ACC 451 exam 1 BSU

5 auditing concepts

Professional Judgement

Reasonable Assurance

Audit Risk

Materiality

Documentation

Why is there a demand for audits? (5)

1- Principal agent problem - Mgr and SH have different goals often times

2- Information Asymmetry - Mgr usually has more info on the true financial position of the company

3- Conflict of interest - mgrs and SH do not act in the same manners

4- information risk - possibility of false info circulating

5- ensure information is reliable, credible, and relevant

Assurance services

IMPROVING QUALITY OF INFO

RELIABILITY, RELEVANCE, TIMELINESS, INDEPENDENT

Independent professional service with the goal of improving the quality of info so that decision makers can make more informed decisions.

Improves reliability of info, context is more relevant and timely, independent

Attestation

EXPRESS CONCLUSION ON A WRITTEN STATEMENT

A service in which an independent professional expresses a conclusion about the reliability of a written statement that is the responsibility of someone else.

Assertion = claim

Auditing

EXPRESS CONCLUSION ON RELIABILITY ON DOCUMENTS OF ANOTHER PERSON

A service in which an independent professional expresses a conclusion about the reliability of assertions about economic actions/events that are the responsibility of someone else

Phase of the audit (7)

1- client acceptance

2-Preliminary engagement activity

3- plan the audit

4- consider and audit IC

5- Audit business processes and related accounts

6- complete audit

7- evaluate and issue audit report

Types of Audit, attest, and assurance services (5)

1. F/S Audit -

2. IC audit - attest

3. compliance audit - attest

4. operational audit - assurance

5. Forensic service - assurance

Types of auditors

external,

internal,

governmental,

Forensic

external auditor

Independent CPA, governed by PCAOB and AICPA

Internal auditor

Employed by company, governed by Institute of internal audit (IIA)

Forensic Auditor

Employed by nearly everyone, governed by association of certified fraud examiner

Organizations that affect the auditing profession

SEC - Oversee GAAP and GAAS

FASB - standards for financial accounting/reporting

PCAOB - inspecting public company audits

AICPA - Standards that guide auditors

International auditing and assurance standards board

International accounting standard board

Auditing standards

General

Field work'

Reporting

General standards (3)

relate to auditors qualifications and quality of work

1. adequate training and proficiency

2. independence

3. auditor uses due care (professional skepticism and performs with skill and care)

Standard of field work (3)

relate to CONDUCT OF AUDIT

1. appropriate planning and supervision

2. gains sufficient understanding of entity's IC to plan the nature, extent, and timing

3. Obtain sufficient, appropriate evidence to make an opinion

Standards of reporting (4)

what is INCLUDED IN AUDIT OPINION/REPORT

1. State that F/S are in accordance with GAAP

2. Identify when F/S are inconsistent

3. assess adequacy of F/S (footnotes)

4. (a)express either an opinion on F/S or if an opinion cannot be expressed, give reasons why.

(b) indicate character of auditors work and

(c) indicate degree of responsibility that the auditor takes

Chapter 3 - Planning the Audit

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1. Client acceptance

auditor makes inquires of

1. Integrity of management

2. Disagreements (Accounting policies, auditing procedures)

3. Communicate with mgt about fraud and noncompliance w/ laws and regulations

4. communicate w/ those with governance on IC and material weaknesses

5. Reason for the change in auditor

Preliminary Engagement

Determines the engagement team req.

1. Audit engagement team requirements

2. ensure independence

3. establish understanding with client

audit engagement team req.

1. Trained and proficient

2. Determine engagement size and complexity of personnel

3. Is a specialist needed?

Objective of engagement

express opinion on F/S and IC

MGT responsibility

provide accurate F/S and maintain IC

Auditor responsibility

perform audit in accordance with GAAS

limitations on engagement

only perform procedures to provide reasonable assurance, material misstatements may not be detected

Audit Committee Role

subcommittee of the board of directors that is responsible for the financial reporting disclosure process.

Planning the Audit

1. Assess Business Risk

2. Establish Materiality

3. Assess the possibility of illegal acts

4. Identify related parties

5. Create audit plan

in order to minimize audit risk, auditors should...

focus procedures on areas w/ highest risk of material misstatement

Materiality

magnitude of an omission or misstatement of accounting info that makes it probable that the judgement of a reasonable person relying on that info would be changed by that omission/misstatement.

Planning Materiality (PM)

Maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decision of the users.

