Test 1 Handouts Flashcards
GAAS-PCAOB
3 Categories of Standards
General Standards
Standards of Field Work (at client site, conducting audit)
Standards of Reporting
GAAS
General Standards
- [Skills] Should have adequate technical training and proficiency.
- [Objectivity] Must be independent, neutral, objective.
- [Professionalism] Must exercise due professional care.
GAAS
Standards of Field Work
- Adequate Planning and Supervision of assistants
- Role of Internal Control in Audit Tests - understand IC to plan audit and determine scope of tests
- Amount and Type of Evidence needed - Gather Documentation, Observe, Inquire, Confirm to provide reasonable assurance
GAAS
Standards of Reporting
- Accordance with GAAP
- Consistency - reporting the way they did last year (principle)
- Review Notes - disclosures accurate?
- Expression of Opinion
Major Phases of an Audit
- Client acceptance/continuance
- Preliminary Engagement Activities
- Plan the audit
- Consider and audit internal control
- Audit business processes and related accounts (eg rev generation)
- Complete the audit
- Evaluate results and issue audit report
Major Phases of an Audit
1. Client Acceptance/Continuance
- Review available fin. info (annual reports, fin st, tax returns, etc)
- Commuincate with predecessor auditor (with permission)
- Consider special circumstances – litigation or going concern
- Determine independence
- Determine firm’s technical skills and knowledge of industry
Major Phases of an Audit
2. Prelim Engagement Activities
- Determine the audit engagement team requirements (training and proficiency)
- Ensure the team and firm comply with ethical and independence requirements
- Establish an understanding with client (Engagement letter, use work of Int Auditors, Role of Audit Committee)
Major Phases of an Audit
3. Plan the Audit
- Risk assessment procedures (inquire mgt, prelim analytical proc for assessing risk, observe/inspect)
- Determine Audit steps (Reliance vs. Substantive approach)
*Must understand IC
Inquiry, Inspection of docs, Observe activities/operations
Major Phases of an Audit
4. Consider and Audit IC
- Test Of Controls: test effectiveness of IC in preventing or detect and correct material misst.
- Mgt Assertions
- Evidence (Types of Test of Controls) Inquiry, Inspec, Obser, and Reperformance - Sampling for test of Controls
- Public Companies - ICFR
Major Phases of an Audit
5. Audit bus. Processes and related accounts
Substantive Tests
- Test of Details (Transactions and Balances)
- Subst. Analyt. Proc. to gather evidence.
- Mgt Assertions
- Evidence
- Auditing a Cycle (See Handout)
Major Phases of an Audit
6. Completing the Audit
Review for contingent liabilities
- commitments
- subsequent events(ntoes)
- communicate with audit committee board
Major Phases of an Audit
7. Evaluate Results and Issue Audit Report
Final Analytical Procedures for Reasonableness
Factor that Influence Acceptable Audit Risk
- Level of reliance by external users
- Probability of financial failure
- Character or integrity of key personnel
Factors that Influence Assessed Inherent RIsk
- Nature of client’s industry/business
- character or integrity of key personnel
- Results of prior audits and audit history
- Amount and types of related party relationships and transactions
- Client motivation and incentives
- Complexity and routineness of transactions
- Level of subjective judgment required by acc standards
- degree to which assets are susceptible to theft
Factors that Influence Assessed Control Risk
- Effectiveness of internal controls
2. Planned reliance on internal controls
Relationship:
Acceptable Audit Risk and Planned Detection Risk
AcceptAR and PDR
Direct (increase in one leads to increase in other)
Relationship:
Acceptable Audit Risk and Planned Audit Evidence
AcceptAR and PAE
Inverse (Increase in one leads to a decrease in the other)
Relationship:
Assessed Inherent Risk and Planned Detection Risk
AIR and PDR
Inverse
Relationship:
Assessed Inherent Risk and Planned Audit Evidence
AIR and PAE
Direct
Relationship:
Assessed Control Risk and Planned Detection Risk
ACR and PDR
Inverse
Relationship:
Assessed Control Risk and Planned Audit Evide
ACR and PAE
Direct
Relationship:
Actual Audit Evidence and Achieved Detect Risk
AAE and ADR
Indirect
Relationship:
Reassessed Inherent Risk, Achieved Detect Risk, Reassessed Control Risk and Achieved Audit Risk
RIR, ADR, RCR and AchAR
Direct
Comparing AcceptAR and AchAR
Determines whether the audit was effective or efficient
Test of Controls (ARM)
Purpose
1. Public Co
2. Private Co
Purpose: To assist auditor in determining the SCOPE (nature, timing, and extent) of substantive tests
- Public - Required. Same auditor performs audit for ICFR and for Fin St and issues opinion on each.
- Private - Not required - After review of controls, only needs to test controls IF they’re strong and the auditor plans to rely on them to reduce subst testing
Do the Work (ARM)
What:
How:
What: Mgt Assertions
How:
1. Test to =Controls (to see how much subst testing)
2. Analytical Proc. - Required when planning(risk assessment) and final review stage (final analyt proc)
Evidence Types
PC RADIOS – Physical Examination (inspect assets) –Confirmation – Reperformance and Recalculation – Analytical Procedures – Documentation (inspect documents) – Inquiry –Observation –Scanning
or MIRADCOPS
Management Assertions:
Transactions
AOCCCA Authroization Occurance Cutoff Classification Completeness Accuracy
Management Assertions
Balances
RECeiVe Rights and Obligs Existence Completeness Valuation
Management Assertions:
Disclosures
ROCuCVa Rights and Obligs Occurence Classification and understandability Completeness Valuation and Accuracy
Audit Evidence Hierarchy
- Auditor Generated Evidence
- Outside 3rd Party provides Evidence
- Inside the Company - provided by client
Auditor Generated evidence
Most reliable
- Inspection (tangible assets)
- Reperformance - redo a process to make sure proc or control works as intended
- Recalc - check math accuracy of records
Evidence provided by
2) Outside 3rd Party
3) Inside the Company (Client)
-Inspection (Documents)
-Confirmation (Written to 3rd party)
-Analyt Proc - Analyze trends, ratios, relationships etc to ID inconsistencies or signif. differences
Scanning - review of acc data to ID signif or unusual items
____________
Inquiry - seeking info (unwritten)
Observation - watching client perform procedure
3 Steps in Applying Materiality
- Determine a mater. level for the overall financial statements
- Determine a tolerable misstatement
- Evalutate Audit Findings
Determining tolerable misstatement is is necessary because
evidence is accumulated by fin state. segments during the course of the audit
Evidence types commonly used to test controls
Reperformance
Observation of procedures
Inquiry
Documents, inspection of
In an audit area that has a higher level of inherent risk, it would be prudent to
- increase amt of evidence
- assign more experienced staff
- review collected evidence more thoroughly
