It would be extremely costly for the auditor to gather enough evidence to be completely convinced. How are these two factors related to audit procedures, sample size, items to select, and timing? Competency refers to the degree to which evidence can be considered believable or worthy of trust. Competency relates to the audit procedures selected, including the timing of when those procedures are performed.
For each characteristics, provide one example of a type of evidence that is likely to be competent. Use of duplicate sales invoices for a large well. Physical examina. Analytical proce. Receipt 2. Written or oral response 3. From independent third party 4. They are also useful in reviewing accounts or transactions for reason ableness to corroborate tentative conclusions reached on the basis of other evidence. Special care should be exercised by the auditor to determine that the 2.
In that case, the analytical procedure constitutes substantive evidence in support of the fair statement of the related account balances, and it is possible to perform fewer detailed substantive tests in connection with those accounts.
Frequently, the same analytical procedures can be used for attention directing and for reducing substantive tests, de. Simple procedures such as comparing the current year account balance to the prio year account balance is more attention directing and provides less assurance than more complex analytical procedures i.
More sophisticated analytical procedures help the auditor examine relation ships between several information variables simultaneously. The nature of these tests may provide greater assurance than simple procedures. To provide a basis for planning the audit. To provide a record of the evidence accumulated and the results of the tests. This is the primary means of docu. To provide data for deciding the proper type of audit report.
To provide a basis for review by supervisors and partners. One of the uses is the review by more experienced personnel. A second is for planning the subsequent year audit. This is the primary means of documenting that an adequate audit was performed. The materials are created, sent, or received in connection with the audit or review. Date of preparation Helps the reviewer to determine the sequence of the preparation of the audit schedules.
It is also use ful for the subsequent year in planning the sequence of preparing audit schedules. Indexing also facilitates in searching between related portions of the audit documentation. Articles of incorporation 2. Bylaws, bond indentures, and contracts 3. Analysis of accounts that have continuing importance to the auditor 4. Information related to the understanding of internal control: 5. The trial balance includes the detailed make. A test of reasonable ness schedule contains information that enables the auditor to evaluate whether a certain account balance appears to be misstated.
Unanswered questions and exceptions may indicate lack of due care by the auditor. What is its purpose? An explanation of the tick mark must be included at the bottom of the audit schedule to indicate what wa done and who did it. Under what circumstances can they be used by other people? Under what circumstances is this a violation of the code of professional conduct? Spreadsheet software packages can also be used by auditors to per form audit tests on data that is available only in machine.
Accept client and perform initial planning 2. Assess client business risk 4. Perform preliminary analytical procedures 5. Set materiality, and assess acceptable audit risk and inherent risk 6. Understand internal control and assess control risk 7. Gather information to assess fraud risks 8. This enables the successor to obtain information about the client so that he or she may evaluate whether to accept the engagement.
The successor auditor should be wary if the predecessor is reluctant to provide information about the client. The primary purpose of new client investigation is to ascertain the integrity of the client and the possibility of fraud.
The auditor should be especially con. The auditor does not want to needlessly expose himself or herself to the possibility of a lawsuit for failure to detect such fraud.
What subjects should be covered in such a letter? In addition, the engagement letter informs the client that the auditor cannot guarantee that all acts of fraud will be discovered. Auditors use the knowledge of these risks to determine the appropriate extent of audit evidence to accumulate. Management and Governance — Read the corporate charter and bylaws, read minutes of board of directors and stockholders, and inquire of management.
For example, the audit of a company engaged in the custom. He or she will also be alert for points at which scrap is generated or spoilage occurs. In this re gard, the auditor will notice the various storage areas and how the materials are stored.
The auditor may also keep in mind for further investigation any apparently obsolete inventory. He or she will also meet some of the key manufacturing personnel who may give the auditor an insight into production problems and other matters such as excess or obsolete materials, and scrap and spoilage.
The auditor will be alert for the attitude of the manufacturing personnel toward accounting controls. The CPA may make some inquiries about the methods of production scheduling, timekeeping procedures and whether work standards are employed. How does the acquisition of this knowledge aid the auditor in distinguishing between obsolete and current inven7 tory? Oxley Act prohibits related party transactions that involve personal loans to executives.
In an ongoing engagement, this work has been performed in the past and is unnecessary each year. List the information in a mortgage that is likely to be relevant to the auditor. The parties to the agreement 2. The amounts included in the agreement 4. The repayment schedule required by the agreement 5. Assets pledged or encumbered by the agreement 8. Liquidity restrictions imposed by the agreement 9.
Purchase restrictions imposed by the agreement Operating restrictions imposed by the agreement Requirements for audit reports or other types of reports on compliance with the agreement Explain why it is important to read the minutes early in the engagement.
