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Auditing HSG > From slides > Flashcards

From slides Flashcards

1
Q

Audit risk

A

The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated. It is a function of the risks of material misstatements and detection risk or expressed as AR=IRCRDR

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2
Q

Materiality

A

The magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have changed or influenced by the omission of the statement.

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3
Q

Applying materiality, 5 step approach

A

(first two during planning phase, third during the entire process, and last two during phase four),
1. Set materiality for the financial statement as a whole,
2. Determine performance materiality
3. Estimate total misstatement in each segment
4 Estimate the combined misstatement
5. Compare combined estimate with preliminary or revised judgment about materiality.

If Combined estimate about misstatement is larger than Preliminary judgment, the financial statements cannot be accepted

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4
Q

Performance materiality

A

Amounts set by auditor as a whole that puts risk sufficiently low. Three steps are common; Auditors expect certain accounts to have more errors than others, both under and over statements are considered (might offset each other), relative audit costs affect allocation.

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5
Q

Audit risk Model

A

It is constituted by: Inherent risk, Control risk and Detection risk; which when multiplied gives Acceptable audit risk

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6
Q

Inherent risk

A

Measures the risk of misstatements, before reviewing internal controls. I.e. if the auditor will conclude that a high likelihood of misstatement exists, he will conclude that the inherent risk is high.

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7
Q

Control risk

A

Risk of misstatements not being prevented or detected by client’s internal controls.

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8
Q

Detection risk

A

Likelihood that audit evidence for a segment will fail to detect misstatements exceeding the tolerable misstatement.

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9
Q

Acceptable audit risk

A

Measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.

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10
Q

Planned detection risk (formula)

A

PDR=AAR/(IR*CR)

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11
Q

Achieved detection risk

A

Measure for the risk that gathered audit evidence could not detect material misstatements if such misstatements exist. Can be revised by gathering additional evidence (substantive audit evidence).

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12
Q

Achieved Audit risk (formula)

A

AcAR=IRCRAcDR

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13
Q

Unqualified opinion

A

Conditions have been met and audit report is presented, a finished report

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14
Q

Unqualified with emphasis-of-matter explanatory paragraph or modified wording

A

A complete audit that is satisfactory, but auditor believes additional information should be provided

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15
Q

Qualified

A

Overall financial statement is fairly presented, but the scope has been materially restricted or accounting standards were not followed

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16
Q

Adverse opinion

A

Only used when the auditor believes that the overall financial statements are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with recognized accounting principles. The adverse opinion report can arise only when the auditor has knowledge, after adequate investigation, of the absence of conformity.

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17
Q

Disclaimer of opinion

A

Issued when the auditor has been unable to satisfy himself or herself that the overall financial statements are fairly presented. The necessity for disclaiming an opinion may arise because of a severe limitation on the scope of the audit or a non-independent relationship between the auditor and the client. The disclaimer is distinguished from an adverse opinion in that it can arise only from a lack of knowledge by the auditor, whereas to express an adverse opinion, the auditor must have knowledge that the financial statements are not fairly stated.

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18
Q

Internal control

A

A process, affected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

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19
Q

Responsibility of auditor (Check CO Art. 728):

A

Includes investigating the internal system of control. He takes it into account when determining extent of audit. The auditor provides the board with comprehensive report with conclusions on financial reporting, the internal system of control as well as the result of the audit. The auditor provides a summary report to the general meeting, which includes assessment on results, information on independence, information about auditor, a recommendation regarding qualification.

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20
Q

Audit plan

A

Planning” means develop audit strategy and audit program

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21
Q

Audit strategy

A

The external auditor must develop and document an audit strategy, which focuses on the expected scope and expected procedures of the audit.

