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1
Q

o Professional judgement

A

Judgment is the process of reaching a decision or drawing a conclusion from among a number of alternatives, often in the face of significant uncertainties

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2
Q

o Skepticism

A

at attitude that includes a questioning mind and a critical assessment of audit evidence

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3
Q

o 5 Professional Judgement Key Steps

A 
	Clarify issues and objectives
	Consider Alternatives
	Gather and evaluate information
	Reach Conclusion
	Articulate and document rationale
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4
Q

• Why is it hard to be skeptical on an audit

A

o Incentives & Pressures
o Trust in management - Inappropriate
o Unconscious Bias

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5
Q

Where do auditors typically do a bad job exercising skepticism

A

o Evaluating management estimates or assumptions used to develop estimates in fair value calculations
o Over-reliance on management inquiry regarding adequacy of management’s reserves
o Lack of skepticism in the evaluation of 3rd party confirmations
o Influenced by prior year work papers, other team members, other clients

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6
Q

• Professional Skepticism Characteristics:

A 
o	Curiosity
o	Self-confidence
o	Interpersonal understanding
o	Questioning Mind
o	Self-Determination
o	Deliberation
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7
Q

o First Movers

A

risk that management makes auditors (second mover) biased in the direction of management’s judgements.

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8
Q

• Type of cognitive biases

A 
Anchoring
Confirmation
Familiarity/Availibility
Framing Bias
False Consensus
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9
Q

• De-biasing techniques:

A 
Decision Aids
Tutorials
Breaking large tasks to smaller task
Develop alternate Explanations
Consider decision impact on 3rd parties
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10
Q

o How are auditor judgements biased in ICFR audits

A

 That management tends to lead them to bias
 Curse of knowledge is not effort related, but hard wired
 Knowledge bias – Explain and document hypotheticals and what you would expect to see – helps mitigate knowledge bias.

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11
Q

o What do authors recommend in order to mitigate bias?

A

 Cognitive restructuring of the task
 Document findings like likelihood or magnitude with identified ICFR problems
 Perform “self review”

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12
Q

3 Key Decisions in sampling

A
  1. Calculate SS
  2. Select Sample items
  3. Evaluate Sample Results
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13
Q

Types of Analytical Procedures

A

 Regression analysis
 Reasonableness test
 Trend analysis/ratio analysis

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14
Q

Regression Analysis

A

calculate the expected value using a statistical technique where one or more variables are used to predict the account balance

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15
Q

Reasonableness Test

A

calculate an expected value using data that may or may not be independent of the client’s information system

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16
Q

 Trend analysis/ratio analysis

A

Calculate Changes in account balances - or in relationships between balances - to identify unusual variances

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17
Q

Low Inherent Risk; Low Control Risk

A

• High Detection Risk: Prime example of where you can use analytical procedures. Maybe exclusively

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18
Q

High Inherent Risk; High Control Risk

A

• Low Detection Risk: do NOT use analytical procedures exclusively

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19
Q

Advantages of Analytical procedures

A

Prime example of where you can use analytical procedures. Maybe exclusively

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20
Q

Disadvantages of Analytical Procedures

A
  • Ability to establish auditor expectation
  • Lack of precision
  • Failure to detect unusual relationship
  • Failure to follow up on exceptions
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21
Q

Steps in Sampling

A

Planning
Performing
Evaluating

22
Q

Non Statistical Sampling (Judgement involved)

A

 Judgmentally determine sample size implicitly recognizing relevant factors
 Judgmentally select a representative sample
 Apply Audit Procedures
 Evaluate test results judgmentally

23
Q

o Statistical Sampling (Judgement)

A

 Determine sample size explicitly recognizing relevant factors
 Randomly select a representative sample
 Apply audit procedures
 Evaluate test results statistically using judgement

24
Q

• Factors that influence the auditor’s decision to use AP as substantive evidence

A

o Nature of and account
o Predictability
o Availability and reliability of data
o Precision of expectation

