Audit 425 Midterm

Assurance aims to information, adds to the information (Independence is )

improve, reliability, Mandatory

Non Assurance does not aims to (Independence is mandatory)

improve, reliability, not

Attest

A report is required on assertions of a responsible party

Non Attest

no report on assertions of a responsible party is required

How do firms make money

Charging clients billable hours, make employees work total billable hours, paying emloyees high salaries. Having high # of employees means more profit for the owner

Non-audit service lines

Help audits improve audit qualities, help auditors in needs

Five (6) Management Assertions

1.) Existence and Occurrence 2.) Completeness 3.) Valuation and allocation 4.) Rights and obligation 5.) Cut off 6.) presentation and disclosure

Existence and Occurrence

That reported assets, liabilities and equity actually exist and reported transactions have actually occurred

Completeness

that the company reported everything in the FS that should have reported

Valuation, accuracy and allocation

That all the reported financial statement items are reported at the appropriate amounts with appropriate valuation and allocation adjustments

Rights and obligations

That the company actually has the right to benefit fully from the reported assets and is fully responsible for the reported liabilities

Cut off

That the company recorded the transactions underlying all of the reported financial statement items in the appropriate period

Presentation and Disclosure

That the company presented all of the amounts and disclosures in a way that is clearly described and appropriate

Material Misstatement

Information that deviates assurance from the truth that it would affect the decision of a reasonable investor or creditor using FS to make decisions

Best time to leave an accounting firm

After making senior audit or Manager

Limited Partners

could lose to the capital they hold in firm

Cliff LLP gets sued for $13 million in damages meanwhile the partner Cliff has $3 million in capital in the firm and Bar has $4 million in capital at the firm. Cliff and Bar also have $10 million in personal assets each.

How much can the lawsuit take?

7 million ($3 + $4 million in capital)

Audit staff and seniors are rewarded for

ability to get things done

Audit managers are rewarded for

soft skills for managing people and business

Audit partners are awarded for

leadership

Do LLP/LLC pay partner income taxes

NO, only pay taxes once when reported as income for partners

Double taxation

Corporations pay income taxes on that money and partnership would pay income taxes on the money left over

What does ICFR stand for

Internal Controls over Financial Reporting

ICFR

Prevent, detect, correct material misstatements in financial reporting

COSO

Control environment, risk assessment, Information and Communication, Control activities, Monitoring

Control environment

Tone at the top - Management sets the tone. Reflects integrity and ethical values of the organization

• Most important ICFR component

Risk Assessment

Mechanisms for organization to identify risks to financial reporting

• EXAMPLE: Company doesn’t have enough staff to implment standards

• A controller may increase employee training on the new standard

Information and Communication

Tools and resources that allow the organization to reliably capture and accurate accounting information

• Conssistent with management assertions

• Existence and Occurance

• Completletness

• Valuations

• Rights and obligations

• Cutoffs

• Presentations

Control Activities

More tangible control

• Systematic activities the organizations employees do to enssure the reliability of its financial reporting

• - Segregation of duties

• Custody

• Recording or Reporting

• Authorization and Approval

  • Combination of these two duties in receiving and recording customer checks all lapping checks and reflecting other recieved checks to those accounts to cover up

Monitoring

• Monitoring of the other four components of control

• Whether new controls need to be implemented, taken out or reinforced

Objective of ICR

Reliably asses financial information (absence of material misstatements)

Testing Designs and Implementation

Public and private copmpanies

Operating effectiveness

Required for all public companies but only some circumstances for audits of private companies

Audit Risk

Can be defined as the risk that auditors will say in their audit opinion that the financial statements are okay

Audit risk equation

Audit Risk = Inherent Risk x Control Risk x Auditors Risk

Inherent Risk x Control Risk

FS misstatement risk

Audit reports on ICFR

Unqualified, qualified, adverse

Unqualified

Clean report - No material misstatements

• Believe that ICFR operate effectively

Adverse

auditors believe that ICFR do not operate effectivly

disclaimer

auditors cannot issue an opinion due to major restriction in their ability to audit ICFR