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Advanced Auditing > Lecture 1: Revisiting Audit Basic Concepts (Audit 1) > Flashcards

Lecture 1: Revisiting Audit Basic Concepts (Audit 1) Flashcards

1
Q

What is Audit Process?

A
  1. Client acceptance or continuance
  2. Planning
  3. Risk assessment
  4. Substantive Procedures
  5. Report
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2
Q

What is engagement letter?

A

It is a written contract which spells out what the auditor is going to do as well as the managements’ responsibilities & specialists required for the audit.

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3
Q

Planning phase

A

Auditors will start to understand the clients’ business & set the materiality threshold.

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4
Q

Risk Assessment

A

The extent that auditors would like to rely on the clients’ internal controls. If internal control is very reliable, then auditors need to do less substantive tests.

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5
Q

Report

A

Tested the managements’ assertion using substantive tests. If free from material misstatements (reasonable assurance), then auditor will make an unqualified report. If unsatisfied, then auditor will make a qualified report.

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6
Q

What are the types of Audit Reports?

A
  1. Unqualified report - free from any material misstatements
  2. Qualified report - financial records aren’t in accordance w/ accounting standards/ GAAP
  3. Adverse report - financial reports are grossly misinterpreted
  4. Disclaimer of opinion - worse audit report out of all, auditor refuse/ can’t make an opinion on the clients’ financial statements.
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7
Q

What is Audit Planning?

A

The process of deciding in advance what is to be done, who is to do, how is it to be done and when it is to be done by the auditor in order to have efficient & effective completion of work.

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8
Q

When can audit planning be done?

A

It can be done once the auditor has knowledge of the business of client

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9
Q

What are the benefits or advantages of audit planning?

A
  1. Accomplishment of objectives
  2. Identification of problems
  3. Timely completion of work
  4. Facilitates coordination
  5. Better outcome of audit work
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10
Q

What does it mean by “identifying clients’ business and industry?”

A

It means auditors must identify & assess the risks of material misstatements, whether due to fraud/ error, based on an understanding of entity & its environment, including the entity’s internal control.

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11
Q

What does “understanding clients’ business and industry” include?

A
  1. Industry & external environment
  2. Business operations & processes
  3. Management & governance
  4. Objectives & strategies
  5. Measurement & performance
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12
Q

After understanding & identifying clients’ business and industry, what should auditors do next?

A

The next step would be to assess the clients’ business risk and thereafter assessing the risks of material misstatements.

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13
Q

What is the formula for Audit Risks Model?

A

Planned Detection Risk (PDR) = Acceptable Audit Risk (AAR) / [Inherent Risk (IR) x Control Risk (CR)]

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14
Q

Based on the Audit Risk Model, what are the types of risks?

A
  1. Detection risk
  2. Control risk
  3. Inherent risk
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15
Q

What is Detection Risk?

A

It is the probability of auditor failing to detect the misstatements & errors in the co.’s financial statements. Thus, issuing a wrong opinion on those statements.
Common reason: Auditor fail to plan the audit well & the use of inappropriate audit procedures or auditor chose the wrong sample size.

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16
Q

What is Control Risk?

A

It is the risks of misstatements & errors in the co.’s financial statement due to co. failing to manage its internal controls well.
Common reason: Management failed to ensure proper segregation of duties between staff who has responsibility in the financial reporting or management fail to implement proper & efficient internal controls in financial reporting.

17
Q

What is Inherent Risk?

A

It is the risks that both management & co. could not prevent due to some uncontrollable factors & auditors didn’t find them in the audit.
Common reason: Auditors are unable to identify risks as transactions req. a high level of judgement, risks of technology obsolescence, co. misreported some of the data to repeat the mistakes again.

18
Q

What are the 4 phases when carrying out Analytical Procedures?

A
  1. Form an expectation.
  2. Identify differences between expected & reported amounts.
  3. Investigate the reason for any differences
  4. Evaluate those differences
19
Q

What are the 9 types of Audit Procedures/ Substantive Tests?

A
  1. Inquiry
  2. Confirmation
  3. Inspect records/ docs
  4. Inspect tangible assets (PPE)
  5. Observation
  6. Recalculation
  7. Reperformance
  8. Analytical Procedures
  9. Scanning through
20
Q

Audit Procedure #1: Inquiry

A

Auditor may interview the client to obtain written representations.

21
Q

Audit Procedure #2: Confirmation

A

Auditor may obtain representation from 3rd party to confirm whether what the client has provided is correct and reliable.

21
Q

Audit Procedure #2: Confirmation

A

Auditor may obtain representation from 3rd party to confirm whether what the client has provided is correct and reliable.

22
Q

Audit Procedure #3: Inspect records/ docs

A

Auditor can check the existence & occurrence of transactions (eg: tracing & vouching journal & source docs)

23
Q

Audit Procedure #4: Inspect tangible assets (PPE)

A

Auditor may verify the existence of PPE, inventory or livestock. This is done by physically visiting the warehouse to verify whether what the client said was true.

24
Q

Audit Procedure #5: Observation

A

Auditor may watch or physically observe the clients’ employees count the inventory on the spot to enhance reliability & accuracy of information. Or even watch how the client applies its internal control.

24
Q

Audit Procedure #6: Recalculation

A

Auditor may check the mathematical accuracy of calculation of depreciation, bad debt, interest, etc. Ask the client what method did they use, then applying back the same method to recalculate to see if it tallies.

25
Q

Audit Procedure #7: Reperformance

A

Auditor reperforms any client procedure/ task to see if he obtains the same results as the client.

25
Q

Audit Procedure #8: Analytical Procedures

A

Auditor may analyze financial & non-financial info to see its plausibility. Compare the figures in the financial statements w/ past years or even w/ competitors/ industry figures.

26
Q

Audit Procedure #9: Scanning

A

Auditor may search for any unusual items to investigate further.

27
Q

What is Audit Evidence?

A

It is the info collected by an auditor to ascertain the accuracy & compliance of a co.’s financial statements.

28
Q

What are the 2 characteristics of Audit Evidence?

A
  1. Appropriateness (Quality)

2. Sufficiency (Quantity)

29
Q

When an audit evidence is appropriate, what are its characteristics?

A
  1. Relevance: pertains to the assertions

2. Reliability: based on sources, persuasiveness of the evidence

30
Q

How can we consider an audit evidence to be sufficient?

A
  • Evidence must be persuasive rather than conclusive due to the limitations of audit
  • Internal control reliance increases, audit evidence decreases (inverse relationship)
  • Costs < Benefits (as long as auditor is persuaded & convinced enough that the audit evidence provide reasonable assurance, then that is considered to be sufficient)
31
Q

What are some of the sources that are considered reliable?

Note: Reliability is arranged from ascending order.

A
  1. Auditor self-developed: MOST reliable
  2. Outsider (3rd party)
  3. Outsider/ insider
  4. Insider/ client self-developed
32
Q

1 important thing to note about Audit Evidence

A

Written audit evidence is ALWAYS MORE RELIABLE than oral ones.

33
Q

What are some of the management assertions? (U-PERCV)

A
  1. Understanding & classification
  2. Presentation & disclosure
  3. Existence & occurrence
  4. Rights & obligations
  5. Completeness & cutoffs
  6. Valuation, allocation & accuracy

Advanced Auditing (12 decks)

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