25
Steps/Requirement in performing AP
o Establish tolerable misstatement o Develop an expectation (precision of expectation tied to req/d level of assurance)  Carefully consider data used in developing expectation (Source, controls over, level of disaggregation) o Compare auditor expectation to client actual; investigate variance o Document
26
Majestic Hotels Case Auditor 2 Challenges
Generating the expectation and evaluation of variance
27
• Management estimates Definition
an approximation of a monetary amount in the absence of a precise means of measurement
28
Approaches (Estimates)
 Review Client’s Process: used most of the time  Develop Independent Estimate: Hard  Consider Subsequent events: rare
29
Challenges
 Estimate calculations require use of complex modelling  Depend on future events or management's intentions, which are difficult to verify • Impairment decisions • Outcome of litigation  Require balancing detailed calculations with "big picture"  May be misled by unreliable numbers
30
Steps in Testing Management's process (Estimates)
 Identify areas that contain significant estimates • Understand company, industry, accounting standards  Evaluate Reasonableness of estimates: • Management’s process drives auditor’s approach  Conclude whether estimates contain material Misstatements
31
Exit Price
 Exit Price: what someone can SELL the item for (not cost)
32
 Financial vs. non financial
financial are measured on a standalone basis (not part of group) whereas non-financial assets can be measured either way. Non financial assets require consideration of “highest and best use”
33
 Market Approach
Goal is to calculate market value. Inputs are available from an observable market for identical assets (level 1) or similar assets (level 2) • Stocks
34
 Income Approach
Goal is to calculate the PV of future income; valuation techniques based directly or indirectly on discounted cash flow analysis or a multiple of earnings (Level 2 or 3 depending on source of inputs) • Goodwill and intangibles
35
 Cost Approach:
goal is to calculate replacement cost of the asset (Most applicable to tangible assets (PPE) – Subtle shift from exit price (to sell) to an entry price (to buy) – (Level 2 or 3) •Fixed Asset
36
 Level 1 inputs:
observable, quoted prices in active markets for identical assets (or liabilities). Open WSJ, pull out closing stock price
37
 Level 2 inputs:
use of observable inputs other than quotes prices in active markets for identical/similar assets. Can also use less-active markets for identical assets/liabilities (Matrix pricing)
38
 Level 3 inputs:
use of unobservable inputs developed by the reporting entity, using management assumptions • FASB: Disclose level of input
39
• How to audit management’s FV measurements and disclosures
o Obtain inventory of FV measurements, assess RMM for each o Understand management’s process & evaluate conformity with GAAP o Test FV measurements & disclosures (assumptions, techniques, inputs, underlying data)
40
o Understand management’s process & evaluate conformity with GAAP
 may use specialists |  consider need for SOC report
41
o Need for judgment and skepticism on Hamilton and Wasatch:
management classification of investments measurement (ie equity method) valuation technique used inputs and assumptions determination re impairment losses
42
What Drives FV?
 Identify inputs  Consider assumptions  Consider quality of data
43
o Attestation:
An accounting service resulting in a report on subject matter or an assertion about subject matter that is the responsibility of another party
44
o Attest
 Subject Matter: Specified subject matter by responsible party  Procedures and Measurement Criteria: Agreed-upon procedures, negotiable  Examination, Agreed-upon procedures, review  Assurance: Positive, negative, or no?
45
 SOC 1
Specific to internal controls over financial reporting | • Restricted distribution to management, user entities, and user auditors
46
SOC 2
report on internal controls relevant to security, availability, processing integrity, confidentiality, or privacy. • Restricted use • Not sufficient for Auditor of F/S
47
 SOC 3
• Similar to SOC 2 but less detail | o Intended for general use (unrestricted)
48
 Type 1
Describes Internal Controls at specific point in time. Tests Design, NOT Effectiveness
49
 Type 2:
Includes description of controls AND evaluation of effectiveness • Minimum six months • Only Type 2 meets SOX requirements
50
Attestation Engagement
 Existence of an assertion  Existence of objective measurement criteria  Assertion amendable to verification  Independent assurance provider  Enhances reliability of information  Issuance of written report to a third part
51
Assurance Engagement
 Independent assurance provider  Adequate knowledge of subject matter  Availability of objective evidence  Addresses relevance and reliability of information
52
Audit Engagement
 Examination of historical F/S

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