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22
Q

Audit program

A

The auditor has to develop and document an audit program which compromises the type, time and scope of audit procedures required by the audit strategy. The audit program serves as guidance for involved auditors and a means to control and documentation of adequate and necessary auditing procedures. When developing, persuasiveness of evidence, inherent risk and control risk is evaluated. The availability of responsible employees is also considered. Consists of the three parts: Test of controls and substantive tests of transactions, analytical procedures and tests of details of balances.

23
Q

Evidence mix

A

Combination of the five tests depending on organization’s size, effectiveness of controls, IT equipment, risk assessment etc.)

24
Q

The Revenue recognition issue

A

Different techniques in order to artificially increase revenues and thereby manipulate the market price

25
Q

Nine general management assertions

A

Detail tie-in, Existence, Completeness, Accuracy, Classification, Cut-off, realizable value, Rights, Presentation and disclosure

26
Q

Representative sample

A

A sample in which the characteristics is approximately similar to those of the population. In practice, an auditor never knows whether a sample is representative.

27
Q

Sampling risk

A

Probability that the sample is not representative and the auditor reaches an incorrect conclusion.

28
Q

Statistical sampling (probability or random sampling)

A

Each population item has a known probability of being included in the sample. The auditor cannot subjectively influence which items that are included. Methods such as, Simple random selection, Systematic sample selection (every tenth transaction), Probability proportional to size sample selection, Stratified sample selection (segmental, dividing into heterogeneous subgroups)

29
Q

Non-statistical sampling (judgmental sampling):

A

Subjective sample procedure. Can be used due to prior results in order to focus on high-risk items. Methods such as Haphazard sample selection (picking subjectively), Block sample (specific month, even though different months might have different characteristics), directed sample selection (e.g. specific characteristics lite high risk of misstatement).

30
Q

Attribute sampling

A

Used to estimate the percent of items in a population containing characteristic or attribute of interest. The percent is called occurrence rate or exception rate, i.e. ratio of number exhibiting the attribute and the number or items in the population.

31
Q

Tolerable exception rate

A

Represent the highest exception rate the auditor will permit in the control being tested and still be willing to conclude the control is operating effectively. TER can have significant impact on sample size.

32
Q

Acceptable risk of overreliance

A

The risk that the auditor concludes that controls are more effective that they actually are is the risk of overreliance. ARO measures the risk the auditor is willing to take of accepting a control as effective when the true population exception rate is greater than TER. ARO represents the auditor’s measure of sampling risk (i.e. an ARO of 5% leads to 95% confidence level). ARO is based on the assessed control risk, the lower the assessed CR, the lower the ARO. Like for TER there is an inverse relationship to planned sample size and both are determined by the auditor before selecting the sample.

33
Q

Sample exception rate (SER):

A

Actual number of exceptions divided by the actual sample size

34
Q

Estimated population exception rate (EPER):

A

Exception rate that the auditor expects to find in the population before testing begins.

35
Q

Computed upper Exception rate (CEUR):

A

The highest estimated exception rate in the population at a given ARO. CEUR is derived from a table and is a result from the sample. It is influenced by ARO, sample size and SER.

36
Q

Internal auditing (“Key concepts”):

A

An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

37
Q

Going concern assumption

A

Under the going concern assumption, an entity is viewed as continuing its business for the foreseeable future. Financial statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of the business.

38
Q

Agency costs are sum of

A
  • Monitoring expenditures by the principal
  • Bonding expenditures
  • Residual loss (i.e. costs of decisions taken that does not maximize value)
39
Q

Non transferable duties of the board, Art 716 CO (examples)

A
  • The overall management of the company and the issuing of all necessary directives
  • Determination of the company’s organization
  • Overall supervision of the persons managing the company
  • Compilation of the annual report
40
Q

Two types of independence

A
  • Independence in mind/fact
    The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional skepticism.Determined by e.g. ethics, personal character and professional experience
  • Independence in appearance
    Result of others’ interpretations of independence of mind/fact. Achieved through avoidance of circumstances that create doubt
41
Q

