1.1 Introduction
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Explain the investors’ need for high-quality, reliable information.
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Explain the concept of information asymmetry, how it applies to the audit market, and how auditors assist in reducing the problems resulting from a “market for lemons.”
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Describe the role of auditors in the financial reporting process.
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Describe the various types of assurance services provided by CPAs.
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Describe the key elements in the definition of auditing.
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Describe the importance of high-quality audits and their indicators.
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Describe factors that impact the quality of the audit.
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Identify the largest public accounting firms in the United States.
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Describe the types of business organizations most commonly used by CPAs.
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Describe the organizational structure of audit firms.
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AU-C Section 200—Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards
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AS 1001—Responsibilities and Functions of the Independent Auditor
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ISA 200—Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing
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AT Section 101—Attest Engagements
According to a 2011 survey,1 publicly held companies paid their external auditors, on average, $3.9 million in fees to perform audits of their financial statements for the 2011 fiscal year. Data from reports filed with the SEC indicates that the world’s largest four accounting firms (the Big 4) earned more than $12 billion in audit fees—just from publicly held companies—for their audits of fiscal year 2011 financial statements.2 Why would these companies pay their auditors such large amounts of money each year? And what are the companies paying the auditors to do?
The short answer is two-fold: First, federal law requires these companies to have an annual audit of their financial statements. Second, because auditors improve the quality and credibility of these companies’ financial information, the companies are willing to pay substantial audit fees because the increased perception of credibility for their financial statements means that investors, lenders, and other interested parties are more likely to engage in transactions with the company. This topic discusses in greater depth what auditors do, our society’s need for auditors, and the roles they play in improving the quality of information.