Chapter 4- Responsibilities in the Financial Statement Audit Flashcards
1
Q
What is the financial reporting ecosystem?
A
The people and processes involved in the preparation, approval, audit, analysis , and the use of the financial reports. The purpose of the system is to serve the public interest by enabling complete, accurate, and transparent financial disclosures.
2
Q
Who are the key stakeholders in the financial reporting system?
A
- Management
- Board Members
- Auditors
- Regulators
- Professional Accounting Bodies
- Standard setters.
3
Q
What are managements 4 responsibilities in the financial statement audit?
A
- Preparing the financial statements in accordance with the applicable accounting frameworks.
- Assess the appropriateness of going concern basis of accounting
- Maintain adequate internal control
- Provide auditors unrestricted access to relevant information and people.
4
Q
What are the 3 responsibilities of those in charge with governance in the financial statement audit?
A
- Oversee management and the financial reporting process.
- Oversee the auditor
- Approval the financial statements
5
Q
What are the 5 responsibilities of the auditor in the financial statement audit?
A
- Plan and perform the audit in accordance with GAAS
- Obtain reasonable assurance that the statements are free from material misstatements due to fraud and error.
- Express an opinion on the statement in written report.
- State whether the statements are prepared in accordance with the applicable reporting framework
- Report to those who are in charge of governance.
6
Q
What are duties management must do when preparing the financial statements? When is it ok for the auditor to draft financial statements and make accompanying footnotes?
A
- Apply the appropriate accounting policies
- Make reasonable accounting estimates.
- Management understand and approves the company doing it.
7
Q
What is the going concern underlying assumption? What framework is this appleid too?
A
The entity will be able to continue operating for a period of time that is sufficient to carry out its commitments, obligations, and objectives. Both IFRS and ASPE.
8
Q
What are the two exceptions when the management does not need to create financial statements on a going concern basis?
A
- Intends to liquidate the entity / cease trading
- No realistic alternative to keep the company running
9
Q
Describe the meaning of maintaining adequate systems of internal control?
A
Design, implement, and maintain a system of internal control to provide reasonable assurance about the achievement of entity objectives with regard to the reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.
10
Q
In accordance with CAS 200, what are the 3 items that managers managers provide auditors with
A
- Access to all information that is relevant to the preparations of the financial statements, like records, documentations, etc.
- Any additional information that the auditor may request
- Unrestricted access to persons within the entity whom the auditor determines necessary to obtain audit evidence.
11
Q
What is corporate governance?
A
A system of rules, practices, and processes, by which an organization is directed and controlled in which you must balance the needs of many different stakeholders.
12
Q
Who is charged with governance in large vs small entities?
A
In large entities the board of directors is charged with governance.
In small entities only one person may be charged with governance, such as the owner manager.
13
Q
What is the role of the board of directors?
A
Provide a high level strategic view of the organization and ensure that the organizations resources are used to achieve its purpose and fulfill its accountability to external stakeholders. They also have duties in regarding financial reporting and internal control.
14
Q
Describe what overseeing the managerial financial reporting process means?
A
- Reviewing the quality and integrity of the corporations financial reporting
- Oversee managements responsibilities as to the adequacy of internal controls.
15
Q
What does it mean when the board oversees the auditor? What does these safeguards create?
A
- Reviewing the independence and qualifications of the auditor
- Appointing the external auditor
- Pre-approving audit and audit related fees and expenses.
- They create important safeguards to the auditors independence.
16
Q
What does approving the audited financial statements mean?
A
- Be able to understand financial statements
- Identify and issues or problems that may arise.
17
Q
What are the five inherent limitations to the financial statement audit?
A
- Nature of financial reporting
- Concealed Fraud
- Factors affecting the future
- Nature of audit evidence
- Design of audit procedures.
18
Q
What is the nature of financial reporting limitation to the financial statement audit?
A
The preparation of financial statements involves subjective decisions regarding items (such as estimates) that are complex and uncertain.
19
Q
What is the concealed fraud limitation of the financial statements?
A
Fradulent reporting is often extremely difficult to detect, when there is collusion among management.
20
Q
What are the factors affecting the future limitations of the financial statement audit?
