Audit 2 Flashcards
SAS 84
successive auditor must attempt to communicate with prior auditor before accepting the engagement.
- must ask client first before communicating
- must primarily focus on assessing the integrity of the client’s management
Preliminary engagement activities
1) Determine the audit engagement team requirements
2) Ensuring compliance with all relevant ethical and independence requirements
3) Establishing an understanding with the client
establishing an understanding with the client means to draw up an….
engagement letter
facts about the engagement letter
it is a contract
Signed/dated by auditor and client* (audit committee*)
internal audit communications
sox encourages communication with IA
-Emphasis is decision making
-Improving the quality (relevance and reliability) of information or its context (usefulness)
-A level of independence is necessary (e.g. objectivity)
reliance on IA should be outlined in the audit plan
audit committee definition
A subcommittee of the board of directors that is responsible for the
-financial reporting and
-disclosure process
(communicating with the financial reporting/accounting group, internal auditors, external auditors and management)
sec 301 sox audit committee requirements
- Members must be on the board of directors and must be independent
- Directly responsible for overseeing work of any registered public accounting firm employed by the company
- Must preapprove all audit and nonaudit services
- Must establish procedures to follow for complaints
- Must have the authority to engage independent counsel
audit planning steps
1- Assess business risks (more in Chapter 4)
2- Establish materiality
3- Identify multilocation needs
4- Assess the need for specialists
5- Assess the possibility of illegal acts
6- Identify related parties
7- Consider additional value-added services
documenting the audit plan includes…
assessing the risk at all levels focusing on:
nature
timing
extent
supervision means to …
inform
direct
review
types of audit tests
risk assessment procedures
test of controls
substantive procedures
tests of controls
inquiry inspection observation reperformance walkthrough
substantive procedures
tests of details
analytical procedures
dual purpose test
test of controls
substantive tests of transactions
materiality determination requires
professional judgement
steps of applying materiality
1-determine level for the overall financial statements (planning)
2-determine tolerable misstatement (individual account allocation)
3- evaluate audit findings near the end of the audit
Planning materiality requires/uses
quantitative data that may be influenced by qualitative information
why is tolerable misstatement generally greater than planning materiality ?
- Not all accounts will be misstated by their full tolerable misstatement allocation.
- Audits of individual accounts are conducted simultaneously.
- When errors are identified, additional testing is typically performed in that account and related accounts.
- Overall materiality serves as a “safety net.”
if the aggregate misstatement is less than planning materiality, then the auditor may conclude that…
the FS are fairly represented.
audit risk=
risk of material mistatement*detection risk
RofMM=inherant risk*control risk
inherent risk definition
Risk of a material misstatement occurring in an assertion assuming no related internal controls (auditors assess by performing risk assessment procedures).
control risk definition
Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the company’s internal control (auditors assess by performing control tests).
detection risk definition
Risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist (auditors restrict by performing substantive tests).
factors that effect inherent risk
Nature of the client and its environment
Nature of the particular financial statement element
characteristics indicative of high control risk
No internal audit function
Inconsistent profitability or operating cash flows
Top management is cynical towards controls (“tone at the top”)
Previous control failures detected
Substantial turnover, questionable reputation, inadequate staffing, or management team lacks requisite accounting skills
limitations of the audit risk model
-The desired level of audit risk may not actually be achieved.
-It does not consider potential auditor error.
-There is no way of knowing what the preliminary level of risk actually was.
Note: Qualitative measures may be used instead
areas of risk
nature of the entity external factors objectives and strategies entity performance measures internal control
likely mistatement categories
- difference in judgment of estimates
- “likely to exist” mistatement based on projections from sample size
fraud risk triangle
pressure
opportunity
rationalization
management assertions about the FS
Completeness
Existence / Occurrence
Accuracy (Numerical / Classification / Cutoff or Timing)
Valuation / Allocation
Obligations / Rights / Authorization
Presentation
completeness
All transactions that should have been recorded, have been recorded
Existance/occurance
Transactions and events that have been recorded, have occurred and pertain to the entity
accuracy
Amounts and other data relating to recorded transactions and events have been recorded appropriately
valuation
Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded
obligations
The entity holds or controls the rights to assets, and liabilities are the obligations of the entity
presentation
Financial information is appropriately presented and described, and all disclosures are clearly expressed.