Declaration of dividends 2. Acceptance of contracts and agreements 4. Authorization for the acquisition of property 5.
Approval of mergers 6. Authorization of long. Approval to pledge securities 8. Authorization of individuals to sign checks 9. For instance, if a long. If the client were in violation of the provisions of the pension plan docu ment, inherent risk and planned evidence for pension. Give examples of key performance indicators for the following business: 1 a chain of retail clothing stores; 2 an internet portal; 3 a hotel chain.
Performance measurement includes ratio analysis and benchmarking against key competitors. This increase would most likely in. Other top management controls include a well.
What types of comparisons are useful when performing preliminary analytical procedures? What is the primary purpose of analytical procedures performed during the completion phase of the audit?
Analytical procedures are also often done during the testing phase of the audit, but they are not required in this phase. For several engagement, he computed the industry ratios included in publications by Robert Morris Associates and compared them with industry standards. How could Gordon improve the quality of his analytical procedures? Making internal comparisons to ratios of previous years. In some cases, these discussions with management have been the basis for management consulting engagements.
By that time, the audit procedures are completed. SAS 56 AU requires that analytical procedures be performed in the planning phase of the audit and near the completion of the audit.
Liquidity activity — Accounts receivable turnover, days to collect receivables, inventory turnover, and days to sell in ventory.
Ability to meet long. Which part is the evaluation of ma teriality and risk? The auditor must therefore make an assessment of the likely users and the decisions they will make.
The auditor must, therefore, exercise considerable professional judgment in the application of materiality. B: Because materiality is relative rather than absolute, it is necessary to have bases for establishing whether misstate. For example, in the audit of a manufacturing company, the auditor might use as bases: net income before taxes, total assets, current assets, and working capital.
For a governmental unit, such as a school district, there is no net income before taxes, and therefore that would be an unavailable base. Instead, the primary bases would likely be fund balances, total assets, and perhaps total revenue. What qualitative factors should she also consider in de ciding whether misstatements maybe material? B: The following qualitative factors are likely to be considered in evaluating materiality: a. How are they related to each other? Tolerable misstatement is the maximum amount of misstatement that would be considered material for an individual account balance.
The amount of tolerable misstatement for any given account is dependent upon the preliminary judgment about materiality. Ordinarily, tolerable misstatement for any given account would have to be lower than the preliminary judgment about materiality. Justify your an swer. B: There are several possible answers to the question. Why is it important to make these estimates? What is done with them? B: An estimate of the total misstatement in a segment is the estimate of the total misstatements based upon the sample results.
If only a sample of the population is selected and audited, the auditor must project the total sample misstate. This is done audit area by audit area. The esti. B: If an audit is being performed on a medium.
If, however, the auditor is giving a separate opinion on the medium. B: Planned detection risk is a measure of the risk that the audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist.
When planned detection risk is increased from medium to high, the amount of evidence the auditor must accumulate is reduced. B: An increase in planned detection risk may be caused by an increase in acceptable audit risk or a decrease in either con trol risk or inherent risk.
A decrease in planned detection risk is caused by the opposite: a decrease in acceptable audit risk or an increase in control risk or inherent risk. Compare your answer with the one for question B: Inherent risk is set for segments rather than for the overall audit because misstatements occur in segments. By identi fying expectations of misstatements in segments, the auditor is thereby able to modify audit evidence by searching for misstatements in those segments.
When inherent risk is increased from medium to high, the auditor should increase the audit evidence accumulated to de termine whether the expected misstatement actually occurs. The audit evidence goes in the opposite direction in Review Question 9. What is its relevance to evidence accumulation? Acceptable audit risk has an inverse relationship to evidence. If acceptable audit risk is reduced, planned evidence should increase. B: When the auditor is in a situation where he or she believes that there is a high exposure to legal liability, the acceptable audit risk would be set lower than when there is little exposure to liability.
Even when the auditor believes that there is lit tle exposure to legal liability, there is still a minimum acceptable audit risk that should be met. How is it possible to use the model in a meaningful way without a precise way of measuring risk? The auditor should exercise care in determining the additional amount of evidence that will be required. This should be done without the use of the audit risk model. Management has both a legal and professional responsibility to be sure that th information is fairly presented in accordance with reporting requirements such as GAAP.
In addition to the legal provisions of Section , public, nonpublic, and not. Some relate to accounting only indirectly, such as environmental protection and civil rights laws. Others are closely related to accounting, such as income tax regulations and fraud. Which part is understanding in ternal control and assessing control risk? What parts precede and follow that understanding and assessing? Understanding internal control and assessing control risk is therefore part six of planning.
