Transcript Auditing - | University of Nebraska Omaha

Chapter 3
Engagement Planning
ACCT-4080
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1. Audit Process
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Stages of an audit
1. Initial audit planning
2. Obtain an understanding of the client and
its environment, including internal control
3. Assess the risks of material misstatement
and design further audit procedures
4. Perform further audit procedures
5. Complete the audit
6. Form an opinion and issue the audit report
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1. Audit Process
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AU-C 300 Planning an Audit
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Performance Principle (FW Std. No. 1): The auditor must
adequately plan the work and must properly supervise any
assistants.
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Planning involves developing an overall audit strategy
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Not a discrete phase of audit
Supervision involves directing the efforts of all assistants involved
in the audit
Objective is to plan the audit so that it will be performed in
an effective manner
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1. Audit Process
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AU-C 210 Terms of Engagement
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Objective of auditor is to accept an engagement for a
new or existing audit client only when the basis upon
which it is to be performed has been agreed upon
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establishing whether the preconditions for audit are present
confirming that common understanding exists between auditor
and management
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1. Audit Process
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Preconditions of audit
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determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable
obtain the agreement of management that it acknowledges and understands its
responsibility
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for preparation and fair presentation of the financial statements in accordance with the
applicable financial reporting framework
for the design, implementation, and maintenance of internal control
to provide the auditor with
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access to all information that is relevant to the preparation and fair presentation of the financial
statements
additional information that the auditor may request from management for the purpose of the audit
unrestricted access to persons within the entity from whom the auditor determines it necessary to
obtain audit evidence
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2. Structure of CPA Firm
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Positions in firm
Up or out
Partnership potential
Women in public accounting
Work load
Busy season
Size of firm
Size of engagement team
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3. Preliminary Arrangements
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Early appointment of auditors
Evaluate client
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Evaluate your resources
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integrity of management
special risks
staffing
interim vs. year-end work
time budget
independence
Quality assurance partner
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required on issuer engagements
provides second review on high risk areas of audit
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3. Preliminary Arrangements
(continued)
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Communicate with predecessor auditor (AU-C 210)
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Engagement letter (AU-C 210)
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integrity of management
disagreements with management
reason for auditor change
required communications
purpose
First time audits
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auditing opening balances (AU-C 510)
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3. Preliminary Arrangements
(continued)
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Using work of internal auditors (AU-C 610)
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objectivity
competence
Identification of related parties (AU-C 550)
IT in an audit
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IT audit specialist
CAATs in an audit
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ACL, IDEA, proprietary software
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4. Evidence Provided by
Specialists
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AU-C 620
Definition - a person (or firm) possessing special skill or
knowledge in a particular field other than accounting or auditing
Examples: actuaries, appraisers, engineers, environmental
consultants, geologists, and attorneys
Consider qualifications, experience, reputation
Independence
Review of work
Effect on audit report
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7. Effect of Electronic
Environment on Audit
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Risks
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risks related to hardware and software
reduced audit trail
need for IT experience and separation of IT duties
No effect on
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purpose of audit (e.g., gathering sufficient appropriate
evidence)
importance of management’s assertions
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8. Materiality
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AU-C 320 – Materiality in Planning and Performing the Audit
Definition
Assessing materiality
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Materiality guidelines
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SEC caution
Accounting materiality
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quantitative factors
qualitative factors
ex post decision process
Auditing materiality
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ex ante decision process
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8. Materiality (continued)
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Financial statement level materiality
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Account balance level materiality
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methods to establish
annualizing financial results
performance materiality
tolerable error
Clearly trivial
Top down approach
Planning materiality vs. final evaluation level materiality
Cost benefit considerations
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8. Materiality (continued)
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Cumulative effects
Factual (no doubt actual error), judgmental (arise
from management estimates), and projected (from
sampling projections) errors
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(known error and likely error)
Relationship between audit risk and materiality
Nonadditive nature of tolerable error
Materiality example example2
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9. Audit Tests and Procedures
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Risk assessment procedures
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Tests of controls
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procedures to obtain understanding of client, its environment, including IC
observation, inquiry, inspection, and analytics (walkthrough)
procedures to determine the operating effectiveness of controls
inquiry, observation, inspection, reperformance
Substantive tests
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procedures to verify account balances
activities performed to detect material misstatement or fraud at assertion
level
includes tests of balances, transactions, and SAP
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9. Audit Tests and Procedures
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inspecting
observing
confirming
inquiring
tracing
vouching
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9. Audit Tests and Procedures
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scanning
counting
recalculating
reperforming
analytical procedures
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10. Audit Programs
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Transactions cycles
Audit plans
Audit programs
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11. Audit Documentation
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AU-C 230
Purpose
Factors affecting type and content
Ownership
Organization
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permanent file
current file
Electronic workpapers
AS 3 requirements
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completion date – 45 days after report date
Retention – at least 7 years
additions/amendments – no deletions; fully documented additions
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11. Audit Documentation (con’t)
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Types
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working trial balance
lead schedules
supporting schedules
adjusting journal entries
reclassification journal entries
Indexing
Tick marks
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APOLLO SHOES, INC.
C-1
Inventory Lead Schedule
APOLLO SHOES, INC.
B-1
Accounts Receivable Lead Schedule
APOLLO SHOES, INC.
A-3
Bank Confirmation
APOLLO SHOES, INC.
A-2
First National Bank Reconciliation
APOLLO SHOES, INC.
A-1
Cash Lead Schedule
12/31/04
Current File
Other Lead
Schedules
Supporting
Schedules
Ref Account Unaudited AJE
Balance
C-1 1rst Natl $484,000 $50,000 $534,000
APOLLO SHOES, INC.
Working Trial Balance
12/31/04
Ref
A-1
B-1
C-1
TB-1
APOLLO SHOES, INC. TB-2
Adjusting Entries
Account Unaudited AJE
Balance
Cash
$484,000 $50,000 $534,000
A/R
Inventory
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dr
cr
Cash
$50,000
Expenses
$50,000
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Audit Documentation
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Information on
Workpaper
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Name, date, purpose,
page number
Procedures performed
and conclusions
reached by the auditor
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Evidence that auditor
followed general
standards and
standards of field
work
Audit Mark Legend
Reviewers’ initials
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12. Review Questions for Discussion
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Chapter 3
3.2
3.3
3.6
3.7
3.9
3.10
3.11
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3.13
3.16
3.19
3.20
3.23
3.24
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