Two audits are possible in Switzerland

A

Ordinary audit, done by:
• Public companies
• Economically significant companies (two of three fulfilled: Assets 20M, Sales 40M, 250 employees)
• Companies that require consolidated accounts
• Shareholders (min 10%) request it
• Decisions of the articles of the association or the general meeting

Limited statutory examination
•	Small and medium sized companies
o	Exempted since:
•	Economically burdensome for small firms
•	Time consuming
•	Benefit
42
Q

o Independence ordinary audit, the following are the most important:

A
  • No relationship with people in decision making ability (board) or employment relationship
  • No financial relation (equity or debt claim)
  • No close relationship with decision maker (board or major shareholder)
  • No review of own work (employed)
  • No duty that leads to economic dependence
  • No contracts that affect interests
  • No gifts or privileges
43
Q

o Independence Limited statutory audit:

A
  • Involvement in the accounting or consulting for company is permitted
  • In the event of own work being audited, a reliable auditable measures needs to be done within organization
44
Q

o Classes of assertions:

A
  • Occurrence: recorded transactions have occurred
  • Completeness: transactions that should be recorded, have been
  • Accuracy: amounts are appropriate
  • Classification: proper accounts
  • Cutoff: correct accounting period
45
Q

• Characteristics of persuasive evidence (Two determinants, and their characteristics)

A 
o	Appropriateness
•	Relevance of evidence
•	Reliability of evidence
•	Independent provider
•	Clients internal controls
•	Auditor’s knowledge
•	Quality of provided information
•	Degree of objectivity
•	Timeliness
o	Sufficiency
•	Adequate sample size
•	Higher risk leads to higher required sample
•	Higher quality of evidence leads to smaller required sample
•	Selection of proper population items
46
Q

• Finished audit report, 4 types:

A

o Unqualified opinion
• Conditions have been met and it is presented, a finished report
o Unqualified with emphasis-of-matter explanatory paragraph or modified wording:
• A complete audit that is satisfactory, but auditor believes additional information should be provided
o Qualified
• Overall financial statement is fairly presented, but the scope has been materially restricted or accounting standards were not followed
o Adverse or Disclaimer

47
Q

Audit process, phase 1

A

Plan and design an audit approach
• Accept a client and perform initial planning
• Understand the business
• Assess client business risk
• Perform preliminary analytical procedures
• Set materiality and assess acceptable audit and inherent risk
• Understand internal control and assess control risk
• Gather information to understand fraud risk
• Develop an overall audit plan and audit program

48
Q

Audit process, phase 2

A

Perform tests of controls and substantive tests of transactions
• Perform test of controls
• Perform substantive tests of transactions
• Assess likelihood of misstatements in financial statements

49
Q

Audit process, phase 3

A

Perform analytical procedures and tests of details of balances
• Perform analytical procedures
• Perform tests of key items
• Perform additional tests of details of balances

50
Q

Audit process, phase 4

A

Complete the audit and issue audit report
• Review for contingent liabilities
• Review for subsequent events
• Accumulate final evidence
• Evaluate results
• Issue audit report
• Communicate with audit committee and management

51
Q

o Three reasons for planning

A
  • Enables to obtain sufficient evidence to minimize legal liability and maintain good reputation
  • Enables lower audit costs
  • Avoid misunderstandings
52
Q

• Engagement letter might include:

A
  • Objectives and that auditor cannot guarantee everything
  • Responsibilities for auditor and manager
  • Financial reporting framework
  • Engagement’s limitations
  • Agreement to provide other services e.g. consulting
  • Restrictions for auditor, e.g. deadline
  • Agreement on fees
53
Q

Main measures of understanding business (page 13):

A 
Industry and external environment
- Risks associated with specific industries
- Inherent risks dependent on industry
Business operations and processes
Management and governance 
Client objectives and strategies
- E.g. WV, largest in the world, gives incentives to use questionable measures
- Reliability of financial reporting
- Compliance with laws
Measurement and performance

Auditing HSG (7 decks)

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