Chapter 4 - Responsibilities in the Financial Statement Audit - Powerpoint Slides Flashcards
Who is in the financial reporting system?
Includes management, board of directors, auditors, regulators, professional accounting bodies, standard setter, and financial statements.
What is the purpose of the financial reporting system?
To serve the public interest with corporate financial reporting that users can rely upon in making their decisions.
What are the 4 managerial responsibilities?
- Prepare the financial statements in accordance with the proper policy
- Maintain adequate internal controls
- Provide all necessary information as requested by the auditor
- Assess the firm on an ongoing going concern basis.
What are the 3 corporate governance responsibilities?
- Oversee the internal controls preparation of financial documents
- Oversee the auditor
- Approve the audited financial statements.
What is the job of the board of directors?
It is to provide an oversight high level strategic view of the organization, ensure resources are used to achieve its purpose, and that it fulfills its accountability to external stakeholders.
Who holds the governance duties?
They are held by the board of directors.
What is the role of the audit committee?
Responsible for oversight of financial reporting process and the external auditor, and the internal control procedures.
What does the audit committee need to consider?
Consider the potential for management override and the need to investigate financial reporting issues.
What are the three main auditor responsibilities.
- perform and plan the audit in accordance with CAS.
- Obtain sufficient and appropriate audit evidence to provide reasonable assure that the financial statements are free of material misstatements due to fraud or error.
- Form an opinion on the financial statements based upon the audit findings.
What are material misstatements?
These are misstatements that are so severe that when aggregated or disaggregated they are likely to influence the decisions that a user of the financial statement would make.
What is an error?
A mistake that is unintentional
What its fraud
A mistake that is intention
What are material errors?
These are unintentional misstakes made by management or employees like wrong calculations, omissions, misapplication of accounting standards.
What is material fraud?
Misappropriation of assets or fraudulent financial reporting.
What is the responsibility of the auditor in accordance to CAS 240?
An auditor who is conducting the audit in accordance with CAS is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatements whether caused by fraud or error.
- However, due to the limitations of the audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed according to the CAS>
What attitude should an auditor hold throughout the audit?
The auditor should have professional skepticism throughout the audit, recognizing the possibility of misstatement due to fraud, notwithstanding past experience with the entity about the honesty and integrity of management and those charged with governance. Member of the engagement team should discuss the susceptibility of the misstatements
Why is it difficult for an auditor to detect fraud?
- The auditors knowledge of the clients internal controls may be inferior to the employees
- Fraud may be intentional concealed.
- Client management may have the ability to override internal controls.
What are financial statement cycles? What is the purpose?
Audits are performed by dividing the financial. statement into smaller segments or components. It makes the audit more manageable and aids the assignment of tasks to different members of the audit team.
What is the cycle approach?
A common way to divide an audit, by keeping closely related types/ classes of transactions and account balances in the same segment.
What are the 6 types of cycles?
- Sales and Receivables
- Acquisition and payment
- Human Resources and Payroll
- Inventory and distribution cycle
- Capital and repayment cycle.
What is the steps of the financial statement cycle approach? (What is it similar too?)
- Post it to the journal
- Summarize in the general ledgers
- Place it in the trial balance
- Then in the financial statements
How does the auditor treat the different cycles?
- Each of the cycles are important when conducting an audit.
- The audit should treat each of the cycles separately during the audit.
- However the auditor is careful as they must also interrelate the different cycles at different times, they must threat cycles somewhat independently to manage complex audits effectively.
What approach does the audit use to conduct the financial statement audit? What is the role of understanding risks and controls?
They use the cycle approach by performing audit procedures for the transactions making up the ending balance, account balances, and related disclosures. It allows the auditor to know what audit procedures to use and what audit evidence to obtain.
What are assertions? How are assertions derived?
They are implicit or explicit representation of management about the existence, completeness, ownership, presentation, and disclosure of items in included in the financial statement and notes. They are derived from the applicable reporting framework.
What is the existence assertion?
Are all transactions recorded actually exist?
What is the completeness assertion?
Is everything that should have been recorded recorded?
What is ownership (Rights and Obligations) assertion?
Are the assets owned and are the liabilities owed and belong to the entity.
What is the valuation (measurement and allocation assertion?
Are all amounts included properly valued?
What is the presentation management assertion>
Are the assets, liabilities, and equity when aggregated and disaggregated represented properly with all the disclosures.
What are the 5 account balance assertions?
- Existence
- Completeness
- Valuation
- Presentation
- Ownership
What is the overall purpose of all the audit objectives?
To ensure and asses that whatever the economic reality of what actually occurred is portrayed in the statements.
What are the three parts of the existence assertion?
Establish with evidence that:
1. Assets, liabilities, and equity actually exist
2. Revenue and expense transactions actually occurred as of a proper date.
3. There are cut off considerations, no transactions from the next period are recorded at the statement date,
What is the completeness assertions 3 parts?
