Audit Technical Flashcards
Materiality basis: normalized net income before tax benchmark
3 to 7%
Can not be used for a company with net loss position
Materiality steps
Step 1: identify users and their needs/sensitivities
Step 2: pick appropriate basis for materiality linking back to user needs
Step 3: calculate overall materiality
Step 4: calculate performance materiality
Step 5: determine specific materiality
Step 6: determine specific performance materiality
Materiality basis: revenues or expenses
1 to 3 %
Materiality basis: total assets
1 to 3%
Basis for materiality: equity
3 to 5%
Performance materiality definition
set to reduce the risk of aggregate uncorrected and undetected misstatements exceeding overall materiality
Audit needs to consider the amount of audit work required to ensure that the identified and potential unidentified misstatements will not exceed overall materiality
Higher risk of material misstatements means lower performance materiality %
normal base range: 60 to 75%
Substantive procedures
Designed to detect material misstatements at the assertion level. Comprises:
- test of details
- substantive analytical procedures
Test of controls - procedure
Designed to evaluate the operating effectiveness of controls in preventing or detecting and correcting material misstatement at the assertion level
Audit approaches
Combined - test of controls & substantive procedures
Purely substantive
Based on risk of material misstatement and if the risk is mostly inherent or control risk
Inherent risk
Likelihood of material misstatement due to particular characteristics of relevant class of transactions, account balance or disclosure
CAS 330.7
Control risk
Risk that relevant controls are not operating effectively and will not prevent or detect a material misstatement
Approach factors - discussion points
Discuss different factors and then recommend an approach.
Factors:
- high-volume, low-dollar value transations
- Assess design and implementation of controls - if appropriately designed an implemented then can test controls
- controls tested and operating affectively, can rely on them and reduce substantive testing
- discuss specific controls that would need to be tested (IT likely if heavily relied upon)
- discuss specific areas with known control issues.
- discuss specific areas where substantive testing would be required
- CAATs for automated controls
- timing (before/after year end)
- first time audit (document control environment & test controls to determine if they can be relied on)
- Repeat engagement - focus on what has changed in company’s control environment
- opening balances (ability to obtain sufficient appropriate audit evidence to support)
- predecessor auditor (must contact & obtain working papers)
- use of specialist
Comparing report options
Identify possible appropriate reports
Discussion points:
- explain reporting framework
- describe report
- assurance level & what that level means
- materiality
- cost
- types of procedures that would be performed
Computer-Assisted Auditing Techniques (CAATs)
Using computer as an audit tool during auditing procedures - for both tests of controls and substantive procedures.
2 main categories: data-oriented and system-oriented
System-oriented: test transactions that are created by practitioner and processed using the client’s information system. Used for tests of controls.
Data-oriented: use software designed for practitioner to test client data when performing tests of controls and substantive testing.
Audit tests:
Analytical testing - perform ratio and trend analysis
Sample selection - apply rules to data in order to select high-risk samples
Data analysis - filter records based on specific criteria or join data from two separate sources
Recalculation - re-perform complex calculations
Data mining - search for patterns within data
CAAT queries: search for specific things in data and relate to company/risk
Audit assertions - balance sheet
Existence - do items on balance sheet actually exist? Results in overstatement when violated. Sample/documentation selected from books and then matched to evidence. (Sheet to floor test)
Rights & Obligations - Do assets/liabilities belong to another party? Bank could have right to assets if bank covenant is broken - tested by recalculating bank covenant.
Completeness - Have all assets/liabilities/equity been recorded? Results in understatement when violated. Floor to sheet testing, select sample of physical item (inventory, payable invoices, etc and confirm they have been recorded in the books)
Accuracy, Valuation & allocation - can just call valuation. have accounts been measured correctly. Recalculate measurements, test for collectability of AR, impairments etc
Classification - specific for when a balance sheet item has been misclassified as another balance sheet item. (misclassification between BS and IS is and existence/completeness issue for the BS and occurrence/completeness issue for the IS)
Presentation - are items appropriately aggregated or disaggregated, appropriate disclosures made
Audit Assertions - Income statement
Occurrence - have revenues and expenses actually occurred, results in overstatement when violated. Has something been recorded to account that didn’t happen. Sheet to floor test - tracing general ledger to audit evidence.
