Chapter 1
The Demand for Audit and Other Assurance Services
Usually students will not have read Chapter 1 before the material is covered. As
a policy, we always give students the entire scheduled time on the first day of class.
In addition to setting up a seating chart (which we always use), and reviewing the
course policies and procedures, we attempt to cover the following major topics in
the chapter:
Chapter Opening Vignette
Nature of Auditing
Distinction between auditing and accounting
Economic demand for auditing
Overview of assurance services
Types of audits and auditors
Requirements for becoming a certified public accountant
Chapter Opening Vignette — “Brown Goes Green”
We use this vignette about the United Parcel Service (UPS) sustainability
reporting to highlight the role of auditors in providing assurance on sustainability
reports, as well as many other types of information. Students have a great interest in
sustainability, but most are not familiar with sustainability reporting and assurance.
This is a great way to gain students’ interest by emphasizing the valuable role of
auditors in providing assurance on all types of information. Consider assigning
Problem 1-24, if you would like to expose students further to sustainability reporting.
Nature of Auditing (page 3)
Start by asking students to tell you what auditing is and display one of the
student’s own definitions. Other students are asked to discuss it until there is a
reasonably usable definition. The three things that should be stressed are:
1. Evidence (define the term)
2. Information
3. Determining degree of correspondence
Students tend to think of auditing as auditing financial statements by CPA firms
in accordance with GAAS or other auditing standards. We therefore use Figure 1-1
on page 4, to discuss the definition.
(See Figure 1-1; shown on Slide 1-7)
We also like to display the matrix on OH-1-1 and go through it with the students.
As a part of this, students are briefly introduced to IRS auditors, CPAs, and internal
auditors. None of this is usually lecture.
1-1
Copyright © 2024 Pearson Education, Inc.
, (See OH-1-1)
After you have gone over this information, refer students to the definition of
auditing as included on Slides 1-5 and 1-6.
(See Slides 1-5 and 1-6)
Briefly talk about the importance of:
Competence and independence of auditor (Chapter 4)
Need to report on findings (Chapters 3, 24, and 25)
Distinction between Auditing and Accounting (page 5)
We spend little time on the distinction between accounting and auditing, but it is
at least desirable to point out the differences and relationship between the two. Then
ask why auditors need to have knowledge of accounting to be effective auditors. See
Review Question 1-2.
Economic Demand for Auditing (page 5)
We like to spend a few minutes discussing the economic role of auditors in
society in Chapter 1. Refer back to this material again in Chapter 5 (legal liability)
and Chapter 8 (audit planning and materiality).
First, go over the three factors determining interest rates, with emphasis on
information risk. Use OH-1-2 to summarize the material in the text. It is useful to
discuss the effect on earnings of reducing an organization’s interest rate by 1 or
2%. Problem 1-17 is useful for demonstrating the level of assurance associated
with audits and reviews, and the effect of these services on information risk and
borrowing costs.
(See OH-1-2)
Assurance Services (page 7)
We start by asking students to describe assurance services. The term will be
unfamiliar to most students, but some may recognize the concept. We discuss the
following services:
Assurance services
Attestation services
Audits of historical financial statements
Audits of internal control over financial reporting
Reviews of historical financial statements
Management consulting and other nonassurance services
We then cover Problem 1-16 in class to help students distinguish assurance,
attestation, and audit services.
1-2
Copyright © 2024 Pearson Education, Inc.
, Ask students to suggest other types of information on which users may desire
assurance and the most likely provider of the assurance. OH-1-3 can be used to list
their responses. To start the discussion, we often name one or two types of assurance
that aren’t provided by CPAs, such as gas pump inspections and Nielsen Audio
ratings. Ask students to suggest reasons why the demand for assurance is
increasing. Table 1-1 (page 10) is helpful for identifying other types of assurance
services that may be provided by CPAs.
(See OH-1-3)
(See Table 1-1; shown on Slides 1-23 through 1-26)
Problem 1-18 can be covered in class to give students a perspective on the
similarity between assurance services offered by CPAs and the role played by
organizations such as Consumer Reports.
Types of Audits and Auditors (page 11, page 13)
Most students at our universities know little about the types of auditors and
the nature of CPA firms. In a brief discussion, we highlight the following for the
students:
The nature of financial, operational, and compliance audits
The primary differences between independent CPAs, government auditors,
internal revenue agents, and internal auditors
OH-1-1 and Table 1-2 (page 11) can be used as part of this discussion. Problem
1-20 is a good one to use in class as part of a discussion about careers in
accounting. Problem 1-21 can also be used to help distinguish the types of audits,
and the auditor most likely to perform the audit.
(See OH-1-1)
(See Table 1-2; shown on Slides 1-29 and 1-30)
Certified Public Accountant (page 14)
We talk briefly about why some people want to be a CPA. We use Figure 1-3
(page 15) to review the requirements for becoming a CPA, and also discuss the exam
requirements and the format of the computerized exam.
(See Figure 1-3; shown on Slide 1-37)
We discuss the significant revision of the CPA exam and licensure process,
referred to as CPA Evolution. We use Figure 1-4 to discuss the new requirements
and format of the exam.
(See Figure 1-4; shown on Slide 1-39)
1-3
Copyright © 2024 Pearson Education, Inc.
, We then review the CPA Exam eligibility requirements in our state. We
encourage students to visit the CPA Examination portion of the AICPA website
(www.aicpa.org) to learn more about the exam and to review the link to Frequently
Asked Questions (FAQs) about the CPA Exam. We find students appreciate this
information and it saves us a lot of time in the office telling them the same thing
individually. Problem 1-25 requires students to research different requirements of the
CPA Exam.
1-4
Copyright © 2024 Pearson Education, Inc.