A
Auditors cannot predict the future, which limits their ability to detect misstatements regarding future events that may cause the entity to cease to continue as a gain concern.
21
Q
What is the nature of the audit evidence limitation to the financial statement audit?
A
Auditors rely on persuasive rather than conclusive evidence
22
Q
What is the design of the audit procedures limitations to the financial statement audit?
A
Audit procedures cannot detect all misstatements. Auditors use sampling, which includes the risk of not uncovering a material misstatement. Auditors also us professional judgement when determining the audit evidence and forming conclusions.
23
Q
How do auditors fight back against the inherent limitation of the audit?
A
If they fulfill their personal and performance responsibilities than it should be able to reduce the risk that they face.
24
Q
What is an error?
A
It is an unintentional misstatement of the financial statements
25
What is fraud?
It is an intentional misstatement of the financial statements.
26
What are material misstatements?
If the individual or combined uncorrected misstatements and misleading / missing disclosures in the financial statements would have likely changed or influenced economic decisions of the intended users of the statements.
27
When an auditor plans and performs the audit, what error are they typically looking for, intentional or unintentional? What are the common examples of material errors?
- They are typically looking for unintentional errors.
1. Mistakes in calculations
2. Omissions
3. Misunderstanding and misapplication of the accounting standards
4. Incorrect summarizations and descriptions.
28
What are the two types of intentional misstatements?
1. Misappropriation of assets
2. Fraudulent financial reporting
29
What is the misappropriation of assets? What is an example?
A fraud involving theft of an entity's assets. The clerk pocketing cash at the time of sale and you do not enter the sale in the cash register.
30
What is fraudulent financial reporting? What is an example?
Intentional misstatements or omissions of amounts or disclosures in financial statements to deceive the users. Overstating the sales to increase the reported earnings.
31
What are the 4 limitations to detecting material misstatements set out by the CAS 200?
1. Concealed fraud
2. The existence and completeness of related parties and transactions
3. Non compliance with laws and regulations
4. Future events or conditions that may cause the entity to cease as a going concern.
32
Who is the most common individual to commit fraud within the organization? Why is fraud difficult to detect? Does the difficulty to detect change the auditors responsibility?
Typically it is the managers as they have the ability to do it without the employees knowledge. Management and /or the employees perpetrating the fraud attempt to conceal the fraud. No, the manager still has a responsibility to properly plan and perform the audit to detect the material misstatements regardless if error or fraud.
33
Who is more likely to commit misappropriation of assets?
It is most likely the employees and not management, but often the amount taken are small and immaterial.
34
What is CAS 550? What does it describe?
It is the auditors responsibilities regarding related parties. Given the nature of related parties, there is an increased risk of misstatement due to either fraud or error. Management may be unaware of all related party transactions or relationships, elated party transactions create a greater chance for collusion, concealment, or manipulation by management.
35
What does the CAS 550 state regarding the responsibilities of the auditor?
It does not matter if there are these limitations to detecting material misstatements, the auditor must still identify, assess, and respond to the risks of material misstatements arising from the entity's failure to appropriately account for disclosed third party relationships.
36
What is non compliance? Who commits NOCLAR?
Acts of omissions or commission, intentional or unintentional, that are contrary to prevailing laws or regulations. These acts may have been committed by the entity or those charged with its governance, by management, or by individuals working for or under the direction of the entity.
37
What is CAS 250? According to the CAS 250, what are 3 reasons that it can be difficult for the auditor to detect material misstatements?
Consideration of Laws and Regulations in an Audit of Financial Statements
1. There are many laws and regulations that do not affect the financial statements and are not captured by the entity's financial reporting system.
2. NOCLAR may involve collusion, forgery, deliberate failure to record transactions, management override of controls, international misrepresentations being made to the auditor.
3. Determining if there is non compliance is complex and is up to the court and other adjudicative bodies.
38
How is the auditors performance responsibilities regarding non compliance with laws and regulations determined?
It is based upon whether the laws and regulations have a direct or indirect impact on the amounts and disclosures in the financial statements.
39
What does it mean when a law or regulation has a direct effect?
Law or regulations contain provisions that determine the reported amounts and disclosures required in the financial statement. Think of industries that are heavily regulated such as the banks and cannabis.