- Establish with evidence that all transactions and accounts that should have ben presented in the financial reports are actually included
- No items belonging to the financial statements have been mislead.
- All transactions from the period are actually recorded in the period.
What is the ownership assertion?
Establish with evidence that amounts reported as assets of the company’s represent property rights and the amounts represented as liabilities represent obligations
What is the valuation (measurement and allocation) assertions?
Determine whether proper values have been assigned to assets, liabilities, equity, revenue, and expenses.
What is the presentation (classification and disclosure) assertion?
Determine whether the accounting principles are properly selected and applied, and whether disclosures are adequate.
What is the compliance assertion? Is this normally listed?
Management asserts compliance with laws and regulations. This is typically not listed as a separate management assertion, it is sometimes called an implicit assertion.
What is the responsibility of management regarding illegal acts of clients?
Responsibility of management, those in charge of governance, to ensure that the entity operations are conducted in accordance with the provision of laws and regulations, including compliance with the provision of laws and regulations that determine the reported amounts and disclosures in an entity’s financial statements.
What is the auditors responsibilities in illegal acts?
Identifying material misstatements of the financial statement due to non compliance with laws and regulations. The auditor must apply the applicable legal framework, owing to the inherent limitations of an audit, there is an unavoidable risk that material misstatements in F/S may not be detected even if the audit is planned and performed in accordance with the CAS
What are the three inherent limitations of the auditors responsibility?
- There are many laws and regulations, relating to the operating aspects of an entity, that do not affect the F/S and are not captured by the entity’s information systems relevant to financial reporting.
- Non compliance may involve conduct designed to conceal it such as collusion, forgery, deliberate failure to record transactions, override of controls or intentional misrepresentations made to the auditor.
- Matter for legal determination.
What is the relationship between assertions and audit objectives?
- Assertions are the fundamental management claims to be audited.
- Focal point for all audit procedures.
- The evidence produced by each procedure must relate to one or more of the specific assertions, if it does not relate it is usually useless.
When does a manager make an assertion? What does the management state when they make an assertion?
They make an assertion when producing financial statements from a trial balance.For each item they assert that is exists, it is complete, valued, rights and obligations, and presented properly in the F/S or in the notes.
Which assertions should be tested?
You should test all five assertions during a financial statement audit for all accounts and classes of transactions.
Describe the fact that different assertions are more important for some accounts and less so for other accounts. Provide an example.
For goodwill, the valuation assertion is normally the most important assertion, whereas the existence and completeness assertion are less important.
For Cash valuation assertion is not that important.
- More important assertions require more audit testing, whereas less important assertions require less audit testing.
What assertions are important when firms want to maximize and minimize income?
In income maximization, auditors are concerned with the existence of assets and completeness of the liabilities.
In income minimization the auditor is concerned with the completeness of assets and existence of liabilities.
What type of evidence does the inventory count audit procedure provide?
The existence and the completeness of the inventory. When you count from the sheet to the floor, this is your existence assertion
When counting from the floor to the sheet, it is completeness
For the valuation assertion, what is the AR and inventory related too?
AR it is related to the AFDA rule or the collectibility, and the inventory is the valuation or the saleability (LCM rule)
What are the 7 steps to the audit process? - Briefly describe them.
- Client acceptance
- Audit planning
- Risk assessment -
- Develop a risk response -
- Implement the risk response
- Conclude
- Report
Describe the client acceptance stage
At the client acceptance stage you need to assess competence to perform the job, threats to independence, engagement letter, and engagement risk assessment
Describe the audit planning stage
You want to understand the entity and its environment, including materiality
Describe the identify risk of material misstatement stage
Here you want to assess what misstatements may occur at the financial statement level and the assertion level.
Describe her develop risk response
You want to develop an overall audit strategy/response, you want to have an audit strategy for the specific cycles, finalize the audit plan, develop an audit program and further procedures for each cycle.
Describe the perform risk response
Gather the audit evidence, sample decisions, perform test of controls, perform substantive analytical procedures, and perform substantive tests (test of details)
Describe the conclusion aspect?
Complete the final evidence gathering, evaluate the results of the tests completed, and conclude if the gathered evidence is sufficient, reliable, and appropriate.
Describe reporting
Determine the type of audit opinion to issue, and issue the audit report.
What are the three important planning documents and their hierarchy of importance?
- Audit strategy
- Audit Plan
- Audit Program
What is audit planning?
Audit planning is an ongoing iterative process, where the preliminary planning activities are the basis for the overall audit strategy
The audit strategy then guides and develops the detailed audit plan which details the nature, extent, and timing of the audit procedure.
What are 4 factors that are continuous throughout the entire audit process?
- Ethical requirements, like quality control
- Professional skepticism and professional judgement
- Communicate with management and those in charge of governance
- Documentation.
