ch 3 review Flashcards
who issues the audit standards for private company audits?
ASB
when considering client acceptance/ continuance some factors you should consider are
management integrity, competance, independence
when speaking with predecessor auditors what re some factors to consider
-management integrity
-disagreements with management over accounting policies or audit procedures
- why the change in auditors
-communication with those charged with governance regarding fraud/ IC
is an engagement letter required?
yes
what is an engagement letter
establishes an understanding with the client regarding services to be performed
objective of engagement
express opinion on the financial statementa
auditor’s responsibilities
conduct the audit according to audit standards (PCAOB/ ASB)
management’s responsibilities
give us access to all documentation and client personnel; prepare and present financial statements; implement and maintain internal controls
what are the three phases of an audit
- risk assessment phase
- risk response phase
- reporting phase
what happens in the risk assessment phase of the audit
planning - what are the greatest risks for error or fraud in the financial statements; auditors spend more time on high risk areas of the financial statements
what happens in the risk response phase of the audit
detailed testing of internal controls and account balances/ transactions (execute out plan)
- may have to revisit audit strategy and make changes
what happens in the reporting phase of the audit
conclusion and forming an opinion
materiality
an error or omission is material if there is a substantial likelihood that it would influence the judgment made by a reasonable user based on the financial statements
qualitative versus quantitive
qualitative is the nature and quantitative is maginitude
the three steps involving materiality
- determine planning (overall) materiality
- determine performance materiality
- reevalute materiality throughout entire audit and at conclusion of audit
how do you calculate planning materiality
pick a benchmark and take %
what is the most common benchmark and percentage for planning materiality
net income before taxes and take 5%
how to calculate performance materiality
breakdown planning materiality to apply to each account (account specific!!!)
what is the typical performance materiality?
approximately half planning materiality
what happens if you raise materiality
would conduct less extensive testing (less audit evidence)
what happens if you lower materiality
have to do more extensive testing (more audit evidence)
what do you do in the reevaluate materiality?
use professional judgment as to whether or non materiality needs to be altered
professional skepticism
maintain a questioning mind and thoroughly investigate all evidence presented by the client
availability bias
tendency to be influenced by information or events that are memorable or readily availible
confirmation bias
the tendency to place more weight on information that corroborates an existing belief than on information that contradicts that belief
overconfidence bias
the tendency to overestimate one’s ability to make accurate assessments of risk or other judgments or decisions
anchoring bias
the tendency to use an initial piece of information as an anchor against which subsequent information is inadequately assessed
automation bias
a tendency to favor output generated from automated systems even when human reasoning or contradictory information raises questions about whether such output is reliable or fit for purpose
what are three ways to overcome audit bias
- proper training of audit staff
- supervision of audit staff
- review of audit work performed
financial statements are _________ & __________ made by management
claims; assertions
audit risk:
risk that the auditors will give the wrong opinion
what is the audit risk model?
a formula that calculates audit risk
do you want audit risk to be high or low?
low
audit risk (AR) =
Risk of Material Misstatement (RMM) * Detection Risk (DR)
what are the two risks calculated into risk of material misstatement in the audit risk model
inherent risk * control risk
what is inherent risk?
the susceptibility of an account to be misstated; some accounts are more likely to be based off of complexity, number of transactions, etc.
what does the number assigned to inherent risk mean
the percentage of confidence that the auditors will give the right opinion
what is control risk
risk that the client’s internal controls will not prevent or detect a material misstatement
what is detection risk
the risk that our audit procedures so not detect a material misstatement
what does the number assigned to control risk mean
90% chance internal controls won’t catch misstatement (bad)
what does the number assigned to detection risk mean
the % chance that auditors dont detect misstatement
the _________ the detection risk the more work/ evidence for the auditor
lower
there is an inverse relationship between __________ and ____________
risk of material misstatement and detection risk
the __________ the detection risk the less work/ evidence for the auditor
higher
what is the “N - E - T “ of the audit stand for
Nature; extent; timing
what is the nature of the audit
what types of audit procedures to perform
what is the extent of the audit
how much audit work to perform
what is the timing of the audit
when to perform the audit procedures
in what quarter(s) is risk assessment phase
2nd Q
in what quarter(s) is reporting phase
end of 3rd Q and YE
in what quarter(s) is reporting phase
after year end when field work is does and report is issued
have to determine inherent risl for ________
EVERY account level
fraud versus error
fraud is an intentional misstatement or omission while an error is unintentional misstatement or omission
2 categories for fraud risk
fraudulent financial reporting and misappropriation of assets
what is fraudulent financial reporting
“lying” ; not applying GAAP properly; “cooking the books”
what’s worse for the economy: fraudulent financial reporting or misappropriation of asses
fraudulent financial reporting (think ENRON)
what is misappropriation of assets
“stealing” ; “embezzlement”; causes companies to pay for something it didn’t receive
responsibility of management
to design and implement programs and controls to prevent, deter and detect fraud
responsibiltiy of auditor
to plan and perform (design) the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud
three fraud risk factors
- incentives/ pressures
- opportunities
- attitude/ rationalization
fraud risk assessment
auditors assess and do fraud risk
- brainstorm among audit team
- document extensively our fraud risk assessment
