...1 Session 4 Audit Planning; Materiality and the audit risk model Auditing: Principles and Methods 2 After studying this session you should be able to: 1. Discuss why adequate audit planning is essential 2. Make client acceptance decisions and perform initial audit planning 3. Gain an understanding of the client’s business and industry 4. Assess client business risk 5. Perform preliminary analytical procedures 6. Apply the concept of materiality to the audit 7. Define risk in auditing and the audit risk model Auditing: Principles and Methods 3 8. Consider the impact of engagement risk on acceptable audit risk 9. Discuss the relationship of risks to audit evidence 10. Answer the Review Questions Auditing: Principles and Methods 1. Audit Planning 4 Why is adequate audit planning essential? “The auditor must adequately plan the work and must properly supervise any assistants”. There are three main reasons why the auditor should properly plan engagements: to enable himself to obtain sufficient appropriate evidence, to keep audit cost reasonable and to avoid misunderstanding with the client. Auditing: Principles and Methods 1. Audit Planning 5 An important part of audit planning is assessing acceptable audit risk and inherent risk because it helps determine the amount of evidence that will need to be accumulated and staff assigned to the engagement. Acceptable audit risk is a measure of how willing the auditor is to accept that the FSs...
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...E-mail: chiho.ng@cica.ca Fax : (416) 204-3408 Auditing Considerations in an Uncertain Economic Environment Uncertainties in the current economic environment There is a possibility that the Canadian economy may weaken in the near term. This has been noted in various sources, including the economic forecast for Canada issued by the Organization for Economic Co-operation and Development. Heightened risks from renewed financial-market turmoil linked to the European sovereign debt crisis and high levels of household indebtedness are eroding consumer confidence. In January 2009, staff of the Auditing and Assurance Standards Board (AASB) issued a Risk Alert, “Auditing Considerations in the Current Economic Environment,” to highlight matters for auditors to consider when responding to higher risks of material misstatements of financial statements of entities significantly affected by the 2007/2008 downturn in the Canadian economy. This Bulletin updates the January 2009 Risk Alert to make reference to the Canadian Auditing Standards...
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...protection of information acquired in the course of duties. Not to use information for any personal gain or in a way that would be contrary to the law or detrimental to the ethics. Professional behavior Members should behave with courtesy and consideration towards all with whom they come into contact during the course of performing their work. Ethical threats Self-interest threat It occurs when auditor could benefit from a financial interest in an audit client. Self review threat It occurs when the audit from a member or audit team put itself in a position of reviewing the subject that previously the member is responsible Familiarity threat It occurs when auditor has a close relationship with the client Advocacy threat It occurs when the audit from a member of the audit team promotes/support or may be perceived to promote an audit client’s position or opinion. Intimidation threat It occurs when a member of the audit team may be deterred from acting objectivity and exercising professional judgment due to pressure given by the audit client to terminate the service. Auditors have an obligation to disclose -where the courts order them to do so -where they suspect their client...
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...events to ascertain the degree of correspondence between assertions and established criteria * Purpose: To enhance the degree of confidence of intended users in the financial statements by the expression of an opinion by the auditor Overall Objectives of the Auditor: * To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material aspects, in accordance with an applicable financial reporting framework * To report on the financial statements and communicate in accordance with the auditor’s findings Audit Process Overview: * Step 1: Client Acceptance and Retention * Step 2: Risk Assessment (Through understanding client business environment and operations Assess risks of material misstatement Assess Audit Risk) * Step 3: Audit Procedures Planning * Step 4: Test of controls (IF reliance on controls) * Step 5: Perform substantive tests * Step 6: Audit Completion and Reporting Financial Statement Assertions: * Assertions are representations made by management, explicit or otherwise, that are embodied in F/S, as used by auditor to consider the different types of potential misstatements that may occur * Focus on assertions as: * Different risks result in different risks of misstatements affect different assertions (transactions and account...