Completeness - have all revenues and expenses been recorded, results in understatement when violated. Floor to sheet test, collect audit evidence and trace back to general ledger to ensure it has been recorded.
Accuracy - have revenues and expenses been recorded accurately. assertion is about measurement, usually when estimates are required. Recalculation is usual procedure.
Cut-off - have revenue and expenses been recorded in the right period. Inspect audit evidence (invoices, shipping documents etc) around period end date for verify dates.
Classification - specific to classification amongst income statement accounts.
CAS 800 - Audits of FS prepared in Accordance with Special Purpose Frameworks
Special purpose frameworks examples: cash basis, tax basis, provisions established by regulator, in accordance with terms of a contract.
Practitioner will have to obtain understanding of:
- purpose for the financial statements
- intended users
- mgmts decision to adopt financial framework
Report should include:
- purpose of FS and list intended users
- evaluation of if FS are prepared in accordance with framework and if there is adequate description of significant interpretations of that framework
- Emphasis of matter paragraph to alert readers of FS being prepared in accordance with special purpose framework & may not be suitable for other purposes.
- may include a statement saying the report is only intended for specific users and should not be distributed
- description of responsibility of management
- description of responsibility of auditor
Reasonable assurance since audit report.
Materiality will be set with consideration of financial information needs of intended users.
Equivalent for review engagement with limited assurance - CSRE 2400
Audit level procedures
- Inspection
- Observation
- Inquiry
- External confirmation
- Recalculation
- Reperformance
- Analytical procedures
Review procedures
Usually only Inquiry and Analytical procedures
For areas of high risk where sufficient evidence can not be obtained through inquiry and analytical procedures alone, other audit level procedures could be performed.
Items to discuss when comparing different report options:
- Explain reporting framework covered by report option
- Describe what will be included in the report
- Assurance level
- Materiality if required
- Cost of engagement
- types of procedures that would be performed
Conclude on if report would meet users needs
CAS 805 - Audit of single financial statements and specific elements, accounts or items of a FS
Planning consideration :
- need to consider if audit or review of a specific element or single financial statement is practical.
- consider all of the related accounts and disclosures that could have a material impact on the single FS or specific element
- if financial statements as a whole are being audited then this will make the above a non-issue.
If an adverse opinion or denial of opinion is given on a complete set of of financial statements, then an unmodified opinion cannot be expressed on a single FS from a complete set
Separate materiality will need to be calculated based on specific user needs.
Must determine acceptability of FR framework applied and FR framework must be referenced in the report.
Report must reference the single FS or elements that has been audited.
Report will have paragraph describing responsibilities of management & paragraph on responsibility of auditors
Reasonable assurance since audit report.
Materiality will be set with consideration of financial information needs of intended users.
Equivalent for review engagement with limited assurance - CSRE 2400
CSRE 2400 - engagements to review historical financial information
- applies to historical financial statements and other historical financial information
- materiality must be determined
- must obtain understanding of entity & its environment & applicable FR framework
Report must contain:
- identification of FS being reviewed
- reference to summary of significant accounting policies
- if FS prepared for a specific purpose, must include description of purpose
- description of responsibility of mgmt
- description of responsibility of reviewer
- conclusion paragraph
- provides limited assurance as it is a review engagement
CSRS 4400 - agreed upon procedures engagement
New to be used in 2022. Previously HB 9100
Good option to use to comparison for almost anything.
No opinion is given.
Can be applied to financial or non-financial information.
Practitioner required to obtain understanding of the purpose of the engagement and must consider if procedures being asked to perform are appropriate for the purpose.
No consideration needed for materiality.
Practitioner performs procedures that have been agreed upon by practitioner and engaging party. Engaging party must acknowledge that procedures performed are appropriate for purpose of the engagement.
Report describes only findings of agreed upon procedures but states no opinion. Engaging party and intended users consider the procedures and findings reported to come to their own conclusions.
