Audit 3 Flashcards
During Planning the auditor is required to
S-trategy must be developed for the audit
P-lan for the audit must be developed
O
R-isk assessment procedures must be performed to obtain understanding of the entity which includes IC
K-nowledge of the client’s business and industry must be obtained
The Nature, Extent and Timing(NET) of the supervision depends on
Q-ualifications of the assistants
-
S-ize of the entity
C-omplexity of the entity
A-ssessed risks of material misstatement
N-ature of the work assignedCycle test 3 categories
T-ransactions
B-alances of accounts
D-isclosures
Types of Cycles
P-ayroll I-nventory P-P&E E-xpenditure R-evenue
F-inancing
&
I-nvestments
Required Contents of Engagement letter
S-cope of the audit
O-bjective
R-esponsibilities of the auditor/management
T-iming of audit procedures
F-orm and content of report
A-statement that because of the inherent limitations of an audit
T-iming of audit procedures
S-ervices additional to be rendered
L-iability restrictions if applicable
O-ther auditors
B-illing
S-ubsequent events must be informed to auditor
P-redecessor auditor
F-ramework: Identify applicable financial reporting framework
FOR THE SUN PROTECTION OF YOKOZUNA
Assessing risk of material misstatement
I-nternal control, and environment-obtain an understanding
M-aterial misstatement-assess the risk(ID types of potential misstatements)
A-ssessed level of risk response(NET)
C-ontrol testing
P-erform substantive testing
A-udit Evidence-evaluate appropriateness and sufficiency
F/S risks
C-ontrol environment
L-ack of qualified personnel in financial reporting roles
A-pplication and selection of significant accounting policies
P-reparing process the F/S
Required Documentation of an audit
Key elements- of the understanding of the entity and its environment
A-ssessment of the risks of material misstatements
M-ore extensive tests/documentation for more complex entities
I-dentified risks and related controls evaluated by the auditor
D-iscussion among the audit team members
Documentation may include any item the auditor can FIND
F-lowchart
I-nternal Control Questionnaire or Checklists
N-arrative
D-ocumentation
The 6 main F/S assertions(Assertions made by management)
C-ompleteness O-ff(Cut-Off) V-aluation, allocation, and accuracy E-xistance and occurance R-ights and obligations U-nderstandability and classification
PCAOB standards state that the F/S assertions are
C-ompletness
E-xistence
O-ccurance
A-llocation P-resentation R-ights O-bligations V-aluation E-bought a letter D-isclosure
AR=
[Risk of Material Misstatement (Inherent Risk X Detection Risk)(Client’s system)] X Detection Risk
Fraud types
Fraudulent Financial reporting
Misappropriation of assets
Fraud risk Factors
R-ationalization
I-ncentives/pressure
O-pportunity
Identifying Risks
S-ignificance of the risk
L-ikelihood of the risk
E
P-ervasiveness of the risk(Transactions as a whole or individual accounts)
T-ype of risk(does it involve FFR or MA)There is a presumption that the following 2 types of risk exist in every audit
Improper revenue recognition
Management override of controls
The auditor is required to respond to the results of the fraud risk assessment on 3 levels
O-verall, General response
R-esponse encompassing Specific Audit procedures
R-esponse Addressing risks Related to Management Override
CPA must communicate with/to:
C-ircumstances (special)
L-egal: To comply with certain legal and regulatory requirements
O
G-overnmental: To agencies involving governmental assistance
S-uccessor auditors(with permission from client)
S-ubpoena: In response to subpoena
Entities’ objectives may be divided into 3 categories
R-eliability of financial reporting-F/S fraud
E-ffectiveness and efficiency of operations-Asset Misappropriation
C-ompliance with applicable laws and regulations-Corruption
5 Components of internal control(COSO framework)
C-ontrol environment R-isk Assessment I-nformation and Communication Systems M-onitoring E-xisting Control Activities
Control Activities in a strong system of internal control
P-renumbering documents
A-uthorization of transactions
I-ndependent checks to maintain asset accountability
D-ocumentation
T-imely and appropriate performance reviews
I-nformation processing controls
P-hysical controls for safeguarding assets
S-egregation of duties
Documentation may include any item the auditor can FIND
F-lowchart
I-nternal Control Questionnaire or Checklists
N-arrative
D-ocumentation
5 areas of IT that need to be separated(segregation of duties)
C-ontrol group O-perators P-rogrammers A-nalyst(system) L-ibrarian
2 types of service auditor’s reports
Type1- report on design & implementation of service organization’s controls(NO ASSURANCE)(does not reduce control risk)
Type 2- Report on the Design, implementation, and Operating Effectiveness of a service organization’s controls
Levels of responses
O-verall response to address F/S level risks
A-ssertion Response: at the relevant assertion level
S-ignificant risk: Response to significant risks
Hierarchy of audit evidence
A-uditor’s direct knowledge and observation E-xternal Evidence I-nternal Evidence O-ral Evidence U-know the vowels for audit evidence
Types of Substantive tests
$ balances D-isclosure amounts R-atios A-nalytical procedures T-ransaction totals
The results of further audit procedures may lead the auditor to
Reassess the risks of material misstatements
Identify control activities
Identify misstatements as a result of substantive procedures
Documentation requirements should contain
R-esponse overall N-ET L-inkage of those audit procedures R-esults of audit procedures C-onclusions reached
