Exam 1 Chapter 5 (Auditing)

Examples of Inherent Risk (IOGLS)

-Inconsistent profitability of the client relative to other firms -Operating results that are highly sensitive to economy -Going Concern -Large known and likely misstatements in prior audits -Substantial turnover and problems with management

Steps to performing analytical procedure (four)

1. Develop an expectation of an account balance 2. Determine the amount of difference from that expectation to be accepted 3. Compare the company's account balance with the expectation 4. Investigate and evaluate significant differences from the expectation

Audit Risk consists of: (2 things)

1. Risk of material misstatement of a relevant assertion 2. The risk that the auditors will not detect such misstatement

Audit Evidence

All the information used by the auditors in arriving at the conclusion on which the audit opinion is based.

Inspection of records or documents (Audit Procedure)

Examining a record or document

(TRUE OR FALSE) Audit evidence is more reliable when obtained from inside the organization

FALSE, outside is better

(TRUE OR FALSE) Audit evidence is more reliable when received orally compared to document form

False

(TRUE OR FALSE) Audit evidence is more reliable when you have the original documents compared to faxes or copies

True

Presentation and Disclosure

Assets are properly classified

Inherent Risk

Possibility of material misstatement of an assertion before considering the clients internal control

Working papers

Record of the audit procedures preformed, relevant audit evidence obtained, and the conclusions the auditors reach.

Audit Risk

Refers to the possibility that the auditors may unknowingly fail to appropriately modify their opinion on the financial statements that are misstated

Control Risk

Risk that a material misstatement could occur in a relevant assertion and not be prevented or detected on a timely basis by internal controls

Detection Risk

Risk that the auditors procedures will not detect a material misstatement that exists in a relevant assertion.

Routine Transaction Examples

Sales, purchases, cash disbursements, cash receipts and payroll

Non-routine transactions

Taking of physical inventory, calculating depreciation and adjusting financial statements for foreign currency gains and losses

Relevant Assertion

Those that, without regard to the effect of controls, have a reasonable possibility of containing misstatement that could cause the financial statements to be materially misstated.

(TRUE OR FALSE) Audit evidence is more reliable when obtained directly by the auditors rather than indirectly or by inference

True

When should auditors document audit findings or issues?

When they are significant. -Selection of appropriate accounting principles -Accounting for complex and unusual transactions -Issues related to accounting estimates