Report should include:
- identification of subject matter the procedures are performed on
- identification of purpose of agreed upon procedures report & stmt that it may not be suitable for any other purpose
- a description of an agreed-upon procedures report
- a stmt saying that no opinion is given
CSAE 3530 - Attestation Engagements to Report on Compliance
Can be an audit or review engagement.
Practitioner forms an opinion on whether or not management’s assessment of compliance is fairly stated.
Specified requirements must comprise criteria or can be used as a basis for developing criteria.
Subject matter must be within prof. expertise of the engagement team
Required to obtain understanding of entity & its environment and the specified requirements
Materiality shall be considered when:
1. determining nature, timing and extent of procedures
2. evaluating whether an instance of non-compliance is material.
Report should include:
- identification of specified requirements and significant interpretations
- description of mgmts responsibilities
- description of practitioners responsibilities
- practitioners conclusion
Less specified version is CSAE 3000
CSAE 3531 - Direct engagement to report on compliance
Can be an audit or review engagement.
Practitioner forms an opinion on whether or not entity has complied with agreement, statute or regulation in question.
Specified requirements must comprise criteria or can be used as a basis for developing criteria.
Subject matter must be within prof. expertise of the engagement team
Required to obtain understanding of entity & its environment and the specified requirements
Significance (not materiality) shall be considered when:
1. determining nature, timing and extent of procedures
2. evaluating whether an instance of non-compliance is significant
Report should include:
- identification of specified requirements and significant interpretations
- description of mgmts responsibilities
- description of practitioners responsibilities
- practitioners conclusion
Less specified version is CSAE 3001
Specialized areas section 7600 - Reports on the application of accounting principles
Audit level assurance
Practitioner generates a written report or oral advice on application of accounting principles to specific transaction or impact of specific transaction on opinion to be rendered on FS. The report is addressed to the entity and includes:
- relevant facts
- circumstances
- assumptions
- sources of information
- express a conclusion on appropriate accounting principles or type of opinion that may rendered on entity’s financial statements
- will state that responsibility for proper accounting treatment rests with preparers of FS
AuG-16 - Compilation of Financial Forecast or Projection
Located in “assurance and related services guidelines”
No opinion expressed. Limited to preparing the forecast or projection based on information provided by management
Practitioner needs to obtain sufficient understanding of entity and its environment including industry and accounting policies and practices of industry
Compilation includes:
- collecting financial information from mgmt that is used in assembly of financial forecast or projection
- inquiring as to how mgmt developed the assumptions used in the financial forecast or projection
- determining whether management’s assumptions are appropriate for the circumstances & no obvious omissions or inconsistencies
- performing limited procedures consisting primarily of inquiry related to the info supplied to the practitioner & considering whether the financial forecast/projection is prepared in accordance with GAAP
AuG-6 - Examination of financial forecast or projection included in a prospectus or other public offering document
Located in “assurance and related services guidelines”
Opinion provided but no level of assurance
Practitioner will have to obtain evidence for assumptions and preform procedures on assumptions and forecast.
Practitioner should also review entity’s forecasting process to understand how mgmt identifies the effect of future events and assumptions and applies these to develop the forecast.
Report will contain 3 paragraphs:
1. scope paragraph - identifying the forecast FS presented, describe nature of examination, practitioner has not responsibility to update report for events occurring after the date of the report
2. opinion paragraph - includes opinion as to whether:
- at date of the report: assumptions developed by mgmt are suitably supported and consistent with plans of entity & provide a reasonable basis for the forecast
- the forecast reflects the assumptions
- financial forecast complies with presentation and disclosure standards set out in the CPA handbook
3. disclaimer that actual results may vary materially from forecast & disclaimer about achievability of results of the forecast
CSAE 3416 - Reporting on controls at a service organization relevant to user entities’ internal control over financial reporting
Audit - reasonable assurance provided
Report that a service organization (think payroll provider or IT operations) can provide to companies that use their services to show that internal controls are suitably designed, implemented and operating effectively.
2 types: different things included in each report
Type 1: applies to specific point in time when auditors actually review the design and implementation of the control system, no actual review of operating effectiveness of controls.
