Audit SB Chp 6
auditors perform a number of procedures near the completion of the audit including:
-performing final analytical procedures -completing the review of minutes of meetings -completing the search to identify contingencies -obtain representation letter
Which is not a relevant assertion? A) existence of occurrence B) Materiality and appropriation C) Rights and Obligations D) Cutoff
B) Materiality and appropriation
Materiality planning is commonly based on % of
Net income Total Revenues Total Assets
What do auditors perform to obtain the understanding of the entity and its environment?
Risk Assessment Procedures
auditors test completeness of receivables in order to determine:
all receivables have been recorded
Tolerable Misstatement
application of performance materiality to a particular audit procedure
Dual Purpose Procedure
audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year is known as
Auditors should document several elements of risk assessment including:
audit team discussion, understanding of the entity and its environment, the nature, timing and extent of further audit procedures
At planning stages of an audit
auditors consider materiality to determine scope of the audit
Audit Risk
auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially mistated
achieving management objectives is always subject to
business risk
Significant business risk for clients include:
changes in government regulations interest rate increase competition material price volatility
Further audit procedures include a combo of additional tests of:
control and substantive procedures
What do auditors consider when it comes to fraud?
defalcations and management fraud
Audit Plan should include:
description of the nature, timing, and extent of planned risk assessment procedures
substantive procedures are performed to restrict:
detection risk
overall audit strategy involves determining overall characteristics of the engagement that:
determine the focus of the audit team determine the timing of procedures define the audit scope
Systems portion of the audit addresses:
effectiveness of client's internal controls
overall risk of association with a particular business is referred to as:
engagement risk
Relevant assertions include:
existence of occurrence, valuation or allocation, completeness
Materiality
idea that some matters are important to the fair presentation of financial statements while others are not
if auditors identify fraud risks, auditors may modify their overall approach by:
increasing third party confirmations adding specialized audit staff
Risk assessment procedures include;
inquiry of external parties analytical procedures observation and inspection
Inquiries of predecessor auditors are aimed at obtaining information on:
integrity of management reason for change in auditors disagreements with management
successor auditors seek info from predecessor auditors on communication with the client and those charged with governance regarding:
internal control deficiencies and material weaknesses fraud and noncompliance with laws and regulations
auditor selection of further audit procedures is based on:
materiality of account balances transactions disclosures being audited assessed risk of material misstatement
management fraud
misstatements arising from fraudulent financial reporting
Defalcation
misstatements arising from misappropriates of assets
when successor auditor is offered an auditing engagement, the successor auditor:
must obtain the client's consent before communicating with the predecessor auditor
What depends on the effectiveness of client's internal controls in preventing or detecting material misstatements?
nature and extent of audit work to be performed on a particular engagement
upon acceptance by the client, the engagement letter
presents an executor contract between the auditor and the client
What are 3 components to fraud trangle?
pressure, rationalization, opportunity
Verifying financial statement presentation of assets
reviewing related party transactions to confirm that they are properly recorded
Detection Risk
risk that auditors will not uncover a material misstatement
Significant Risk
risk that has been identified and assessed auditor's opinion states "requires special audit consideration"
During planing stages of the audit, auditors develop
schedule strategy audit plan
material misstatement to the financial statements
small misstatement, such as a misstatement that affects a client's loan covenants
substantive test portion of audit addresses:
substantive tests of account balances
Analytical Procedures
tests that involve comparisons of financial data of the current year to the prior years, budgets, and industry averages
Interim Period
time interval from the beginning of audit work to the balance sheet date
Why do auditors vouch cash receipt transactions occurring near period end?
to verify cutoff of transasctions
During audit, client staff may prepare
trial balance, aging of AR, analysis of accounts written off
Advantages of interim audit work:
uniform workload for CPA firm, timely release of audited financial statements, increased assessment of internal control
balanced scorecard
uses combination of financial and non financial information performance measures to assess the organization