10/7 Class Flashcards
reasons for planning
required by GAAS obtain sufficient evidence reduce costs avoid misunderstandings with client staff communication avoid lawsuits develop a map
audit risk
how willing the auditor is willing to accept the risk that the f/s are wrong
reduced by gathering evidence
we aren’t going to use quantities
it will be assessed as a low medium or high, no calculations yes
inherent risk
material mistatement without consideration of internal control
indicated by characteristics:
nature of industry
operating results sensitive to economic factors
going concern problems
large know & likely misstatements - prior audits
initial audit planning
accept or continue
understand need for audit
engagement terms
staff and specialists
client acceptance
continuing client assessment
new client investigation
client evaluation
conclusion of audit integrity of management disagreements business or industry risk profitable
obtaining a new engagement
pre-proposal investigation: major concerns proposal: experience of professionals fee range quality of firm resources
new client acceptance
reason for audit and/or change of auditor investigate history of firm officers management prior auditor - SAS 84 Reputation (objectivity and integrity) officers directors major shareholders
engagement letter
contract confirm understanding of engagement auditor's responsibility management's responsibility timing other services - tax fees
select staff
team partner manager senior staff experience continuity business and industry specialists planning meeting
understand the client’s business & industry
auditor must understand client's : industry business strategy and issues helps auditor assess inherent risk controls and processes explanations to analytic view
understanding the client’s business & industry
methods and sources: board minutes historical financial data prior work papers trade magazines and news AICPA Industry Guides Internet research company homepages tour of plant meet employees related parties
audit planning
read legal documents corporate charter & bylaws minutes contracts & agreements stock option plans compensation & pension plans
analytical procedures required
current period financials vs prior, industry, etc
required to plan the audit
understand internal controls
consideration of fraud
first year client
issues: they could have done something wrong
procedures: ….
audit planning memo
contents: description of company audit of objectives nature and extent of procedures timing, scheduling of audit work staffing requirements target dates of completion audit risks/issues - key audit areas of focus materiality assessments consideration of fraud
materiality
preliminary judgment about materiality, has to be in documentation
max misstatement allowed
plan evidence accumulation
professional judgement required
materiality tolerable misstatement
SAS 107 - allocated to specific account allocate planning materiality segments of the audit accounts to be tested adjust for risk plan specific procedures (sampling) consider effect to assets vs liabilities
materiality in testing
misstatements estimated / found projected error(sampling) actual error compare to planning materiality three options accept(misstatementplanning M) Dig ...further(misstatement>planning M)
audit risk model
determines the amount misstated key components planned detection risk(PDR) acceptable audit risk(AAR) inherent risk(IR) control risk(CR)
planned detection risk (PDR)
Accept audit risk (AAR)/(inherent risk(IR)*Control risk(CR))
Hi PDR less testing/evidence
Low PDR more testing/evidence
acceptable audit risk (AAR)
IRCRPDR
inherent risk
likelihood of material errors before internal controls things that tell about this are complex calculations difficult accounting issues significant judgment susceptibility to misappropriation
control risk
material misstatement not prevented or detected by internal controls
gain an understanding of IC
problems to do
9-34 and 9-35
obtain understanding of internal controls
required by GAAS
types of audit tests
risk assessment procedures test controls substantive tests of transactions analytic review tests of detail of balances
test of controls
procedures: inquiries inspection observation reperformance
substantive tests
look for monetary misstatements types: tests of transactions analytical procedures tests of detail balances
types of evidence pg 406
physical examination confirmation inspection observation inquiries of client reperformance/recalculation analytical review