Type 2: applies to ongoing design and effectiveness over a period of time
Materiality consideration includes fair presentation of mgmt’s description of the service organization’s system and suitability of design of controls.
Specialized area 7150 - auditor’s consent to the use of a report of the auditor included in an offering document
Must review for material inconsistencies and accurate reproduction
Must perform procedures over intervening period events
Practitioner has to give consent in writing prior to the use of the report in an offering document.
Letter would clarify that the consent does not provide audit or review of offering document.
Letter would inform securities register that practitioner has read the prospectus and has no reason to believe there are any misrepresentations.
If unaudited FS are included in offering document, practitioner will need to perform review procedures on FS using Specialized Areas 7060 - review of interim FS
Specialized areas 7060 - Auditor review of interim financial statements
To assist audit committee in discharging its responsibilities with respect to interim FS issued under securities legislation
Limited assurance since review engagement
- procedures would be inquiry and analytical procedures
- testing to determine if any material modification needs to be made for statements to be in accordance with applicable FR framework
Must gain understanding of entity and its environment, including internal controls
Must read interim MD&A and ensure consistency with interim FS
Materiality will have to be considered
Going concern procedures have to be performed if anything comes to light that casts significant doubt on going concern assumption
CAS 570 - Going concern procedures and indicators
Management is required to assess company’s ability to continue as a going concern. Assessment must be for 12 months or more and include projected cash flow.
Auditor is responsible for obtaining sufficient evidence regarding the appropriateness of mgmt’s use of the going concern assumption & conclude on if material uncertainty exists related to events or conditions that may cast significant doubt on entity’s ability to continue as a going concern
If auditor believes going-concern assumption is not appropriate, request that mgmt provide its going-concern assessment and review/perform procedures on the assessment.
Description of procedures are in CAS 570 paragraphs 10 to 16
Indicators of going concern issue: located in risk assessment procedures and related activities section paragraph A3
Financial - working capital deficit, current ratio below 1, adverse key financial ratios, LT debt that is maturing and cannot be repaid or refinanced, reliance on excessive ST financing, inability to secure supplier credit or pay bills on time, negative operating cash flows, poor profitability and return ratios, substantial operating losses, negative retained earnings
Operating - plans to liquidate company or cease operations, departures of key mgmt who cannot be replaced, loss of market share, loss of key customer, inability to obtain key supplies, loss of operating licence, labour issues
Other - non-compliance with law, material lawsuits against the company that company will not be able to pay if lost, changes in laws or regulations that will negatively impact the company
CAS 570 - Going concern conclusions and reporting
Going concern assumption is appropriate -> unqualified opinion
Going concern assumption is appropriate but a material uncertainty exists:
- auditor must determine if FS adequately disclose the events/conditions that have led to the material uncertainty and that a material uncertainty exists
- if disclosure is adequate -> unqualified opinion & emphasis of matter paragraph that will:
-> highlight existence of material uncertainty relating to going-concern assumption
-> draw attention to the note in the FS that sets out the going-concern disclosure
- if disclosure is inadequate -> qualified or adverse opinion will be given
Going concern assumption is not appropriate:
- auditor must determine if FS are presented on a liquidation basis and if there is adequate disclosure
- if presented appropriately -> unqualified opinion & emphasis of matter paragraph that will:
-> highlight lack of going-concern assumption
-> highlight that FS are prepared on a liquidation basis
- if disclosure is inadequate -> adverse opinion
emphasis of matter paragraph would be labeled - “Material uncertainty related to going concern”
Key Audit Matters
CAS 701
Each key audit matter will have its own subheading
Factors to consider when determining if something is a KAM:
- areas of higher assessed risk of material misstatement
- Significant auditor judgements relating to areas in the FS that involved significant mgmt judgement (includes accounting estimates)
- effect on the audit of significant events or transactions that occurred during the period
The section will document the following:
- matters that required significant auditor attention during the audit
- rationale for the auditor’s determination as to whether or not each of those matters were KAM
- when there are not KAM, rational should be provided as to the auditor’s determination that there are no KAM to report
