Audit General Flashcards
Information risk
Risk that financial information presented to stakeholders is not reliable . Audit must reduce this risk to an acceptable level
Threats to independence
- Self interest : financial interest
- Self review
- Advocacy
- Familiarity
- Intimidation
Rules of professional conduct
Objectivity integrity and due care Professional competence Confidentially Professional behaviour
Materiality is used when
- planning - where to focus procedures
- Execution - used to evaluate errors and determine extent of additional procedures
- Reporting - Evaluate aggregate errors. If client wont fix opinion will be affected
Unqualified opinion
Often called a clean opinion, an unqualified opinion is an audit report that is issued when an auditor determines that each of the financial records provided by the small business is free of any misrepresentations. In addition, an unqualified opinion indicates that the financial records have been maintained in accordance with the standards known as Generally Accepted Accounting Principles (GAAP). This is the best type of report a business can receive
Qualified opinion
In situations when a company’s financial records have not been maintained in accordance with GAAP but no misrepresentations are identified, an auditor will issue a qualified opinion.
Adverse opinion
he worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm’s financial records do not conform to GAAP. In addition, the financial records provided by the business have been grossly misrepresented. Although this may occur by error, it is often an indication of fraud. When this type of report is issued, a company must correct its financial statement and have it re-audited, as investors, lenders and other requesting parties will generally not accept it.
Disclaimer of opinion
On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm’s financial status could not be determined.
Base for materiality
Usually Normalized income before taxes
others: total assets total revenues total expenses total equity
Threshold for materiality
Usually 3-7% of normalized net income
1-3% of revenues/ expenses/ assets
3-5% of equity
If sensitive users use lower range
Materiality is based on
Objectives of users
NOT risk
Change in materiality from p/y if new users or new objectives
Normalized net income
Adjust for unusual items that wont happen again in future years.
ex special mgmt bonus
above normal wage for managers
unusual gains or losses on sale of ppe or shares
NI BEFORE TAX
- Accounting adjustments (profit not sales)*
- normalizing amounts
*think must adjust COGS with any sales adjustments
Performance materiality
60 to 80% of overall
For individual account balances
Specific materiality
For specific accounts that would affect users.
RMM
IR X CR
Audit risk
RMM X DR
Risk that auditors opinion is incorrect
Detection risk
Risk that auditor will not detect material misst.
Objective is to bring detection risk to a low level
If RMM is high do what?
Don’t lower materiality
Do increase quality and quantity of audit evidence to reduce RMM to acceptable level
Increase professional skepticism
Assign more qualified staff
Increase supervision
Change timing of audit
IR at OFSL
Poor financial health
Signif competition
1st audit
Upcoming sale / purchase
New rules from industry
Public offering of shares
Employee bonuses based on NI - risk of manipulation
Accounting issues subject to judgement or estimates - risk of error
New bank users w/ covenant - risk of manipulation to meet covenants
Long time client - decreases risk
CR at OFSL
Old systems Lack of segregation of duties lack of internal audit functions lack of computer controls poor attitude by mgmt for controls lack of policiies lack of system documentation lack of staff knowledge - risk of error Lack of oversight from mgmt. or owners - risk of fraud or error
When discussing risk
Talk about facts that increase and decrease
Talk about what risk is
& how it impacts entity
IR & CR at assertion level
Industry facts
Nature of business ie food become obsolete inventory
Characteristics of account balances ie jewelry likely to be stolen
Physical controls
Segregation of duties
Fraudulent reporting
By management. Intentional omissions or manipulations
Misappropriation
Stealing, personal use of assets etc
Indicators of going concern
current ratio going down bad financial ratios LT debt cannot be paid Reliance on ST financing negative cash flow neg r/e plans to liquidate top mgmt leaves loss to key customer non compliance with laws material lawsuit
Approaches
- Substantive
- Combined
For OFSL and assertion level. May be diff
Overall Risk Question
Discuss factors than increase and decrease risk
Why risks are important (impact)
How will users be affected
Materiality Question
Identify USERS
Does materiality need to be revised from p/y
What OBJECTIVES of USERS (not risk) have changed the materiality need
Consider your base & link to user
If using NI adjust for accounting issues & normalize
apply a threshold %
discuss your approach
Independence
Ability to act w/ objectivity, integrity and professional skepticism
Safeguards to independence
Reduce threat:
education - profession
audit committee - client
firm policies - practioner
Audit evidence must be
Sufficient &
Appropriate
Must get reasonable not absolute assurance that F/S are free from material misstatement
Review engagement approach
Use inquiry and analytical
Obtain limited assurance
Normalize income for materiality
Only adjust for items that are recurring
include - adjustments to sales etc
don’t include - impairment, obsolete inventory, special wages etc