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...a Solutions for Chapter 4 Audit Risk, Business Risk, and Audit Planning Review Questions: 4-1. Business Risk - Those risks that affect the operations and potential outcomes of organizational activities. Engagement Risk - The risk auditors encounter by being associated with a particular client: loss of reputation, inability of the client to pay the auditor, or financial loss because management is not honest and inhibits the audit process. Financial Reporting Risk - Those risks that relate directly to the recording of transactions and the presentation of financial data in an organization’s financial statements; also referred to as the risk of material misstatement. Audit Risk - The risk that the auditor may provide an unqualified opinion on financial statements that are materially misstated. 2. Business risk management is defined as: “Process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risks to within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.” (COSO, 2004) The organization itself bears the responsibility for effective implementation of ERM. It is important for all organizations to implement an effective ERM so that risks are understood and properly controlled by members of the organization, particularly...
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...CHAPTER 1 AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING Answers to Review Questions 1-1 The study of auditing is more conceptual in nature compared to other accounting courses. Rather than focusing on learning the rules, techniques, and computations required to prepare financial statements, auditing emphasizes learning a framework of analytical and logical skills to evaluate the relevance and reliability of the systems and processes responsible for financial information, as well as the information itself. To be successful, students must learn the framework and then learn to use logic and common sense in applying auditing concepts to various circumstances and situations. Understanding auditing can improve the decision making ability of consultants, business managers, and accountants by providing a framework for evaluating the usefulness and reliability of information. 1-2 There is a demand for auditing in a free-market economy because the agency relationship between an absentee owner and a manager produces a natural conflict of interest due to the information asymmetry that exists between the owner and manager. As a result, the agent agrees to be monitored as part of his/her employment contract. Auditing appears to be a cost-effective form of monitoring. The empirical evidence suggests auditing was demanded prior to government regulation such as statutory audit requirements. Additionally, many private companies and other entities not subject...
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...CASE STUDY PA503 FUNDAMENTALS OF AUDITING Audit Firm Contact Number JABATAN PERDAGANGAN Programme Section CHAPTER 1 CHAPTER 2 Email Materiality and Audit Risk Corporate Governance PROBLEM SOLVING CLO2 | LD2/P3 Instruction: Please answer ALL questions. | Part 1 NEW CLIENT ACCEPTANCE DECISION Learning Objectives After completing and discussing this case, you should be able to: 1. Understand the types of information relevant to evaluating a prospective audit client 2. List some of the steps an auditor should take in deciding whether to accept a prospective client 3. Identify and evaluate factors important in the decision to accept or reject a prospective client 4. Understand the process of making and justifying a recommendation regarding client acceptance INTRODUCTION Your accounting firm is a medium-sized, accounting firm in Malaysia, formed in 2012, mainly provides auditing and tax services. But it has recently had success in building the information-systems-consulting side of the business. Recently, your group has been assigned for the first time to perform audit engagement procedures for a small and medium-sized company in Malaysia. One of team member has been a senior auditor for the past three years. Your first assignment is to assist an audit partner on a client acceptance decision. The partner explains to you that the prospective client, Unggul Holdings Berhad, is a medium-sized textile company. The partner recently met the...
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...Changes in Balancesheet 5 • Ratio Analysis 7 Liquidity position 7 Profitability 8 Leverage 8 Asset Management 8 Audit Risk assessment and Audit Approach 9 • Going concern risk 9 • Revenue 10 • Expenses 11 • Inventory 11 • Account Receivables – valuation and existence 13 • Goodwill 13 • Account payables 14 • Capital Assets 15 Materiality 16 Evaluation of Internal Auditor work 17 Additional procedures performed at future inventory count 18 • Procedures performed during inventory count 19 • Procedures followed after inventory count 20 Audit program for Property Plant and Equipment 22 ROMM 22 Approaches to testing 22 Audit Test 23 Audit Documentation and Audit File 25 • Importance of audit documentation 25 • Parts of Audit file require Documentation 26 Auditor Report 28 Analytical Review Analytical review of Matty Kitchens is done using comparison and Ratio analysis. This analysis is based on extract of financial statement provided by Matty Kitchens. Matty Kitchens, a distributor of packaged meals and these meals are prepared by the matty kitchens itself. Company sell these products to grocery stores nationwide. Matty kitchens operates in a competitive environment. Because increased competition could affect the sales and profitability of Matty kitchens, likely affecting the value asset such as account receivables and inventory. So, we may use this information to identify areas where Matty Kitchens faces...
