Page 443 - Introduction to Business

CHAPTER 12 Financial Reporting 417

examines the firm’s financial statements and provides an audit opinion indicating
whether those statements are fairly presented according to generally accepted
accounting principles.
The two major categories of auditing are internal auditing and external audit- internal auditing Chiefly concerned
ing. There are two primary types of internal audits: the management, also called with evaluating the economy and
efficiency with which scarce resources
operational, audit, and the internal control audit.
are utilized, but may include other
The first the management or operational audit is concerned with evaluating objectives such as evaluating the
the economy and efficiency with which scarce resources are utilized. Internal audi- effectiveness of internal controls
tors often review all aspects of operations performed in a firm to determine external auditing Auditing of a firm’s
whether any improvements can be made in departmental operations. The efficient financial statements by an independent
external auditor who is a certified public
utilization of resources by the various departments and their accomplishment of accountant
established objectives are evaluated by internal auditors in their performance of a management or operational audit The
management audit. audit done to evaluate the economy and
The second type of internal audit deals with the evaluation of internal controls. efficiency with which scarce resources
are utilized
Internal control structure comprises those policies and procedures established to
internal control structure The control
provide reasonable assurance that established objectives will be achieved. In per-
environment, the accounting system,
forming an audit of internal controls, internal auditors review the internal control and the control procedures that help
structure, which includes the control environment, the accounting system, and ensure the integrity of information
output and the safety of the firm’s
control procedures, and test specific controls to determine whether they are oper-
assets
ating as anticipated. A key objective of an internal control audit is to ensure that the
internal control structure is sound and provides a reasonable degree of assurance
about the integrity of information output, such as the financial statements, by the
accounting system, and that the firm’s assets are safeguarded. The internal control
structure audit is especially important as a result of the Sarbanes-Oxley Act of 2002.
A compliance audit can be performed by internal, external, or governmental
auditors, depending on the constituency being served. A compliance audit has the compliance audit The audit done to
objective of ensuring that the organization is in compliance with laws, rules, regu- ensure that the organization is in
compliance with laws, rules,
lations, or contractual agreements. These rules and regulations are typically those
regulations, and contractual
that have been established by some governmental institution. For example, the agreements
Government Accounting Office (GAO) and the Department of Defense (DOD) audi-
tors review the operations of governmental agencies and defense contractors,
respectively. Internally, management might charge internal auditors with the
responsibility of ensuring that the organization is in compliance with regulations
established by the Environmental Protection Agency (EPA).

External or Financial Statement Audit
External or financial statement audits must be conducted by independent Certified Certified Public Accountants (CPAs)
Public Accountants (CPAs). External audits are required of all publicly traded com- Accountants licensed by the state to
provide accounting services, including
panies. The external auditor must maintain his or her independence by having no
external audits of a business firm’s
material financial interest or stake in the outcome of the audit. In conducting a financial statements
financial statement audit, CPAs must comply with Generally Accepted Auditing
Standards (GAAS). Furthermore, CPAs must abide by the AICPA code of ethics in the
conduct of all their activities.

Audit Steps
All audits are characterized by the following common set of steps: (1) plan the audit,
(2) obtain and evaluate evidence, (3) arrive at an opinion, and (4) communicate
audit results. Obtaining evidence to support the audit opinion involves the appli-
cation of a series of audit procedures to verify the accuracy of assertions being
made by the firm being audited, also called the auditee. For financial statement

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