40
What does it mean when a law or regulation has an indirect effect?
These are laws or regulations management must comply with that may set provisions under which the entity is allowed to conduct its business. The payment of a bribe by a subsidiary in a foreign country could lead to expulsion of the company and / or expropriation of the company's assets.
41
What performance responsibilities are in effect if the law has a direct effect?
Obtain sufficient and appropriate audit evidence about the organizations compliance with the provisions of those particular laws or regulations.
42
What performance responsibilities are in effect if the law has an indirect effect?
Limited to performing specialized audit procedures that may identify non compliance with laws and regulations that may have a material effect on the financial statements. The auditor has no direct responsibility to search for non compliance with indirect laws and regulations unless there is a reason to believe they may exist.
43
What is CAS 570? What is the auditors responsibility regarding CAS 570?
Going concern. The auditor is responsible for obtaining appropriate audit evidence related to and concluding on the appropriateness of managements view of the going concern basis of accounting in the preparation of financial statements. In addition, they must state whether there is material uncertainty about the ability to continue as a going concern.
44
What is professional judgement?
- applying relevant knowledge and experience, within the context provided by auditing and accounting standards and the rules of professional conduct, in making informed decisions about courses off action that are appropriate in the circumstance.
- It is analytical, systematic, objective, integrity, prudent
45
What are the characteristics of good professional judgement?
1. Well thought out
2. Objective
3. Meets the underlying principles of GAAP and GAAS
4. Evidence to support the decision
5. Maximizes the likelihood of a good consequences
6. Carried out with truthfulness and forthright
7. Considers the impact on the users of the financial statement
46
What are the five steps to the framework for the auditors professional judgement/ auditor mindset ?
What does it represents?
1., Identify and define issues.
2. Gather the facts and information
3. Perform analysis and evaluate alternatives
4. Reach conclusions
5. Review and complete documentation and rationale for conclusions.
- The values, attitudes, and behaviours of the auditor.
47
What is identifying and defining the issue often referred to as?
How do we easily identify and define the issue?
Framing the problem - While it is simple we need to be clear about what we are going to solve or we may solve the wrong problem
Consider different perspectives, allowing us top focus on the real issues.
48
What do auditors do when they gather the facts and information?
- Evaluate the information that is readily available, and information that may need to be obtained from others.
Be alert for disconfirming information, and understand the client, not just info through a story.
49
What should auditors be weary of when they gather the facts and information?
- Not rely solely on the information from the accounting team, but also look at information from the people in sales, shipping, and HR.
- Investigate potential management biases and ensure that the gathered facts relate to standards like IFRS and ASPE.
50
What ensures that the analysis of the auditor is good?
Ensuring that the problem was well defined to begin with, and not selecting the first alternative available only.
51
What should auditors look out for when performing an analysis and evaluating alternatives?
Potential judgement tendencies traps, biases, that can limit the ability to evaluate effectively.
52
How does an auditor ensure that they reach and document the conclusion properly?
Auditor must take a step back point of view and consider the issue within the broader context. - How does it relate to the other evidence in the file and what is the impact on the financial statements.
53
Why is documentation important? What does it safe guard against?
Documentation drives quality decisions, as keeping a record of why the auditor thought what they did allows them to remain objective.It safeguards them against confirmation bias.
54
What is professional skepticism. Why is this important? What does critical assessment imply?
An attitude that includes a questioning mind, critically analyzing audit evidence, and the willingness to challenge the audits assertions.
It offsets the natural bias to want to trust the client, it creates a trust but verify mental outlook.
- Implies going for probing questions and seek inconsistencies in details and story.
55
What are the 6 qualities of professional skepticism?
1. Questioning mind
2. Suspension of judgement
3. Search for knowledge
4. Interpersonal understanding
5. Autonomy
6. Self esteem
56
What does a questioning mind mean?
The tendency to inquire with some sense of doubt
57
What does suspension of judgement mean?
Withholding judgement until you have appropriate evidence (not jumping to conclusions)
58
What does search for knowledge mean?
A desire to investigate beyond the obvious
59
What is interpersonal understanding?
