Auditing Supplements Flashcards
An independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.
Audit
Attempts to ensure that the books of accounts are properly maintained by the concerned as required by law.
Auditing
Audire: to hear
Etymology of audit
Officials in Egypt and the Roman Empire who double-checked public spending
History of audit
Birth of corporations and accountability of the BoD and company officers and internal controls
Relevance in industrial revolution
Good governance, forensic accounting, risk-based auditing, ESG reporting
Relevance in modern auditing
Purposes of auditing?
- Provides updated monitoring of the management of the business
- Provides a method of control of financial management
- Aids in the achievement of organizational goals
- Helps minimize fraud and irregularities
- Helps increase the value of the organization
Internal auditors vs external auditors?
IA: Generally internal company employees, perform a number of smaller focused internal audits, reports are for the use of management, can function as internal consultants
EA: Always a third party, generally perform a single comprehensive annual audit, audit report is prepared for use by external entities, prohibited from providing attestation and consultative services to the same organization they are auditing.
One of the best defenses against business failure, as well as an important driver of business performance
- Manages risk and enables the creation and preservation of value
- Integral part of an organization’s governance system
- Understood, effected, actively monitored by the governing body, management, and other personnel
Internal control system
- Supports the organization’s objectives
- Determines roles and responsibilities
- Fosters a motivational culture
- Links individual performance
- Ensures sufficient competency
- Responds to risk
- Communicated regularly
- Monitored and evaluated
- Provides for transparency and accountability
Key principles of evaluation and improving internal control
Who is in-charge of internal control?
- Governing body (BoD)
- Management
- Every employee
- Support staff (risk and compliance officers)
- Internal and external auditors
What are the elements of an audit program?
- Key result area
- Methodology: data gathering technique, coverage (sampling)
- Manning requirement
- Timeframe
- Logistical requirements
Refers to any activity that relies on deception in order to achieve a gain
- Crime: knowing that the representation of the truth or concealment of a material fact to induce another to act to his or her detriment.
Fraud
- Opportunity
- Pressure
- Rationalization
- Capability
- By David T. Wolfe and Dana R. Hermanson
Fraud Diamond Model
- Inspection
- Observation
- External confirmation
- Recalculation
- Reperformance
- Analytical procedure
- Inquiry
Procedures in obtaining audit evidence (PSA 500)
When is a perfect sampling (100%) needed to obtain audit evidence (PSA 500)
- Population is a small number of large value items
- Significant risk with no other means being capable to provide sufficient appropriate audit evidence
- The repetitive nature of a calculation or other process automatically makes a 100% examination cost effective.
Internal control weaknesses?
- Lack of SoD
- Lack of physical safeguards
- Lack of independent checks
- Lack of proper authorization
- Lack of proper documents and records
- Overriding of existing controls
- Inadequate accounting system
Strategies to combat fraud?
- Detection strategies
- Analytical strategies
- Prevention strategies
What are the root causes of fraud?
- Human resources
- Culture
- Policies
- Leadership
How to respond to fraud diamond?
- Opportunity - tighten internal controls
- Rationale - get interested in employees’ welfare and situation
- Pressure - rapport and leadership
- Capability - prudent HR recruitment and selection
Statement intended to increase the level of stakeholders confidence about an organization’s governance, risk management and control processes over an issue, condition, subject matter or activity under review when compared to established criteria.
Assurance
Highest-level body charged with governance
Board
Adherence to laws regulations, contracts, policies, procedures, and other requirements.
Compliance
Questioning and critically assessing the reliability of information.
Professional skepticism
The combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives.
Governance
Any action taken by the management, the board, and other parties to manage risk and increase the likelihood that established objectives and goals will be achieved.
Control
A document, developed by the chief audit executive, that identifies the engagement and other internal audit services anticipated to be provided during a given period.
- Should be risk-based and dynamic: reflects timely adjustments in response to any changes affecting the organization
Internal audit plan
Any situation, activity, or relationship that may influence, or appear to influence, an internal auditor’s ability to make objective professional judgments or perform responsibilities objectively.
Conflict of interest
A specific internal audit assignment project that includes multiple tasks or activities designed to accomplish a specific set of related objectives
Engagement
