What is attestation? Well, you can really think of assurance and attestation as concentric circles and if you were to do that attestation is the narrower circle. Assurance would be the broadest one, attestation next, more restrictive, and then even within that you have financial statement auditing, which is still more restrictive. So let's look at a book definition of an attest engagement. As an engagement, in which a CPA is engaged to issue an examination. Now, an audit is an examination. So, you can even think of it this way, is engaged to issue and audit review. Review is where you have limited assurance, or an agreed upon procedures report. Agreed upon receipt procedures report actually, you can vary the amount of assurance provided in that type of engagement. On subject matter, or an assertion about the subject matter, that is a responsibility of another party, the asserting party. In some sense the easy word to think about is the promiser, and the audit of a financial statements is a form of attestation. So let's look at the definition of auditing. Financial statement auditing is a specific form of attestation. And now we're going to bring in another organization for you. It's the American Accounting Association. The triple A. I'm not talking about the organization that will give you discounts to hotels if you were to join it or to give you good deals on auto-insurance. This is the American Accounting Association. It is the academic group of accountants. It has thousands of members and what we see here in this definition is that auditing is not a haphazard process, but is rather a systematic process of obtaining and evaluating evidence. Now, how do you obtain and evaluate evidence? It's objectively, obtaining and evaluating evidence. Regarding the assertions about economic actions and events, to ascertain the degree of correspondence between those assertions, as listed by management in a financial statement context, and established criteria. Established criteria here, in the financial statement auditing context are going to be what? Well, it's going to be either generally accepted accounting principles, often the case in the United States or IFRS, which is the international reporting standards. But you don't just stop there with your examination. You actually have to communicate what you find. So the whole process of auditing involves a planning process of systematically and objectively gathering evidence, coming to an opinion about the degree of correspondence between assertions and established criteria. Are these financial statements presented in conformity with generally accepted accounting principles? In all material respects? And then you communicate that to users. Now, as we will see the communication, in a later lesson, the communication auditors engage in, historically, has been relatively muted. It's been largely a binary opinion. Yes, no. Either we think there are no material misstatements in our opinion or we do think that there are some departures from gapping and here they are. So, what's the financial statement auditing definition by the United States auditing standard setters that has the power and the authority to govern auditing for all public companies? And here you see it. The objective of an audit of financial statements by the independent auditor is to express an opinion. It's actually to engage in that communication that we just talked about. Okay? You're ultimately trying to communicate an opinion. It's not just the performance of your examination. And your opinion speaks to the fairness with which the financial statements present, in all material respects, the financial position, results of operation, and its cashflows in conformity with GAAP. Now, what do you think financial position means? That's referring largely to the balance sheet, one of the main financial statements. What do you think results of operation means? Well that's really referring to the income statement, another one of the main financial statements. Finally, you have a statement of cashflows being alluded to. But of course, if you're familiar with financial statements you will know that they contain footnotes that can be much much longer and much more dense. Those certainly are incorporated in this opinion. The auditor's report is critically important. It is actually the medium through which the auditor tells the world about the outcome of his or her examination. Sometimes, these reports will, very rarely, include a disclaimer of an opinion. A disclaimer occurs when the auditor says, you know, try as we might, we just couldn't gather enough evidence to come to this positive basis to render an opinion. In either case, you do state whether you have made the audit in accordance with the standards of the PCAOB. A couple more things about a financial statement audit within the context of PCAOB audit standard 1001. And by the way, you might be asking yourself, well, if the PCAOB is the body that is responsible for standards for public companies in the United States, is there another body that has a responsibility for all those other hundreds of companies? They're far more private companies than public and that add is the AICPA. Well, these standards require stating whether in the auditor's opinion, the financial statements are presented in conformity with GAAP, and they also require identification of circumstances in which these principles have not been consistently applied in relation to the preceding period. That last paragraph on that slide, I mean, a company can change from one acceptable GAAP presentation. Let's think of inventory. You can change from a cost flow assumption of FIFO. You may remember first-in first-out. You can change from that to a different, also generally accepted method, let's say LIFO. L-I-F-O. Both of them are okay, but if a company does that, it is the auditor's responsibility to flag that for users, and that's a good thing because neither net income nor gross margin and really, not even of course ending inventory will be the same under these different cost flow assumptions. So who are the auditing standards setters? Well, as I've...I've mentioned all three of these. The PCAOB, the Public Company Accounting Oversight Board, the AICPA, and the IAASB. If you have the time, I really encourage you to go to the websites for each of these organizations. You know, by doing so, you can come to learn fairly quickly by looking at the front end, the early standards, the whole landscape of the different types of standards that are out there. You will also see that there's a lot of convergence across these standards. Nevertheless, if you are a public company auditor in the United States, one of the things that's interesting is that, even though the PCAOB is your primary regulator, they will tell you that if you think the standards that are located elsewhere are actually superior, you can't duck your responsibilities to use the best standards while you wait for the PCAOB public company audit standards to improve and get better. That's a very interesting thing. Now, I don't know how many auditors will actually take the PCAOB up on that, for major parts of the audit? But it is an interesting phenomenon because what it's telling you, at the end of the day, is that the most valuable thing that the auditor can bring to an engagement is his or her professional judgment. You have these standards. But these standards should not be viewed as cookbook recipes for doing your audit. You, using your professional judgment with your team of professionals, are going to have to use these to guide your judgment. These will provide you with minimum compliance hurdles, but they come no where close to telling you how to specifically run an audit. Every client that you have is a unique client. They have unique business risks. Unique misstatement risks within their financial statements. You've got to bring the expertise to these engagements. These standards are very helpful, but they are not sufficient in and of themselves.