Recognition that peoples motivations and perceptions can lead to biased decisions
60
What is autonomy?
The conviction to decide on your own rather than be influenced by others
61
What is self esteem?
The self confidence to resist persuasion and challenge assumptions?
62
What is business acumen?
Due to the rapid changes in the business environment, strong acumen is needed. Have a deep knowledge on the clients business model and environment, and have competencies of the auditor.
63
What are judgement traps?
Common systematic judgement tendencies and biases that can impede the quality of professional judgement process. We must be skeptical of ourselves.
64
What are the common judgement traps according to CAS 220?
1. Confirmation
2. Overconfidence
3. Anchoring
4. Availability
5. Automation
6. Group think.
65
What is the confirmation bias? What are two ways to avoid this bias?
Putting more weight on information that corroborates an existing belief than on information that contradicts or casts doubts on that belief. May not adequately assess the contradictory evidence.
1. Make an opposing case and consider alternative explanations
2. Consider potentially disconfirming or conflicting information
66
What is the overconfident bias? What are 2 ways to overcome this bias?
Judgement tendency concerns for potential for the auditor to overestimate ones own ability to perform tasks or to make accurate risk assessments. This can make it so that the person cannot see the different points of view or contradictory evidence. May see no need to involve others.
1. Challenge opinions and experts
2. Challenge underlying assumptions
67
What is the anchoring bias? What are 2 ways to avoid this bias?
Inclination to use an initial piece of information as an anchor against which subsequent information is inadequately assessed. Occurs when there are preliminary findings.
1. Solicit input from others
2. Consider management bias, including potential for fraud or material misstatements.
68
What is the availability bias? What are the 3 ways to avoid the availability bias?
Tendency to place more weight on events or experience yes that immediately come to mind or are more readily available than on those that are not. It dampens professional skepticism, especially when the auditor is faced with a rare event.
1. Consider why something comes to mind
2. Obtain and consider objective data.
3. Consult with others and make the opposing case.
69
What is the automation bias? What are three ways to avoid this bias?
Tendency to favour output generated from automated systems, even when human reasoning or contradictory information raises questions as to whether the output is reliable or fit for the purpose.
1. Explicitly alerting the engagement team to instances or situations when vulnerability to automation bias may be greater.
2. Emphasize the importance of seeking advice from more experienced members of the engagement team in planning and performing audit procedures.
3. Involving members of the engagement team with specialized skills and knowledge to assist the engagement team with complex or subjective areas of audit.
70
What is the group think bias? What is a way to avoid this bias?
Tendency to think or make a decision as a group, which discourages creativity or individual responsibility. Auditors are susceptible to this as they work in groups.
1. Less experienced auditors should be encouraged to seek advice frequently.
71
What is the role of the work environment on hindering professional skepticism?
What is the role of the work environment on hindering professional skepticism of junior auditors?
General characteristics such as time pressures can contribute to applying less than idea professional skepticism. Their performance measurements are against the time budgets.
They may struggle with the technical details like the firms policies, GAAS, and audit methodology and focus too much on the issues rather than actually solving them.
72
What is the financial statement cycle?
It is the process of dividing financial statements into smaller segments or components. It makes it more manageable and aids in the assignment of tasks to different members of the audit team.
73
What is the cycle approach? What is an example of this division?
The common way to divide an audit, by keeping closely related classes (or types) of transactions and account balances in the same segment.
Think sales, sales returns, cash receipts, and allowance for doubtful accounts are four classes of transactions that cause AR to increase or decrease.
74
What are the five common audit cycles?
1. Revenue and receivable cycle
2. Acquisition and payment cycle
3. Human Resources and pay roll cycle
4. Inventory and distribution cycle
5. Capital acquisition and repayment cycle.
75
What are the Five Steps in the Cycle Approach
1. Start with the transactions
2. Transactions is recorded to the journal
3. it is posted to the general ledger in total amounts
4. It is applied to the trial balance
5. Brought to the financial statements
76
What is the general ledger account that connects most cycles?
The cash amount, typically audited separately although it is not a cycle.
77
What are the two cycles associated with acquisition?