Only gathering information to assess fraud risk and developing an overall audit plan and audit program follow understanding internal control and assessing control risk. F: The six transaction.
What framework is used by most U. Control environment 2. Risk assessment 3. Control activities 4. Information and communication 5. The control environment serves as the umbrella for the other four components. What are the factors the auditor must evaluate to understand it? The other four components are closely related to the control environment. F: Separation of operational responsibility from record keeping is intended to reduce the likelihood of operational person nel biasing the results of their performance by incorrectly recording information.
Separation of the custody of assets from accounting for these assets is intended to prevent misappropriation of assets. F: As illustrated by Figure Next the auditor must make a pre liminary assessment control risk phase 2 and perform tests of controls in every audit as part of their integrated audits phase 3. F: Section of the Sarbanes.
F: When obtaining an understanding of internal control, the auditor must assess two aspects about those controls. Second, the auditor must gather evidence about whether those controls have been placed in operation. What is the PCAOB standard 2 requirement related to auditor walkthroughs of internal control in an integrated audit?
At each stage of processing, the auditor makes inquiries and observes current activities, in addition to examining completed documentation for the transaction or transactions selected. Thus, the auditor combines observation, documentation, and inquiry to conduct a walkthrough of internal con trol.
PCAOB Standard 2 requires the auditor to perform at least one walkthrough for each major class of transactions. What major factors permitted the defalcation to take place? Regardless of how trustworthy James appeared, no employee should be given the combined duties of custody of assets and accounting for those assets. Evaluate her approach. F: Maier is correct in her belief that internal controls frequently do not function in the manner they are supposed to.
By not obtaining an un derstanding of internal control until later in the engagement, Maier risks performing either too much or too little work, or emphasizing the wrong areas during her audit. Whenever the auditor assesses control risk below maximum, the auditor must perform tests of controls to support that control risk assessment. When control risk is as. Both include inquiry, documentation, and observation.
Tests of controls, on the other hand, are applied only when the as. Second, procedures to obtain an understanding are performed only on one or a few transactions or, in the case of observations, at a single point in time. Tests of controls are performed on larger samples of transactions perhaps 20 to , and often observations are made at more than one point in time. Some of the related controls are manual while others are automated. De scribe the extent the auditor can rely on tests of controls performed in prior years.
There is likely to be more variety in these reports. Op portunities are circumstances that allow management or employees to commit fraud. For example, the company may issue aggressive earn ings forecasts, or make extensive acquisitions using company stock. How assets of the entity could be misappropriated. How the auditor might respond to the susceptibility of material misstatements due to fraud. Identify those with whom the auditor must make inquiries.
It is important for management to behave with honesty and integrity because this reinforces the importance of these values to employees throughout the organization. Auditors use informational inquiry to obtain information about facts and details that the auditor does not have. The auditor uses assessment inquiry to corroborate or contradict prior information.
In the previous example, the auditor may attempt to corroborate the information obtained from management by making assessment inquiries of individuals in accounts receivable and shipping. Interrogative inquiry is used to determine if the interviewee is being de ceptive or purposefully omitting disclosure of key knowledge of facts, events, or circumstances.
For example, a senior member of the audit team might make interrogative inquiries of management or other personnel about key elements of the fraud where earlier responses were contradictory or evasive. What must you do in response to this discovery? SAS 99 also requires the auditor to consider the implications for other as pects of the audit. This includes fraud by senior management that results in even immaterial misstatements.
That in turn enhances internal control. The use of IT often converts the traditional paper trail to an electronic audit trail, eliminating source documents and paper. The replacement of traditional manual processes with computer. Due to the uniformity of processing performed by IT based systems, errors in com puter software can result in incorrect processing for all transactions processed. The installation of IT. As companies rely to a greater extent on IT.
The integration of IT can change the audit trail by con verting many of the traditionally paper. Because many of the transactions are entered directly into the computer as they occur, some of the docu. Manual accounting systems are especially prone to random errors that result from honest mistakes that occur as employees perform day. The authors integrate teaching and learning capabilities through tools and strategies, enabling users to find justifiable, authoritative solutions to accounting, auditing, tax, and business problems.
Fully revised, the proven primer on forensic accounting with all-new cases A must-have reference for every …. An accessible beginner's guide to the fundamentals of audit and assurance Audit and assurance is a …. Kieso, Jerry J.
Weygandt, Donald E. Kieso, Paul D. Skip to main content. Start your free trial. Book description Accounting and Auditing Research helps prepare students to conduct research in their future practice, for the CPA exam, or other professional designations.
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