Acc 372 Module 4

What are the two risks faced by an audit firm?

Audit and engagement risk

audit risk

risk of issuing wrong opinion when f/s are mm

engagement risk

risk of financial or reputational loss from association with client even when the audit opinion is correct

how to respond to audit risk

manage d/r to an acceptable level

how to respond to engagement risk

avoid association with management that lacks integrity
addressed via client acceptance and continuous decisions

What affects engagement risk?

bankruptcy, high-stakes litigation, regulatory oversight, healthcare and government programs

What is the importance of the Engagement letter?

contract between auditor and the client

Preliminary activities for Audit engagement planning; client acceptance and continuance

• Consider engagement risk

• Ensure ability to comply with independence rules (aicpa and pcaob)

• Establish understanding with client regarding engagement and responsibilities by document in engagement letter.

planning the scope of substantive procedures by doing NET, which stands for…

Nature, extent, timing

nature

procedure chosen

extent

amount of evidence

timing

when substantive tests are performed

when i/c are effective, c/r is…

low

when i/c are not effective, c/r is…

high

Why would an auditor update tests of controls?

i/c can change and employees can change. i/c that once was effective may become ineffective, as things change

purpose of test objectives and audit procedures

1..obtain evidence regarding i/c effectiveness (test of controls)
2..detect MM (substantive procedures)

test objectives: test of controls

test i/c effectiveness (planned reliance) (assess c/r)

test result from test of controls

i/c is or is not preventing or detecting and correcting misstatements

how does an auditor assess control risk when i/c is working?

low

how does an auditor assess control risk when i/c is not working?

high

test results: substantive procedures purpose

detect misstatements (basis for opinion) (manage d/r)

what are the test results from conducting substantive procedures?

1.. Factual misstatement

2.. Judgmental misstatement

3.. Fairly stated

factual misstatement

a misstatement exists and we know the dollar amount of the misstatement with certainty

judgmental misstatement

a misstatement possibly exists, difference in judgement between the auditor and the client.
Auditor believes their judgement is more reasonable

fairly stated

a misstatement reasonably unlikely to exist

Audit procedures used for tests

1.. inspection

2.. confirmation

3..recalculation

4..reperformance

5..observation

6.. analytical procedures

7.. inquiry

inspection

Examining records/documents or physical assets

confirmation

Obtaining direct written representations of specific information from independent 3rd parties

recalculation

Checking mathematical accuracy

reperformance

Executing procedures or controls performed by client

Observation

Watching a process/procedure being performed by the client

Analytical Procedures

Evaluating financial data via analysis of plausible relationships among financial and non-financial data

Inquiry

Obtaining written or verbal information from knowledgeable parties (client personnel or outside parties)

How does the source of evidence differ for inspections?

records and documents: source of evidence is the document.
physical asset: auditors own experience of seeing the asset

What is the key consideration when using confirmation?

auditor must control the process of evidence gathering
(ex: mail out and receive letters ensures third party evidence)

What are three key considerations for strong analytical procedures?

1.. Precise expectations
2.. Good quality data
3.. reasonable assumptions

Test objectives: test of controls procedures used

inspection, recalculation, reperformance, observation, and inquiry

audit procedures: substantive tests procedures used

all except observation
test of details: inspection, confirmation, recalculation, reperformance

Tests are performed at what level?

Account and assertion level

which procedures arent used to test controls and why?

confirmation: third party has no correlation or knowledge on clients i/c’s
analytical procedures: analysis does not let you know anything about policys and procedures, its mathematical based.

which of the following ultimately determines the types of auditing procedures necessary to provide a reasonable basis for an opinion?

auditor judgement

The client’s Treasurer signed the bank confirmations prepared by client personnel under the direction of the auditor. The Assistant Treasurer then mailed the confirmations. Which of the steps was inappropriate?

The Assistant Treasurer mailed the confirmations.

What is the purpose of Audit documentation: Written record of work?

Evidence that the audit was planned and performed i/c/w auditing standards

what is the KEY for Audit documentation: Written record of work?

Must contain sufficient information to enable an EXPERIENCED AUDITOR with NO EXPERIENCE ON THE ENGAGEMENT to REPLICATE the work.

Sufficient evidence

quantity based on risk of MM and quality of evidence

appropriate evidence

quality based on reliability and relevance

Sources of more reliable evidence for appropriate reliability

-Auditor’s direct personal knowledge by inspection and observation
-Knowledgeable independent 3rd parties like confirmations
-Documentary evidence like inspections

What impacts the reliability of evidence?

source, nature, and how it was obtained

what are examples of documents generated internally (by the client)

Bank recs, sales invoices, deposit slips

what affects reliability of documents generated by the client?

systems of i/c’s, effective ic gives higher quality evidence

Appropriate: Relevant evidence

-relevance depends on audit procedure design
-the procedure must directly address what we need evidence for: ownership, authorization, and direction of testing (os or us)

What is a direct test for ownership of an asset?

purchase documents (contract or invoice), title for vehicle

what is a direct test of the i/c of authorization

look for the signature or initials evidencing the authorization (management approval)

What are the appropriate direction of testing for overstatements?

too many items recorded
begins with whats recorded to go to evidence
(sales, revenue, assets)

What are the appropriate direction of testing for understatements?

too few items recorded
begins with evidence to go to whats recorded
(liabilities and expenses)

The appropriateness of evidence is least likely to be affected by the…

Sampling method used to obtain a sample of evidence

Financial statement assertions

-managements overall assertion that f/s are icw gaap
-assertions used to assess risk of MM, plan audit procedures, and evaluate evidence

Basic financial statement assertions (COVES)

existence and occurrence, rights and obligations, accuracy and valuation, completeness, and presentation and disclosures.

EXISTENCE & OCCURRENCE

Assets, liabilities, & equity EXIST, and transactions recorded OCCURRED.

RIGHTS & OBLIGATIONS

The entity has RIGHTS to assets & liabilities are the entity’s OBLIGATIONS.

ACCURACY, VALUATION

Assets, liabilities, equity, and transactions are included at proper amounts (ACCURACY) and subsequent VALUATION adjustments are appropriately recorded.

COMPLETENESS

All assets, liabilities, equity, and transactions that should have been recorded have been recorded

PRESENTATION & DISCLOSURE

The components of the F/S are properly classified, described, and disclosed.