1. Acquisition of goods and services - Purchase of inventory, supplies, and general services.
2. Capital Acquisition Cycle - Financing the business, issuing stock or debt, paying dividends, repaying debts.
78
T or F: Cycles have no beginning or end except at the origin and the final disposition of the company
True
79
True or False: Acquisition and payment cycles are similar to Human Resources and payroll cycles?
True
80
What changes occur in the relationship among transaction cycles between the service and producing companies?
The only thing that Changs is there will be no inventory accounts like WIP and finished goods, but they still have the distribution part of the cycle such as the unmilled receivable and WIP of unmilled services.
81
What does the cycle approach assist the auditor in doing?
To focus on the flow of transactions and to identify at which points the risk of misstatements could appear and what transaction controls (also referred to as application controls) could mitigate those risks.
82
What are indirect controls (entry level controls)?
Controls that are not sufficiently precise to prevent, detect, or correct misstatements at the assertion level but which support direct controls and therefore, have an indirect effect on the likelihood that a misstatement will be detected or prevented on a timely basis.
83
What is the impact of entry level controls on the relationship of the 5 transaction cycles?
What are examples of situations where entry level controls can limit a problem?
These entry level controls address pervasive risks, since they affect multiple processes, transactions, accounts, and assertions, they are not isolated to just one particular cycle.
- The CFO recording fake transactions would affect all cycles, but the entry level controls could provide a warning.
- Policies and procedures of corporate governance would impact the various cycles, but could also be detected by the entry level controls.
84
According to auditors, what is the most efficient way to conduct an audit?
Auditing the ending balance of accounts receivable. Obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts.
85
How does an auditor determine what audit procedure to use and the audit evidence to obtain? How is the financial statement audit performed?
Based on understanding the risks and controls within each cycle. Use the cycle approach to perform audit procedures for the transactions making up the ending balance, account balances, and related disclosure.
86
What are assertions? How do the auditors use assertions?
- Implied or expressed representations by management about recognition, measurement, presentation, and disclosure of items included in the financial statement and notes.
- Used to consider the different types of potential misstatements that may occur when identifying,. assessing, and responding to the risks of material misstatements.
87
Where do assertions get their meaning from?
It arises from the applicable reporting framework. Revenue recognition has a different meaning under ASPE vs IFRS.
88
According to CAS 315.A129 what are the two categories of audit assertions?
1. Assertions about the class of transactions and events, related disclosures, for the period under audit.
2. Assertions about account balances, and related disclosures at period end.
89
What is the occurrence assertion of classes of transactions and events? What question should the auditor ask themselves?
Transactions and events that have been recorded or disclosed have occurred and pertain to the entity.
Have the recorded transactions really occurred?
90
What is the completeness assertion of classes of transactions and events? What question should the auditor ask themselves?
All transactions and events that should have been recorded, and all related disclosures, have been recorded.
Are all transactions and related disclosures included and recorded?
91
What is the accuracy assertion of classes of transactions and events? What question should auditors ask themselves?
Amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been measured and described.
Are transactions recorded correctly?
92
What is the cutoff assertion of classes of transactions and events? What questions should they ask themselves?
Transactions and events have been recorded in the correct accounting period.
- Are transactions recorded on the correct dates.
93
What is the classification assertion of classes of transactions and events? What questions should auditors ask themselves?
Transactions and events have been recorded in the proper accounts.
- Are the transactions included in the clients journal properly classified (recorded in the proper accounts)
94
What is the presentation assertion of classes of transactions and events? What question should auditors ask themselves?
Transactions and events are appropriately aggregated and disaggregated and clearly described, and related disclosures are relevant and understandable.
- Are classes of transactions and related disclosure requirements clearly presented in the financial statement?
95
What is the existence assertion of account balances? What should auditors ask themselves?
Assets, liabilities, and equity interests exist
- Do all amounts included exist?
96
What is the completeness assertion of account balances? What do auditors ask themselves?
All assets, liabilities, and equity interests that should have been recorded are recorded, and all related disclosures that should have been included in the statements are included.
- Are all amounts recorded?
97
What is the accuracy, valuation, and allocation assertion of account balances?
- What do auditors ask themselves when evaluating the accuracy?