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...CHAPTER 6 Audit Planning, Understanding the Client, Assessing Risks, and Responding Review Questions 6–1 In their investigation of a prospective client, the CPAs should assess the backgrounds and reputations of the prospect and its major shareholders, directors, and officers. Thus, inquiries are made of underwriters, bankers, and attorneys that conduct business with the prospective client. Also, the CPAs are required to make inquiries of the prospect’s predecessor auditors to obtain information that might enter into the acceptance decision, such as information regarding the integrity of management. The prospect’s financial reports, SEC filings, credit reports, and tax returns are used as sources of financial background information. 6–2 The audit committee of a board of directors must be composed of at least three independent directors. Independent directors are those who are outside directors (not officers or employees) who have no relationships that might impair their independence. This would include relationships such as performing consulting services for company management. In addition, the members must be financially literate; at least one member must be a financial expert. 6–3 An engagement letter is sent to the client by the auditors to make clear the nature of the engagement, any limitations on the scope of the audit, work to be performed by the client’s staff, and the basis for computing the auditors’ fee. The engagement letter...
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...CHAPTER 6 Audit Planning, Understanding the Client, Assessing Risks, and Responding Review Questions 6–1 In their investigation of a prospective client, the CPAs should assess the backgrounds and reputations of the prospect and its major shareholders, directors, and officers. Thus, inquiries are made of underwriters, bankers, and attorneys that conduct business with the prospective client. Also, the CPAs are required to make inquiries of the prospect’s predecessor auditors to obtain information that might enter into the acceptance decision, such as information regarding the integrity of management. The prospect’s financial reports, SEC filings, credit reports, and tax returns are used as sources of financial background information. 6–2 The audit committee of a board of directors must be composed of at least three independent directors. Independent directors are those who are outside directors (not officers or employees) who have no relationships that might impair their independence. This would include relationships such as performing consulting services for company management. In addition, the members must be financially literate; at least one member must be a financial expert. 6–3 An engagement letter is sent to the client by the auditors to make clear the nature of the engagement, any limitations on the scope of the audit, work to be performed by the client’s staff, and the basis for computing the auditors’ fee. The engagement letter...
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...Section 70 Texas Woman’s University Dr. John Nugent April 20, 2015 Abstract The purpose of this research paper is to provide an in depth review of the Public Company Accounting Oversight Board (PCAOB) and how it contributes to the interest of the Sarbanes Oxley Act of 2002. The research highlights the importance of the PCAOB’s role in the accounting profession as well as prospective changes that may evolve in the future related to PCAOB. Upon reading this research the reader will be familiar with PCAOB’s roles and functions, as well as auditing standards (AS) released such as AS5 and AS11. The PCAOB’s significance in the protection of investors is revealed as well. Keywords: SEC, PCAOB, SOX, AS 5, AS 11, Internal Control, Materiality Table of Contents Introduction……………………………………………………………………………………………….5 PCAOB…………….……………………………………..……………………………….……….……5-6 a) The PCAOB Mission, Vision, & Core Values………………………………….………........6-7 b) Current Standards…………………………………………………………….…..............…7-8 c) Future Standard Plans…………………………………………………………………….…8-9 Sarbanes Oxley Act of 2002 Section 404……………………………………………………………...….9 a) Auditing Standard 5…………………………………………………………………….….9-10 b) Auditing Standard 11……………………………………………………………………..10-12 c) Communication Requirements.................................................................................................13 Conclusion...............................................................................