The Demand for Audit and Other Assurance Services
Usually students will not have read Chapter 1 before the material is covered. As
a policy, we always give students the entire scheduled time on the first day of class.
In addition to setting up a seating chart (which we always use), and reviewing the
course policies and procedures, we attempt to cover the following major topics in
the chapter:
Chapter Opening Vignette
Nature of Auditing
Distinction between auditing and accounting
Economic demand for auditing
Overview of assurance services
Types of audits and auditors
Requirements for becoming a certified public accountant
Chapter Opening Vignette — “Brown Goes Green”
We use this vignette about the United Parcel Service (UPS) sustainability
reporting to highlight the role of auditors in providing assurance on sustainability
reports, as well as many other types of information. Students have a great interest in
sustainability, but most are not familiar with sustainability reporting and assurance.
This is a great way to gain students’ interest by emphasizing the valuable role of
auditors in providing assurance on all types of information. Consider assigning
Problem 1-24, if you would like to expose students further to sustainability reporting.
Nature of Auditing (page 3)
Start by asking students to tell you what auditing is and display one of the
student’s own definitions. Other students are asked to discuss it until there is a
reasonably usable definition. The three things that should be stressed are:
1. Evidence (define the term)
2. Information
3. Determining degree of correspondence
Students tend to think of auditing as auditing financial statements by CPA firms
in accordance with GAAS or other auditing standards. We therefore use Figure 1-1
on page 4, to discuss the definition.
(See Figure 1-1; shown on Slide 1-7)
We also like to display the matrix on OH-1-1 and go through it with the students.
As a part of this, students are briefly introduced to IRS auditors, CPAs, and internal
auditors. None of this is usually lecture.
1-1
Copyright © 2024 Pearson Education, Inc.
, (See OH-1-1)
After you have gone over this information, refer students to the definition of
auditing as included on Slides 1-5 and 1-6.
(See Slides 1-5 and 1-6)
Briefly talk about the importance of:
Competence and independence of auditor (Chapter 4)
Need to report on findings (Chapters 3, 24, and 25)
Distinction between Auditing and Accounting (page 5)
We spend little time on the distinction between accounting and auditing, but it is
at least desirable to point out the differences and relationship between the two. Then
ask why auditors need to have knowledge of accounting to be effective auditors. See
Review Question 1-2.
Economic Demand for Auditing (page 5)
We like to spend a few minutes discussing the economic role of auditors in
society in Chapter 1. Refer back to this material again in Chapter 5 (legal liability)
and Chapter 8 (audit planning and materiality).
First, go over the three factors determining interest rates, with emphasis on
information risk. Use OH-1-2 to summarize the material in the text. It is useful to
discuss the effect on earnings of reducing an organization’s interest rate by 1 or
2%. Problem 1-17 is useful for demonstrating the level of assurance associated
with audits and reviews, and the effect of these services on information risk and
borrowing costs.
(See OH-1-2)
Assurance Services (page 7)
We start by asking students to describe assurance services. The term will be
unfamiliar to most students, but some may recognize the concept. We discuss the
following services:
Assurance services
Attestation services
Audits of historical financial statements
Audits of internal control over financial reporting
Reviews of historical financial statements
Management consulting and other nonassurance services
We then cover Problem 1-16 in class to help students distinguish assurance,
attestation, and audit services.
1-2
Copyright © 2024 Pearson Education, Inc.
, Ask students to suggest other types of information on which users may desire
assurance and the most likely provider of the assurance. OH-1-3 can be used to list
their responses. To start the discussion, we often name one or two types of assurance
that aren’t provided by CPAs, such as gas pump inspections and Nielsen Audio
ratings. Ask students to suggest reasons why the demand for assurance is
increasing. Table 1-1 (page 10) is helpful for identifying other types of assurance
services that may be provided by CPAs.
(See OH-1-3)
(See Table 1-1; shown on Slides 1-23 through 1-26)
Problem 1-18 can be covered in class to give students a perspective on the
similarity between assurance services offered by CPAs and the role played by
organizations such as Consumer Reports.
Types of Audits and Auditors (page 11, page 13)
Most students at our universities know little about the types of auditors and
the nature of CPA firms. In a brief discussion, we highlight the following for the
students:
The nature of financial, operational, and compliance audits
The primary differences between independent CPAs, government auditors,
internal revenue agents, and internal auditors
OH-1-1 and Table 1-2 (page 11) can be used as part of this discussion. Problem
1-20 is a good one to use in class as part of a discussion about careers in
accounting. Problem 1-21 can also be used to help distinguish the types of audits,
and the auditor most likely to perform the audit.
(See OH-1-1)
(See Table 1-2; shown on Slides 1-29 and 1-30)
Certified Public Accountant (page 14)
We talk briefly about why some people want to be a CPA. We use Figure 1-3
(page 15) to review the requirements for becoming a CPA, and also discuss the exam
requirements and the format of the computerized exam.
(See Figure 1-3; shown on Slide 1-37)
We discuss the significant revision of the CPA exam and licensure process,
referred to as CPA Evolution. We use Figure 1-4 to discuss the new requirements
and format of the exam.
(See Figure 1-4; shown on Slide 1-39)
1-3
Copyright © 2024 Pearson Education, Inc.
, We then review the CPA Exam eligibility requirements in our state. We
encourage students to visit the CPA Examination portion of the AICPA website
(www.aicpa.org) to learn more about the exam and to review the link to Frequently
Asked Questions (FAQs) about the CPA Exam. We find students appreciate this
information and it saves us a lot of time in the office telling them the same thing
individually. Problem 1-25 requires students to research different requirements of the
CPA Exam.
1-4
Copyright © 2024 Pearson Education, Inc.
