audit lesson 4

What is the sequence of steps in the audit process?

Step 1: sign the engagement letter; Step 2: understand the client and its business; Step 3: plan the audit work; Step 4: test operating effectiveness of controls; Step 5: perform substantive testing (interim); Step 6: perform substantive testing (final); Step 7: perform the concluding audit and procedures; Step 8: issue the audit report

What does signing the engagement letter represent?

Represents an agreement between the auditor and the client

What does the engagement letter address about timing?

When will the audit begin

What does the engagement letter address about procedures?

What procedures will the auditor follow

What background work is done in Step 1?

Do some background work on the client

What communication is done in Step 1?

Communicate with the management (impacts the decision to accept or reject the client)

What happens in Step 2 of the audit process?

Understand the client and its business

What control-related work is included in Step 2?

Testing design and implementation of controls

How can auditors gain an understanding of the client?

Look at the financial statements; google search; ask other providers

What happens in Step 3 of the audit process?

Plan the audit work

What happens in Step 4 of the audit process?

Test operating effectiveness of controls

What happens in Step 5 of the audit process?

Perform substantive testing (interim)

What happens in Step 6 of the audit process?

Perform substantive testing (final)

What do testing operating effectiveness of controls and substantive testing aim to reduce?

Detection risk

What are testing operating effectiveness of controls and substantive testing done to detect?

Material misstatements

What happens in Step 7 of the audit process?

Perform the concluding audit and procedures

What happens in Step 8 of the audit process?

Issue the audit report

What governing standards apply to private companies?

AICPA (GAAS: generally accepted accounting standards)

What internal control testing is not required for private companies?

Private companies don’t require the testing of operating effectiveness of Internal Controls over Financial Reporting

What governing standards apply to public companies?

PCAOB (GAAP: generally accept accounting principles)

What internal control testing is required for public companies?

Public companies require testing of operating effectiveness of Internal Controls over Financial Reporting

Why are audits of financial statements valuable for public companies?

Audits are required for public companies (SEC requires this)

Where does the value of audits come from?

The value of audits comes from the trust that users of financial statements have that the CPAs did their work well, and feel reasonably confident about these financial statements

How do audited financial statements help users?

Audited financial statements help reduce information for users