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...Smackey Dog Foods, Inc. was started by three sisters in their home in the suburbs of Chicago. They built a company based on an idea of making exceptional natural dog food not only for their dogs but also for their community. Its popularity grew and they expanded their business to opening a boutique division named Best Boy Gourmet, with food that must be consumed no later than 3 days after its production. This was the beginning of some issues that as the company grew, these issues grew also. Major Issues. There is a lack of solid internal controls in Smackey Foods based on the trust that is being put into certain employees to complete their positions. Some indicators were present that would have indicated that the internal controls should have been appropriately applied. These indicators are waste issues, sales projections being off 11%, and accounts receivable. The first issue that is found with Smackey Foods, is the fact that there is a lot of waste and it is mentioned a couple times within the narrative. It is odd that even though demand seems to be high that the waste is also high. Since they rely on fresh ingredients they are putting themselves in a precarious position that would put them in a stance to fail in the winter months. If one ingredient is unattainable or late, it can spoil the rest of the materials, which is one indicator why waste is so high. They should have invested in equipment such as refrigeration storage, to keep the materials fresh. Then...
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... Auditors are now required to provide company-specific information in their reports. We have reviewed some of the new reports and summarise key conclusions here. 3 new pieces of information: — Auditors are required to report on the materiality for the audit, the scope of the audit, and the work done on key areas of audit focus (ie key risks). Sarah Deans +44-20-7986-4156 sarah.deans@citi.com Terence Fisher +44-20-7986-5180 terence.fisher@citi.com Materiality typically 5% of PBT — Information is material if “omitting it or misstating it could influence decisions that users make on the basis of financial information”. The materiality amount is used by the auditor in planning and performing the audit and when assessing whether the financial statements give a true and fair view. In 78% of cases, materiality has been calculated as a percentage of pre-tax profit, usually around 5%, but sometimes as high as 10%. In our view, many analysts and investors will be surprised at this relatively high level of materiality. Large variation in length and quality — Reports we reviewed varied in length from 2 to 7 pages. We also noted very significant variations in quality, with some reports adding little or no value with largely boilerplate comments, while others contribute significantly to investor understanding. For example, the Rolls-Royce auditor’s report comments not only on key risks and the work done to assess them by the auditor, but...
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...internal control Qver Financial Reporting CASES INCLUDED iN THIS SECTiON 1. Simply Steam, Co. 155 Evaluation of Internal Control Environment 2. Easy Clean, Co. 155 Evaluation of Internal Control Environment 3. Red Bluff Inn & Café 165 Establishing Effective Internal Control in a Small Business 4. St. James Clothiers 169 Evaluation of Manual and IT-Based Sales Accounting System Risks 5. Collins Harp Enterprises 177 Recommending IT Systems Development Controls 6. Sarbox Scooter, Inc. 185 Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 7. Société Générale 195 How a Low-Risk Trading Area Caused a $7.2 Billion Loss case5.!-2 Easy Clean/Simply Steam, Co. Evaluation of Internal Control Environment Mark S. Beasley • Frank A. Buckless • Steven M. Glover • Douglas F. Prawitt INSTRUCTIONAL OBJECTIVES 1] To reinforce aspects relevant to the internal control environment. 2] To illustrate the degree of judgment involved in making internal control environment evaluations. 3] To provide students experience in making subjective evaluative judgments. 4] To provide a forum to discuss inquiry techniques as well as inquiry as a form of audit evidence. 5] To provide students direct experience with, and discovery of, issues surrounding the control environment, making inquiries, and the framing (e.g., positive or negative) of information provided by management. 6] To illustrate...
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... Your1040Return.com Evaluating eBusiness Revenue Recognition, Information Privacy, and Electronic Evidence Issues . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.2 2.3 2.4 Dell Computer Corporation Evaluation of Client Business Risk Flash Technologies, Inc. Asher Farms Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Risk Analysis and Resolution of Client Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Understanding of Client’s Business Environment s e ct ion 3 Professional and ethical issues . . . . . . . . . . . . . . . . . . . . . . . 59 S o l u tio nS inc lu de d in t h iS Section 3.1 3.2 3.3 3.4 3.5 A Day in the Life of Brent Dorsey Staff Auditor Professional Pressures Nathan Johnson’s Rental Car Reimbursement Solving Ethical Dilemmas–Should He Pocket the Cash? Recognizing It’s a Fraud and Evaluating What to Do . . . . . . . . . . . . . . . . 63 The Anonymous Caller WorldCom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 The Story of a Whistleblower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79...
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