Auditing and Assurance Services Chapter 1

What are the phases of the audit process?

Phase I - plan and design an audit approach, Phase II - perform tests of controls and substantive tests of transactions, Phase III - perform analytical procedures and tests of details of balances; Phase IV - complete the audit and issue an audit report

What are the steps of phase I of the audit process?

accept client and perform initial planning; understand the client's business and industry; assess client business risk; perform preliminary analytical procedures; set materiality and assess acceptable audit risk and inherent risk; understand internal control and assess control risk; gather information to assess fraud risks; develop overall audit plan and audit program

What are the steps of phase II of the audit process?

If you plan to reduce assessed level of control risk then perform tests of controls, otherwise perform substantive tests of transactions; assess likelihood of misstatements in financial statements

What are the steps of phase III of the audit process?

low, medium, high or unknown; perform analytical procedures; perform tests of key items; perform additional tests of details of balances

What are the steps of phase IV of the audit process?

perform additional tests for presentation and disclosure; accumulate final evidence; evaluate results; issue audit report; communicate with audit committee and management

auditing

Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria.

What are some examples of "established criterias"?

GAAP; IFRS; Internal Control - Integrated Framework as issued by COSO (Committee of Sponsoring Organization of the Treadway Commission); the Internal Revenue Code for the IRS

Accounting

Accounting is the recording, classifying, and summarizing economic events in a logical manner for the purpose of providing financial information for decision making.

What factors influence interest rate?

risk-free interest rate (what a bank could earn by investing in risk-free U.S. treasury notes); business risk for the customer (a companies economic or business conditions that determine whether it can repay the loan); information risk (the possibility that information given to the bank such as financial statements were inaccurate)

What interest rate factors are affected by auditing?

Information risk

How does a small company deal with information risk compared to a larger company?

A small company may find it less expensive to pay higher interest costs than to increase the costs of reducing information risk, while a larger company will incur costs to reduce information risk.

How can companies reduce information risk?

The best way is by using audited financial statements, impractical methods would include users sharing information risk with management or users verifying the information.

What are the causes of information risk?

remoteness of information; biases and motives of the provider; voluminous data; complex exchange transactions

What kind of attestation service are audited financial statements?

Audit of historical financial statements

What are the five attestation service categories?

audit of historical financial statements; audit of internal control over financial reporting; review of historical financial statements; attestation services on information technology; other attestation services that may be applied to a broad range of subject matter

What are two examples of attestation services on information technology?

WebTrust and SysTrust

The organization ___ must provide an __ the CPA can __.

being audited; assertion before; provide the attestation

example/information/established criteria/available evidence - operational audit

evaluate whether the computerized payroll processing for a Chinese subsidiary is operating efficiently and effectively/ number of payroll records processed in a month, costs of the department, and number of errors made/ company standards for efficiency and effectiveness in payroll department/ error reports, payroll records, and payroll processing costs

example/information/established criteria/available evidence - compliance audit

determine whether bank requirements for loan continuation have been met/ company records/ loan agreement provisions/ financial statements and calculations by the auditor

example/information/established criteria/available evidence - financial statement audit

annual audit of Boeing's financial statements/ Boeing's financial statements/ GAAP/ documents, records, and outside sources of evidence

What are the three primary types of audits performed by CPAs?

operational audit, compliance audit, financial statement audit

operational audit

An operational audit evaluates the efficiency and effectiveness of any part of an organization's operating procedures and methods.

compliance audit

A compliance audit is conducted to determine whether the auditee is following specific procedures, rules, or regulations set by some higher authority.

Results of compliance audits are __

generally reported to management, rather than outside users, because management is the primary group concerned.

financial statement audit

A financial statement audit is conducted to determine whether financial statements (the information being verified) are stated in accordance with specified criteria, usually GAAP or IFRS.

What are the most common types of auditors?

Certified public accounting firms, government accountability office auditors, internal revenue agents, and internal auditors

GAO

An auditor working for the U.S. Government Accountability Office which reports to and is responsible solely to Congress.