Lecture 12 - Audit Process and Completion Flashcards
Audit Procedures
Audit Process
Audit Program
Risk Assessment and Analytical Procedures
Risk assessment procedures involve a variety of specific tests that suport identifying and understanding risks of material misstatements in the FS
Selective procedures:
- Reviewing industry reports and financial publications to understand environment
- Preliminary analystical procedures on historical financial data to identify trends, ratios, and relationships to indicate risk areas
- Understandinf the effectiveness of internal controls - inquire management, perform walkthroughs, observe application of controls, test the IT environment
Audit Procedures
Substantive Analytical Procedures
Substantive analytical procedures include comparisons of recorded amounts to the auditor’s expectations to obtain evidence about assertions in the FS
Objective:
- Detect possible misstatements
- Reduce substantive testing
Audit Procedures
Substantive tests of details (transactions)
Used to test for monetary misstatement that directly affect the correctness of FS
The objective is the audit of transaction-related audit objectives for each assertion
INfluence on CR as well as DR
Audit Procedures
Test of details (balances)
Test of details test the final balances of accounts in irst place in the BS and in second place in the IS
The scope of these tests strongly depend on the result of other type of tests
test of details (balances) are very reliable as they usually deliver audit evidence from a source independent from the client, but are very costly.
Testing Selected Accounts
Cash
2 most important assertions:
- EXISTENCE
- confirm cash held by toehrs (e.g. bank balances) and cash on hand
- confirmation must be received directly from third-party - COMPLETENESS
- Examine the cilent’s bank reconcilitations
- When appropriate obtain cut-off bank statements either side of the year end. Double check all cash payments
- Test cut-off cash receipts, payments, and transfers at year-end
Other assertions may also be important:
3. CLASSIFICATION: special disclosure requirements
4. RIGHTS & OBLIG
5. VALUATION AND ALLOCATION
Testing Selected Accounts
Accounts Receivables
Testing Selected Accounts
Accounts Payable
Testing Selected Accounts
Revenue
Sampling
Overview
= the process used in statistical analysis in which a predetermined number of observations are taken from a larger population
Why sampling?
- less time and costs
- Helps to develop effective and efficient audit procedures
Sampling
Stratified
uner stratified sampling, the auditor splits the population into differents sections (such as high/low value) and then selects from each section
Goal: reduce the variability of items within each stratum and therefore allow sample size to be reduced without increasing sample risk
Advantages: Audit efficiency (i.e. feasibility and credibility) amy be improved if the auditor stratifies a population by dividing it into discrete sub-populations which have an identifying characteristic
Sampling
Monetary Unit Sampling
Completing the Audit
Overview
Completing the Audit
Review of Subsequent events - Type 1,2
The auditor is required to complete procedures to identify any events post yer-end that might require adjustement or disclosure in accounts. The auditor is responsible for reviewing subsequent events up to the audit report date.
Type 1:
- events that provide add. evidence about conditions that existed at or before the BS date
- Accounting treatment: adjust FS for the effect of those events, if material
Type 2:
- events that indicate conditions that arose after the BS date
- Do not require to be adjusted, but may require disclosure
Completing the Audit
Review of Subsequent Events - Auditor’s Responsibility
If the audior becomes aware of a fact that may materially affect financial report before the audit report date:
- must determine whether the financial report needs changing and discuss it witht the client
- if client will not adjust financial report but auditors believe it should change, the audit opinion may be modified
Auditors sometimes learn after the audited FS have been issued that the FS are materially misstated
- obligation to make certain users know
- Most desirable action is to request immediate revisions including an explanation for revisino
- If client refuses, auditor must
> Inform BoD
> Notify regulatory agencies
> Notify each person relying on FS
Audit Reports
Types
Audit Reports
European Audit Opinions by Type
Audit Reports
Unqualified Opinion
Audit Reports
Other opinions
