Week 3 Flashcards
Risk Assessment
What & how much evidence needs to be gathered?
Preplanning
Carefully select your clients
Client Risk Profile
Understand your client & their industry
Plan the Audit
Based on the audit risk model
Design Audit Procedures
Preliminary Risk Identification
Understand the Client Identify Related Parties Fraud Risk Going Concern Risk Corporate Governance Understand Internal Controls Understand IT Environment Significant Accounts Significant Classes of Transactions Closing Procedures Materiality
Understand Client to Assess Risk
Purpose: to assess risk of F/S having a material misstatement
Need to gain knowledge of client at:
Entity level – it’s operations, it’s management, it’s IT environment, etc.
Industry level – highly competitive, amount of regulation, etc.
Economic level – pressures, susceptibilities
Steps to Understand Client
Make inquires
Management
Financial & non-financial staff at all levels
Perform analytical procedures
Looking for unusual relationships
Perform observation & inspection procedures
Take a tour of the facilities
Read management reports, minutes from BOD meetings
Fraud: The Basics
Definition
Intentional error
Types
Financial Reporting – misstatement
Theft of physical assets – cash, inventory, fixed assets
Sources Management – most difficult to detect Employee Computer External
Conditions for Fraud
Incentive/Pressure
Opportunity
Rationalization/Attitude
If any of these conditions exist, then there is risk of fraud occurring exists.
Our Fraud responsibilities
What
Defines our responsibilities
Provides guidelines
Why
An expectation gap exists
Next to impossible task
How
Use professional skepticism at all times
Discuss potential risks, document & respond
Must make inquiries to management
Potential Risk Factors
Related Parities Going concern Corporate Governance Information Technology Closing Procedures
Related Parities
May take place under favourable terms
Specific disclosure requirements & increase RMM
Going concern
Key assumption that the business will continue to operate for 12 months
Need to be on the look out for signs and if suspect then additional evidence needs to be gathered
CAS 570 requires a para. in audit report for material uncertainty
Corporate Governance
Structures put in place to guide and control the organization
A key element of internal control - The Control Environment
“Tone at the Top”
Information Technology
Level of reliance on IT
Effectiveness of IT environment – general and application controls
Have significant changes occurred and associated risks
Closing Procedures
Ability of client to accurately prepare the F/S
The amount of professional judgement involved in adjusting entries
Pressures to smooth F/S results
