exam Flashcards
What is the biggest threat to being an auditor?
The biggest threat to being an auditor is that the auditor could provide the wrong opinion. Therefore, impacting reputation and creating an inability to do their job due to the lack of confidence from users
Auditing
Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria
Auditing is the verification of information by an independent source
Describe the need for auditing 3 party-accountability framework
Refer to wk 1 class 1 diagram slide 11
Describe the 3 levels of assurance
Lowest (75% of transactions) compilation - based on client information provided for internal use. No assurance: “No attempt to verify accuracy or completeness of information”
Middle: Review - some analytical procedures conducted with limited assurance. Negative assurance: “Nothing has come to our attention …”
Highest (95% of transactions) Audit - an intensive examination with the highest level of assurance. Positive assurance: “in our opinion …”
Positive assurance vs negative assurance
Negative Assurance “Nothing has come to our attention”
Positive Assurance “In our opinion …”
What standards to Canadian auditors apply?
Overall objectives of the independent auditor and the conduct of an audit in accordance with Canadian Auditing Standards
What is the purpose of an audit
The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework
What is audits role in society?
Important decisions are made on the basis of accounting information. Audits reduce the risk that these decisions will be based on inaccurate information. Auditors provide assurance as to the accuracy of accounting information. The role of audits is critical in the current business environment.
CPA Enabling Competencies
The CPA Enabling Competencies provide the essential skills for a professional accountant to carry his/her role effectively
- acting ethically and demonstrating professional values
- collaboration
- solving problems and making decisions
- communication
- leadership
- managing self
There are higher ethical standards for auditors as auditors have a set of moral, professional, and legal responsibilities to the society
CPA Professional Code of Conduct aspects and the most important part of the CPA code of conduct
The CPA Professional Code of Conduct includes:
- Professional behaviour
- Integrity and due care
- Independence and objectivity
- Professional competence
- client confidentiality
The most important part of the CPA Code of Conduct is INDEPENDENCE and OBJECTIVITY
Independence and Obejectivity
Independence - no conflict of interest (current or prior) applicable at the firm level. Independence is the foundation of how the procession maintains trust and confidence
Objectivity - is the mindset of not being driven by a bias applicable at the individual level
Threats to Independence & Biggest threats
Threats to Independence:
- Self review (position of having to audit own work)
- Self-interest (financial interest in the client or financial results of client)
- Advocacy - perceived to promote client’s position
- Familiarity - difficult to behave with professional skepticism during the engagement
- Intimidation - client intimidates PA with respect to the content of the audit
Advocacy and Familiarity are the two biggest threats to independence
Expectations Gap
An auditing expectations gap is a term used to signify the difference in expectations of users of financial statements and auditors’ expectations concerning audited financial statements
Reasonable Assurance
A degree of confidence of 90-95% confidence would be normal. 95% confidence is the most common degree of confidence.
Key Responsibilities of a PA
- Keep up to date and comply with professional standards
- Not be associated with false or misleading financial information
- Undergo rigorous professional development
- Contribute to professional body regulation
- May conduct peer reviews
Professional Judgement
The application of relevant training, knowledge, and experience within the context provided assurance, accounting, and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the review engagement.
Professional Skepticism
An attitude that includes questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.
What is central to determining the nature, extent, and timing of the audit
Risk of Material Misstatement (RMM) is central to determining the nature, extent, and timing of the audit
Key Responsibilities of Management and Auditors
Management is responsible for preparing the financial statements
Auditors are responsible for evaluating the appropriateness of such financial statements
Planning a Financial Statement Audit
A financial statement audit needs to be planned using a structure and a systematic approach to determine the extent, nature, and timing of the audit
While planning is performed at the beginning of an audit - it is a continuous activity
To conduct the audit effectively and efficiently
Financial Statement Audit timeline
May - Audit Planning
Oct - Interim Fieldwork procedures
Dec 31 - Fiscal year end
Jan - execute confirmations
Feb - year-end fieldwork
Mar - fieldwork complete + QA review
Mar 15 - F/S and Audit report issued
Fraud vs Error
Fraud is the intentional circumvention of controls
Errors are not intentional and are simply problems in the systems caused by failures in systems, procedures, or policies
Always start by looking at errors and then will look for fraud. Fraud is usually quite sophisticated and is well thought-out
How does an auditor respond to what could go wrongs?
As and when WCGWs are identified
- assign more experiences staff/experts
- assign more resources/time
- review working papers early/during audit
- do more or a different type of testing - gather more or a different type of evidence
- have a second partner review
Audit risk
Audit risk (IR x DR x CR) will occur when:
- a material misstatement has been made in the transactions or balances (inherent risk)
- and internal controls fail to detect or correct the misstatement (control risk)
- audit procedures also fail to detect misstatement (detection risk)
- auditors usually like to limit audit risk to less than 5%
Auditors strive to lower audit risk by performing audit work that gives a high level of assurance that statements are correct
Inherent Risk (IR)
Inherent Risk is the probability that material misstatements affecting one or more financial statement assertions could have occurred in the first place before any controls were applied.
- Do not create or control IR
- Consider characteristics of business and types of accounts
Control Risk (CR)
Control risk is the probability that managements internal control policies and procedures will fail to prevent material misstatements from occurring in the first place or fail to detect and correct them once they have occurred
- Do not create or control
- Effectiveness may be tested by the auditor in the audit
Risk of Material Misstatement
RMM = IR x CR and is the probability that one or more assertions in the elements of the financial statements are materially misstated due to inherent and control risks.
Detection Risk
Detection Risk is the probability that the auditors’ procedures will fail to detect a misstatement that has occurred (due to inherent risk) and has not been corrected by the company’s internal controls (due to control risk)
- can control this risk by conducting substantive tests
- inverse relationship between DR and substantive testing: if DR is low, greater testing is needed; AND if DR is high, less testing is needed
Goal of audit planning
The goal of audit planning is to establish the nature, extent, and timing
Risks that can be experienced when auditing
Auditing is a process of reducing information risk to users of financial statements:
Business risk - results from significant conditions/events that might affect the ability to execute strategies
Information risk - F/S fail to reflect the economic substance of business activities. F/S will be false and misleading
Accounting risk - errors associated with forecasts used in GAAP accounting estimates are not properly disclosed
Audit risk - insufficient evidence being gathered on facts concerning the entity’s economic circumstances
A risk statement is always accompanying with its impact/consequences
How can an auditor minimize risk?
- professional skepticism
- audit firms are split into service lines (have lots of experience and competency in particular industry or sector)
- know the internal and external environment of the business
What are the characteristics of good evidence
Acceptable evidence is sufficient and appropriate
Sufficient - the right amount (ie enough samples) to draw reliable conclusion
Appropriate - the right kind of evidence is obtained