Factors of PM

1. Size of company (complexity)

2. Qualitative factors

Tolerable Misstatement (TM)

Amount of Planned materiality (PM) allocated to an account

TM does

1. Establishes scope of audit procedures ( which accounts to audit)

2. Develop expectations to use during analytics

3. Qualitative factors are considered.

Direct and Material

Tax laws

Indirect and Material

Violation of security act, enviornmental protection, equal employment regulations, antitrust laws

Types of Audit Tests:

1. Risk assessment procudures

2. Test of controls (TOCs)

3. Substantive procedures

4.Dual purpose tests

Risk Assessment procedures

understanding of entity and its enviornment (IC)

TOC

Audit procedures perfomed to test operating effectiveness of IC in preventing, detecting, correcting material misstatements

REQUIRED

Substantive procedure

Test of details (Transactions, account balances and disclosures.)

analytical procedures (evaluate info on financial and non-financial info.)

Dual Purpose Test

Procedures that conduct both test of controls and substantive tests simultaneously.

Chapter 4

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ERROR

Unintentional misstatement or disclosure

Fraud

Intentional act by 1 or more parties associated with the company involving the use of deception to attain an unjust or illegal advantage.

1. Fraudulent financial reporting

2. Misappropriations of assets - stealing assets or money

Fraud Triangle

motivation / incentives

opportunity

Rationalization

Audit Risk

risk that an auditor expresses an inappropriate audit opinion when the F/S are materially misstated.

Audit risk model

AR = IR CR DR

Audit risk

Inherent risk

Control risk

Detection risk

(IR * CR = RMM risk of material misttatement)

Inherent risk (IR)

Susceptibility of an account to a misstatement that could be material

Control Risk (CR)

Internal control risk that a misstatement will not be prevented or detected and collected on a timely basis by internal controls

Detection risk (DR)

risk that the procedures performed by the auditor will not detect misstatement that exists and that could be material.

1. inquire of management, internal auditors, board of directors, employees

2. Analytical procedures

Risk assessment process

Begin identifying business risks through obtaining an understanding of:

1. Nature of the entity - Large acquisitions, new lines, restructuring

2. industry and regulatory environment - Unique accounting estimates, complex regulations

3. Objectives and strategies - New product / services

4. Entity performance measures - incentives/pressures

misappropriation of assets

theft which causes the f/s to be misstated

analytical procedures

evaluation of financial information made through analysis of plausible relationships among both financial and non financial data

Chapter 5

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management assertion categories

1. assertions about the classes of transactions

2. Assertions about account balances

3. assertions about presentation and disclosure

Occurrence / existence

relates to whether all recorded transactions / events have occurred or whether the ending balance of assets, liabilities, and equity interests actually exists

Occurs typically with OVERSTATEMENTS

Completeness

Relates to whether all transactions events that did occur were included in the financial statements and whether all assets all liabilities, and equity have been included in the financial statements

Applies with UNDERSTATEMENTS

Rights and obligations

relates to whether entity hold/controls the rights to assets and owes the obligations of liabilities

Authorization

relates to whether all transactions have been properly authorized

Accuracy / Valuation and allocation

Relates to whether amounts and other data have been recorded appropriately and whether accounts are included in F/S at appropriate amounts and values

Cutoff

relates to whether transactions have been recorded in the correct accounting period

Classification and understandability

relates to whether the account has been properly presented on the F/S and all necessary disclosures have been made.

Audit evidence

Information used by the auditor in arriving at the conclusions in which audit opinion is based

Sufficiency

Quantity of evidence

Appropriateness

quality of evidence

relevant

needs to be related to the assertion being tested

reliable

refers to whether a particular type of evidence can be relied upon to signal the true of an assertions

3 types of audit procedures

1. Risk assessment procedures

2. Test of controls

3. Substantive test

Inspection of records / documents

examining internal and external records

Inspetion of tangible assets

physical examination of assets

highly reliable

Observation

looking at process / procedures

Used for test of controls

Inquiry

seeking info of knowledgeable persons within the entity

External confirmations

direct written response to the auditor from a third party

Highly reliable

Recalculation

Checking mathematical accuracy of documents/records

Re Performance

Independent execution by the auditor of procedures or controls that were originally performed by company personnel

Analytical procedure

evaluations of financial info through analysis of plausible relationships among both financial and non financial data

Reliability depends on:

1. reliability of data used in calculation

2. plausibility and predictability of the relationship being tested

3. precision of the expectation and the rigor of the investigation

Scanning

review of accounting data to identify significant or unusual items

Audit test hierarchy

1. TOC

2. Substantive analytical procedures

3. substantive test of detail on transactions and account balances

Audit documentation

record of audit procedures relevant audit conclusion and conclusion reached by auditor

Occurrence / existence

From the sheet or financial data to the source

Completeness

Going from the source documents and checking their location on the financial documents