J. (2003). Beyond the Audit Report. CAmagazine. Retrieved January 12, 2007 from the World Wide Web: http://www.camagazine.com/1/6/7/2/5/index1.shtml Levels of Service. COF. Raffa. Retrieved January 12, 2007 from the World Wide Web: http://www.cof.org/files/Documents/Education_Collaborations/Audit%20Conference%20Call%20Handouts/3_Levels_of_Attestation_Services_Defined-HANDOUT_3.pdf Requirement 2: Attestation services are newly established services provided by auditors along with their traditional assistance in compliance with attestation standards. Under attestation service, the auditor provides assertion or opinion on any written statement made by another party. Helms & Brackney propound that, “attestation services provide the auditor the opportunity to render opinions on a much broader range of client assertions” (1998, para. 2). In this way auditors are able to utilize their knowledge and skills on assertion and assurance related to financial as well as non-financial matters. The provision of attestation service requires extensive knowledge and skill on the part of auditors, which also happens to be one of the reasons some firms have to decline several attestation engagements (Helms and Brackney, 1998). TPC might ask the CPA firm regarding the extent of attestation or assurance the auditors are willing to provide. For instance, the company’s management might request the CPA to: The CPA firm might be asked to engage into an extensive attestation service that could go beyond the professional skills and capacity of the team. Provide positive or limited assertion on written statements made by third parties. The company might also ask the auditors to deviate from existing professional standards or ethical practice in the course of attestation service provision. A request might also be made concerning matters that bear the capacity to increase the risk of liability the CPA is exposed to. For example, TPC might ask the CPA firm to engage into unlimited assurance or general distribution. This can significantly enhance the risk for auditors. The audit team needs to be firstly aware of the attestation standards that are established to assist the auditors in providing these sorts of services to their clients. Therefore their assertion and attestation should fully comply with the standards issued by a professional body. The audit team also needs to understand that they will provide attestation service in an independent manner and should be cautious with respect to ethical aspects of this service by refraining from any professional dishonesty and misconduct. It is very important that the audit team providing the attestation service is completely well-versed with the attestation and assurance skills. Therefore the first step to prepare the audit team is to train them and provide them awareness of professional practice in the attestation field. The audit team should be prepared to minimize the CPA firm’s exposure to liability risk. The risk of liability can be reduced by providing limited assertion or assurance based on agreed upon procedures. The CPA firm can also cut down the liability risk by engaging in assurance with restricted distribution (Helms and Brackney, 1998). Hence, these preparations are very important for a CPA firm before engaging in attestation services because these might also affect the quality and accuracy of audits performed by the same auditors (Helms and Brackney, 1998). If the team does not have the required knowledge and skill for the provision of assertion and assurance, the CPA firm should hire employees with required capability. Compliance with standards and performance measures is also very important. Therefore the team should also be made aware of the existing attestation standards. References Helms, G.L. and Brackney, K.S. (1998). Attestation Services: Opportunity for Practice Growth. The CPA Journal. Retrieved January 12, 2007 from the World Wide Web: http://www.nysscpa.org/cpajournal/1998/0298/dept/aud298.htm Read More