- What do auditors ask themselves when evaluating the valuation assertions?
- What do auditors ask themselves in evaluating allocation assertions?
Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded, and related disclosures have been properly measured and described.
- Are all account balances recorded properly.
- Are the assets recorded at the amounts estimated to b realized?
- Are all amounts included appropriate.
98
What is the classification assertion of account balances? What should auditors ask themselves when evaluating this criteria?
Assets, liabilities, and equity interests have been recorded in the proper accounts.
- Are all amounts appropriately classified in the financial statements and footnotes, and the balance descriptions.
99
What is the rights and obligations assertion of account balances?
What do auditors ask themselves?
The entity holds or controls the rights to assets, and liabilities are the obligation of the entity.
- Are the assets owned? Do the liabilities belong to the entity?
100
What is the presentation assertion of account balances? What do auditors ask themselves when evaluating this?
Assets, liabilities, and equity interests are appropriately aggregated and disaggregated and clearly described and related disclosures are relevant and understandable.
- Is inventory appropriately aggregated or disaggregated and clearly described, and are related disclosures are relevant and understandable.
101
What are relevant assertions?
Assertions that have a reasonable possibility of containing material misstatements that would cause the financial statement to be materially misstated, and therefore, have a meaningful impact on whether the account is fairly stated.
102
What are factors that increase the possibility of misstatement for relevant assertions?
1. Management bias, incentives, and pressure
2. Complexity, subjectivity, and / or uncertainty of the assertion
3. Risk of fraud and error
4. Change in economic conditions, customer, business model, regulatory framework.
103
What are transaction assertions?
- Managements explicit or implicit representations about classes of transactions, events, and related disclosure for the period under audit
104
What are balance assertions?
Managements implicit or explicit representation of the account balances and the related disclosure as of end period.
105
What is the audit process?
A well defined methodology for conducting the audit to ensure that the evidence is sufficient and appropriate and that all required audit objectives are both specified and met.
106
What are the 7 parts to the audit process?
1. Client acceptance
2. Audit plan
3. Assess risk of material misstatements
4. Develop a risk response
5. Perform risk responses
6. Conclusion
7. Reporting
107
What are the four factors that must be followed throughout the audit process?
1. Ethical requirements and quality control
2. Professional skepticism and professional judgement
3. Communication with management and those in charge of governance
4. Documentation.
108
Describe client acceptance, the three items to be assessed?
1. The audit firm will perform a risk assessment to determine whether the engagement should be accepted or continued in the upcoming year.
2. Take into consideration factors of whether the firm has the competence, capabilities, and resources to take on the engagement.
3. Assess the integrity of the client, threats to independence, and possible risks to the audit firm associated with accepting this specific client.
- If the decision process states that they will go through with the engagement process, they will send out an engagement letter.
109
What are the two considerations that auditors take into account when determining how they will accumulate their evidence?
1. Sufficient, high quality audit evidence must be accumulated to meet the auditors professional responsibility
2. The cost of accumulating evidence should be balanced against the quality of the evidence.
110
What is the purpose of the 2 Considerations of Accumulating Evidence
Enables the auditor to focus their efforts on those areas that are most susceptible to material misstatements and avoid over auditing low risk areas. By balancing the cost with the high quality audits, you only focus on things that matter.
111
What are analytical procedures? What is the foundation to analytical procedures?
Evaluations of financial information through analysis of plausible relationships among financial and non financial data, this is on the financial statement level of risk. Understanding the entity and its environment.
112
What does it mean when an auditor focuses on indirect controls?
They are considering how pervasive risks are addressed.
113
What does it mean when an auditor focuses on transaction level controls?
They are assessing risk at the assertion level and focusing on the processes that initiate, authorize, and record transactions in a specific cycle.
114
According to CAS 320, what is materiality? Why is materiality assessments important?
It is based upon the common financial information need of the uses as a group and is the amount by which errors or omissions could reasonably affect economic decisions of those users.
- Determines the nature, timing, and extent of audit procedures, and evaluates the effects of the misstatements.
115
What are the three important parts in planning an audit?
