Ch.8 Audit Issues

Question 1

RAMP

Answer 1

risk
approach
materiality
procedures

Question 2

RISK

Answer 2

risk of material misstatement
OFSL RIsk
analyze the likelihood that there may be errors in those statements prior to the auditor performing their work
increase or decrease risk

Question 3

APPROACH

Answer 3

Combined vs substantive selected based on:
1. Control risk assessment
2. Efficiency for the audit
case facts that discuss:
• the control environment
• the nature of the business
watch out for triggers in a case that would suggest more pervasive impacts on the audit approach.always consider if there is anything new in the current year that would make this audit more challenging than normal. Be sure to address the impact of this in your approach.

Question 4

MATERIALITY

Answer 4

1. users
2. user objectives
3. base based on user objectives
   Profit oriented= NI unless negative, then rev/asset
   NPO = expenses

Net Income normalizing:
• unusual or non-recurring revenue or expenses
• special management bonuses
• unusual gains or losses on the disposition of property, plant and equipment
known errors identified in the client’s numbers, these should also be corrected prior to calculating materiality. Therefore, in a case, if you have financial reporting adjustments, the adjustments should be calculated prior to calculate materiality.

Question 5

As a part of calc OM calc PM

Answer 5

auditor focused
considers the amount of audit work required to ensure that the identified and potential unidentified misstatements will not exceed overall materiality
-should conclude on your threshold for PM, calculate an amount based on your OFSL materiality and threshold, and make a conclusion.

Question 6

As a part of calc OM calc SM

Answer 6

separate materiality set for accounts that users are particularly concerned about
typically indicated by very specific case facts (such as a bank loan capped at a percentage of the inventory balance)
If you set an SM, you would also set a specific performance materiality (SPM) at a lower level based on the risks to the auditor
-While risk should never impact overall materiality, it should be considered in setting PM and SPM.

Question 7

PROCEDURES

Answer 7

This section will focus on identifying (and developing procedures to address) specific account risks
account risks arise primarily from financial reporting (FR) issues
analyze the FR issues first (if there are any) and then discuss the audit implication of each.
While most of the specific account risks will be tied to FR issues, other common triggers related to account risk may include:
• new transactions during the year
• the implementation of new systems or business processes during the year
• unusual or unexpected changes arising from the prior year
• possible control issues
• noted significant variances or changes in ratios between years
EXPLAIN why there is a risk

Question 8

design audit procedure

Answer 8

Procedures must be specific, detailed and related to the risk identified. A procedure should involve all the steps necessary to sufficiently test the related account and assertion, and the steps should be clear enough that a junior audit team member could read the audit procedure, perform it with little or no supervision. Be sure to include an explanation of how the procedure would test the related risk.
check support for the number that you are concerned with. A simple approach that can help you design a procedure is as follows:
1. Obtain a piece of documentation from the client that supports the balance you are looking at (A/R detail, asset valuation, revenue listing and so on).
2. Perform audit tests on that documentation by comparing it with support (recalculate, vouch to invoices, inspect terms and so on).