Points of Emphasis - Midterm Flashcards
Management’s Responsibility for Reporting on Internal Controls
Management is responsible for establishing and maintaining the entity’s internal controls. (P.289)
Management’s Responsibility for Financial Statements Reporting
Management is responsible for making fair representations in the financial statements. (P.143)
Auditor’s Responsibility for Reporting on Internal Controls
Auditor is responsible for identifying material weaknesses in internal control over financial reporting. (P.144)
Auditor’s Responsibility for Financial Statements
Auditor is responsible for detecting material misstatements in the financial statements. (P.144)
Management Report
Management report on internal controls includes (P.289):
- Statement that management is responsible for establishing and maintaining adequate internal control and procedures for financial reporting.
- Assessment of the effectiveness of the internal control and procedures for financial reporting.
Persuasiveness of Evidence
The degree to which the auditor is convinced that the evidence supports the audit opinion. (P.176)
Determinants: Appropriateness & Sufficiency
Characteristics of Sufficiency
- Adequate Sample Size
- Selection of Proper Population Items
(P.179)
Characteristics of Appropriateness
- Independence of Provider
- Effectiveness of Client’s Internal Controls
- Auditor’s Direct Knowledge
- Qualifications of Provider
- Degree of Objectivity
- Timeliness
(P.179)
Components of Internal Controls
- Control Environment (Umbrella)
- Risk Assessment
- Control Activities
- Information & Communication
- Monitoring
Control Environment (Umbrella)
The actions, policies, and procedures concerning internal control.
Risk Assessment
Analysis of risks concerning the preparation of financial statements.
Control Activities
Policies and procedures to reduce risks.
Examples:
- Separation of Duties
- Proper Authorization of Transactions and Activities
- Adequate Documents and Records
- Physical Control over Assets and Records
- Independent Checks on Performance
Information & Communication
Methods used to initiate, record, process, and report transactions and to maintain accountability for assets.
Monitoring
Assessing quality of internal control performance to determine that controls are operating as intended.
Preliminary Judgement about Materiality
The maximum amount concerning misstatements and still not affect the decisions of reasonable users.
Performance Materiality
Materiality amounts for segments of the audit at less than materiality for the financial statements as a whole.
Audit Risk Model
[PDR=AAR/(IR x CR)]
- Planned Detection Risk (PDR)
- Acceptable Audit Risk
- Inherent Risk
- Control Risk
Planned Detection Risk
The risk that audit evidence for a segment will fail to detect misstatements.
Acceptable Audit Risk
How willing the auditor is to accept misstatements after the audit is completed and an unqualified audit opinion has been issued.
Inherent Risk
Assessment concerning material misstatement before considering the effectiveness of internal control.
Control Risk
Assessment of the risk that misstatement could occur in an assertion and not be prevented or detected by internal controls.
If Acceptable Audit Risk (AAR) ↑, then Planned Audit Evidence…
Decreases ↓ (Inverse)
If Acceptable Audit Risk (AAR) ↓, then Planned Audit Evidence…
Increase ↑ (Inverse)
If Inherent Risk (IR) ↑, then Planned Audit Evidence…
Increase ↑ (Direct)
