Audit Midterm

Advanced Auditing & Audit Research

AICPA (Auditing Standards Board)

Sets the standards for nonpublic companies in the US

PCAOB (Public Company Accounting Oversight Board)

Sets the stanadrds for public companies in the US

Purpose of an Audit

Provide an opinion that financial statements are in accordance with the applicable financial reporting framework

Auditor Responsibility

1. Obtain reasonable assurance about whether financial statements are free from material error or fraud

2. Maintain Independence

3. Cannot provide absolute assurance

Sarbanes-Oxley Act of 2002

Enacted by Congress after the first announcement of Enron problems. Created the PCAOB and revises corporate governance standards.

Nathan Johnson - Case 3.2

Rental car case where he company agreed to reimburse $75 he was overcharged but he got the money back. So should he keep the money or tell his company?

Main audit issue: expense reimbursement and ingegrity

Brent Dorsey - Case 3.1

He is only given a budget of 35 hours for his audit but he is expected to go over. He is receiving pressure from his family and boss so how should he go about the budget.

Main audit issue: ethical decision making

Management responsibility

Prepares financial statements and maintains internal controls

Audit Committee Responsibility

Oversees financial reporting, the external auditor, and the company’s financial reporting costs

External Auditor Responsibility

Independently audits financial statements and express an opinion

SEC Responsibility

Regulates public companies and securities markets and oversees public company records

AICPA Code of Professional Conduct

1. Responsibilities

2. The public interest

3. Ingegrity

4. Objectivity and Independence

5. Due Care

6. Scope and Nature of services

Ethical Decision-Making Process

1. Identify Threats

2. Evaluate the Threats

3. Apply safeguards

4. Decline or end the activity

Self-Interest

Personal financial or other interests influence judgment

Self-Review

Auditor evaluates their own previous work

Advocacy

Auditor promotes a client’s position

Familiarity

Close relationships weaken objectivity

Under Influence

Pressure interferes with judgement

Management Participation

Auditor takes on management’s responsibilities

Auditor Independence

Restricts certain nonaudit services and strengthens independence requirements

Ocean Manufacturing Case

Main audit issue: client acceptance and planning

Cedar Hill Assurance Case

Main audit issue: firm acceptance, competence, and resources

materiality

The significance of a misstatement to users of the financial statements. Does something reasonably influence the decision of financial statement users, considering its size, nature, or circumstances.

Performance Materiality

Set below overall financial statement materialtiy to reduce the risk that the total of undetected and uncorrected misstatements exceeds overall materiality.

AR = IR X CR X DR

Audit Risk Model

Audit Risk

Risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated

Inherent Risk

Susceptibility to misstatement before considering related controls

Control Risk

Risk that internal controls fail to prevent, detect, or correct a misstatement on a timely basis

Detection Risk

Risk that audit procedures fail to detect an existing material misstatement

Anne Aylor Case 7.1

Main audit issue: materiality and audit risk

Existence

Recorded assets or transactions exist

Completeness

Everything that should be recorded is recorded

Accuracy

Amounts and other data are recorded correctly

Valuation/ Allocation

Amounts are recorded at appropriate values

Rights and Obligations

The company own assets or owes liabilities

Cutoff

Transactions are recorded in the correct period

Classification

Items are recorded in the appropriate accounts

Presentation and Disclosure

Items are properly presented and disclosed

Segregation of Duties

The employee who receives cash should not also be responsible for recording receipts and reconciling the bank account. Separating these duties makes concealment more difficult

Fraud Triangle

Pressure, Opportunity, Rationalization

Fraudulent Financial Reporting

Intentionally misstating financial information, such as overstating revenue or inventory

Misappropriation of assets

Stealing or improperly using company assets, such as cash or inventory

Asher Farms Case

Main audit issue: risk assessment and internal controls

FTX/ Coinbase Case

Main audit issue: business, governance, and fraud risks

Satyam Computer Services Case

Main audit issue: Fraudulent cash confirmations

Bank Confirmations

An external request for information sent to a bank to verify information such as account balances, loans, or other banking relationships.

Cash Kiting

Exploiting timing differences between bank accounts to make cash appear higher than it actually is at a reporting date

Wally’s Billboard and Sign Supply Case

Main audit issue: cash reconciliation and kiting

Proof of Cash

A more extensive reconciliation that examines beginning balances, cash receipts, cash disbursements, and ending balances over a period

Confirming Accounts Receivable

AS 2310 addresses confirmation procedures, including the auditor's use of confirmations to obtain relevant evidence from external parties.

Bud’s Big Blue Manufacturing Case

Main audit issue: Accounts receivable

DHB industries Case

Main audit issue: Inventory Manipulation

Of hurricanes and harness racing case

Main audit issue: Assigned case-specific audit risks

Sheet to Floor Testing

Select items from the inventory listing and locate them physically. This tests whether recorded inventory exists.

Floor to Sheet Testing

Select items physically present and trace them to the inventory listing. This tests whether inventory on hand is recorded.

The Madoff Debalce Case

Main audit issue: Ponzi scheme and unreliable evidence

Waste Management and Arthur Andersen Case

Main audit issue: Manipulated accounting estimates