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Chapter 4: Responsibilities in the FS Audit
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Financial Reporting Ecosystem
Ecosystem includes management, board members, auditors, regulators, professional accounting bodies, standard setters, and FS
Purpose: to serve public interest with complete, accurate, and transparent corporate financial disclosures
Professional Judgement
Professional Judgement: application of relevant knowledge and experience, within the context provided by auditing and accounting standards, to make informed decisions about action in circumstances
Framework for Auditor’s Professional Judgement
identify and define issues
gather facts and info
perform analysis and evaluate alternatives
conclusions
review and complete documentation
Professional Skepticism
Auditor’s ability to obtain and critically analyze information from client and 3rd parties
Qualities of Professional Skepticism
question mind: inquire w doubt
suspension of judgement: don’t jump to conclusions
search for knowledge: investigate beyond obvious
interpersonal understanding: aware of bias
autonomy: not influenced
self-esteem: confidence to resist persuasion
Bias and Judgement Traps
confirmation bias
overconfidence bias
availability
anchoring
automation
groupthink
confirm our availability and ask group
Confirmation Bias
Auditor puts more weight on information that is consistent with their initial beliefs of preferences
auditor won’t adequately consider contradictory evidence
Overconfidence bias
auditor overestimates ability to perform tasks or make accurate risk assessments
does not challenge opinions, experts, and underlying assumptions
Availability
Auditors estimate / fcst likelihood of event based on how easily they can recall an instance of that event
Anchoring
Auditor is anchored by initial number (esp when management provides them with preliminary figures and supporting docs) - does not adjust when forming a final judgement
Automation
favours output generated from automated systems even when human reasoning or contradictory info raises questions of reliability
Groupthink
bias to think or make decisions as a group
discourages creativity or individual responsibility
FS Cycles
divide FS into segments to make audit more manageable
revenue w receivables cycle
acquisition and pmt cycle
HR and payroll cycle
inventory and distribution cycle
capital acquisition and repayment cycle
Assertions
claims that management make about accuracy and fairness of FS
ex. company reports 100K in AR - management is asserting that customers acc owe that money (existence), amount is accurate, company has the right to receive it
implied or expressed representations by mngmt about recognition, measurement, presentation, and disclosure of items included in FS and notes
Categories and types of audit assertions
assertions about classes of transaction and events - for period under audit
occurrence, completeness, accuracy, cutoff, classification, presentation
assertions about account balances - at period end
existence, completeness, accuracy, valuation and allocation, classification, right and obligations, presentation
Categories of Assertions
Assertions about classes of transactions and events
Occurrence
Completeness
Accuracy
Cutoff
Classification
Presentation
Assertions about account balances and related disclosures
Existence
Completeness
Accuracy, valuation, and allocation
Classification
Rights and obligations
Presentation
Occurrence
Do the recorded transactions exist?
refers to the transaction itself - did it actually happen
non-fictitious customers
Completeness
Have all transaction been included and recorded?
nothing is left out
Accuracy
Were transaction recorded correctly?
no calculation errors
Cut-off
Were the transactions and amounts recorded on the correct dates?
Classification
Are the transactions included in the client’s journal properly classified
Presentation
Are classes of transactions and related disclosure requirements clearly presented in the FS
revenue recognition principle
Existence
Do all amounts included exist?
refers to if inventory items physically exist
Rights (ownership) and obligations
Are the assets owned?
do the liabilities belong to the entity?
Completeness
Are all inventory amounts recorded?
nothing missing?
everything in transit, stored + in outside location
Accuracy, Valuation, and allocation
are account balances recorded correctly?
are assets recorded at the amounts estimates to be realized?
are all amounts appropriate?
was inventory written down where necessary
is it recorded at cost
Classification
management asserts that assets liabilities and and equity are appropriately classified in FS
inventory is properly classified as current asset
Presentation
assertion to address whether everything is appropriately aggregated and clearly described and understandable
is inventory held for sale
is it disclosed as collateral
The Audit Process
Client Acceptance and Continuance: engagement acceptance risk, independence threat analysis, competence, engagement letter
Audit Planning: understanding entity and its environment, materiality
Assess Risk of Material Misstatement: identify and assess RMM at FSS level and at the account and assertion level
Develop Risk Response: determine audit strat for each cycle, finalize plan and develop audit programs
Perform Risk Responses: gather audit evidence, sampling decisions, perform tests of control
Conclusion: Complete final evidence gathering
Reporting: determine type of audit option , issue audit report
Client accept, plan audit, assess RMM, risk mitigation plan, perform risk mitigation plan, conclude, report