1. Understanding the business and the environment
2. Understand their internal controls
3. Assessing materiality
116
What is the purpose of the assessment risk of material misstatements at the financial statement and assertion levels? What knowledge must they have to ensure that they can assess the risk of material misstatements properly?
Identify where misstatements may occur and the depth of audit work required for the individual accounts and transaction streams. Knowledge of the entity and its environment.
117
What does it mean when risks at the financial statement level pervade the financial statements as a whole.
These risks could potentially affect many assertions related to classes of transactions, account balances, and / or presentations and disclosures.
118
What is a control risk?
Refers to the risk that a material misstatement could occur in a class of transactions or account balance in their related disclosure, and that it will not be prevented (or detected and corrected) on a timely basis.
119
What happens to control risk of the internal controls are effective?
Planned control risk can be reduced and the amount of audit evidence to be accumulated can be significantly less than when internal controls are not adequate.
120
According to the CAS 330 - Overall Audit Strategy (Risk Response), what are the appropriate responses to address risks of material misstatements at the financial statement level?
1. Emphasize to the audit team the need to maintain professional skepticism
2. Assign more experienced staff, those with special skills, or use experts.
3. Provide supervision
4. Incorporate an element of unpredictability into the further audit procedures to be performed. This is necessary if the auditor has determined there is a high risk of fraud
5. Make general changes to the nature, timing, or extent of audit procedures.
121
What are the two audit approach for the accounts and assertions?
1. A combined approach where the auditor plans to rely upon controls and perform a combination of control tests and substantive tests
2. Substantive strategy - When the auditor does no plan to reply upon controls and performs only substantive tests.
122
What is classified as the overall accounting plan?
The planning and assessment of the risk of material misstatements.
123
What does the term further audit procedures mean?
Procedures further to risk assessment procedures. They are designed to respond to the risks of material misstatements at the assertion level, which were identified in the risk assessment phase.
124
What are the considerations for Designing a Test for Assertion Level Risks
Based upon materiality, specific risks like management bias or override, fraud risk, or complex transactions identified. T
They consider different types of tests and the type of sampling to be used to actually conduct the test, and they add unpredictability to the testing process.
125
What are the two different tests that the auditor may put into play?
1. test of controls
2. Substantive tests.
126
What happens as the test of controls are completed?
They are evaluated to determine if there should be any changes in assessed risk or in the design of the audit procedure.
127
What are tests of controls?
Audit procedures to test the effectiveness of control policies and procedures in support of a reduced assessed control risk.
128
What are substantive tests? What are the two parts of this test?
Procedures performed to obtain direct evidence about dollar amounts and disclosures in the financial statements. Test of details (Transactions, account balances, and disclosures) and test of procedures)
129
What is substantive analytical procedures?
Analytical procedures designed to provide evidence at the assertion level that assess the overall reasonableness of transactions, balances, and disclosures using plausible relationships between financial and non financial information.
130
What are substantive tests of details? What is an example of substantive tests of details?
Audit procedures testing for monetary misstatements. (Due either to fraud or to error) in the details of the classes of transactions, balances, and disclosures.
Situation (Accuracy Assertion) - Auditor uses computer software to compare the unit selling price on duplicate sales invoices with an electronic file of approved prices.
131
What does CAS 520 describe? What is an example provided by the CAS standards?
It describes the analytical procedures and highlights that different types of analytical procedures provide different levels of assurance.
-If you try and predict the total rental income on a building divided into apartments (with rental rates, number of apartments, and vacancy rates) it can provide persuasive evidence on the occurrence of revenue.
- If you calculate and compare gross margins percentages as a means of confirming a revenue figure will provide less evidence.
132
Describe the conclusion
After the auditor has completed all the procedures for each assertion, for each class of transaction, account balance, and disclosures, they take and combine the information into an audit summary memorandum to reach an overall conclusion as to if they are fairly represented or not. It is highly subjective and relies on judgements.
133
Describe reporting
When the audit is completed, and those in charge of governance has approved it, the public accountant will issue an auditors report to accompany the financial statements. Must meet well defined technical standards that are affected by the scope of the audit and the nature of the findings.
134
What are the financial statement risks?
These are the inherent 4 limitations to detecting material misstatements set out by CAS 200 (Look at flashcard 31 if confused)
