CPA Audit Notes

38  Download (0)

Full text

(1)

http://www.cpa-cfa.org http://www.cpa-cfa.org

 Audited F/S – The Basi

 Audited F/S – The Basics

cs

Company’s mgmt responsible to prepare the F/S Company’s mgmt responsible to prepare the F/S

Auditors responsible to express an opinion on the F/S and on mgmt’s assertion on internal controls (if public) Auditors responsible to express an opinion on the F/S and on mgmt’s assertion on internal controls (if public) The primary assertion is whether the statements are presented fairly! in accordance with "AA#

The primary assertion is whether the statements are presented fairly! in accordance with "AA#

 Professional Stan

 Professional Standards

dards

"enerally Accepted Accounting Standards $ "AAS "enerally Accepted Accounting Standards $ "AAS

"enerally Accepted "o%ernment Auditing Standards $ "A"AS "enerally Accepted "o%ernment Auditing Standards $ "A"AS The #ublic Company Accounting &%ersight 'oard $ #CA&' The #ublic Company Accounting &%ersight 'oard $ #CA&'

 #ublic accounting firms must register with #CA&' in order to audit public companies  #ublic accounting firms must register with #CA&' in order to audit public companies  egistered firms are sub*ect to board inspection+ disciplinary proceedings+ and sanctions  egistered firms are sub*ect to board inspection+ disciplinary proceedings+ and sanctions "AAS $ T,# #,- AC.& "AAS $ T,# #,- AC.& "eneral standards $ T,# "eneral standards $ T,# T $ Training T $ Training

, $ ,ndependence (in fact and appearance) , $ ,ndependence (in fact and appearance) # $ #rofessional Care

# $ #rofessional Care Standards of Field or0 $ Standards of Field or0 $

#,-# $ #,-#lanning and super%ision # $ #lanning and super%ision

, $ ,nternal control+ entity and en%ironment , $ ,nternal control+ entity and en%ironment

Strong controls imply the auditor will re1uire less e%idence Strong controls imply the auditor will re1uire less e%idence

ea0 controls imply the auditor will re1uire more e%idence (more wor0) ea0 controls imply the auditor will re1uire more e%idence (more wor0) An exam tric02 wea0 internal controls does not e1ual an ad%erse opinion An exam tric02 wea0 internal controls does not e1ual an ad%erse opinion - $ -%idence

- $ -%idence

Standards of eporting $ AC.& Standards of eporting $ AC.&

A $ A

A $ Accounting 3 ccounting 3 "AA#"AA#

-xplicit2 &pinion must state that the acctg used was "AA# -xplicit2 &pinion must state that the acctg used was "AA# C $ Consistency between periods

C $ Consistency between periods

,mplicit2 Silence is o0ay cause its implied ,mplicit2 Silence is o0ay cause its implied . $ .isclosure

. $ .isclosure

,mplicit2 Silence is o0ay ,mplicit2 Silence is o0ay & $ -xpress &pinion

& $ -xpress &pinion

• -xplicit2 &pinion must state ,n our opinion4!-xplicit2 &pinion must state ,n our opinion4! •

• 5eant to pre%ent misinterpretation of the degree of responsibility the auditor is assuming5eant to pre%ent misinterpretation of the degree of responsibility the auditor is assuming

when his/her name is associated with the F/S when his/her name is associated with the F/S

• The auditor may express different opinions of different sections ('/S+ ,/S)The auditor may express different opinions of different sections ('/S+ ,/S) •

• The auditor may express an opinion on 6 section and not the others as long as information hasThe auditor may express an opinion on 6 section and not the others as long as information has

not been limited not been limited

 Reports on A

 Reports on Audited F/S

udited F/S

The Auditors Standard eport (7n1ualified &pinion)

The Auditors Standard eport (7n1ualified &pinion)

Title Title Addressee Addressee ,ntroductory #aragraph $ 2  ,ntroductory #aragraph $ 2  •

• Statement that the F/S as identified in the report were auditedStatement that the F/S as identified in the report were audited •

• Statement that the F/S are theStatement that the F/S are the responsibilityresponsibility of mgmt and the auditors of mgmt and the auditorsresponsibilityresponsibility is to express an opinion is to express an opinion

Scope #aragrap

Scope #aragraph $ A#5-A52 A#5-A5h $ A#5-A52 A#5-A5

(2)

http://www.cpa-cfa.org http://www.cpa-cfa.org

• Statement that the audit wasStatement that the audit was planned  planned  and and performed  performed  to obtain reasonable assurance that the F/S are free to obtain reasonable assurance that the F/S are free

from

frommaterial misstatement material misstatement 

• Statement that the audit includedStatement that the audit includedexamining evidenceexamining evidence on a test basis2 assessing the on a test basis2 assessing theaccounting principlesaccounting principles

used and significant estimates

used and significant estimatesmademade by by mgmt mgmt 2 and e%aluating the o%erall presentation2 and e%aluating the o%erall presentation

• Statement that the audit pro%ides a reasonable basis for an opinionStatement that the audit pro%ides a reasonable basis for an opinion

&pinion #aragraph &pinion #aragraph

• Statement referring to the F/S specifically identified in the introductory paragraphStatement referring to the F/S specifically identified in the introductory paragraph •

• An opinion as to the fair presentation of the F/S (AC.&)An opinion as to the fair presentation of the F/S (AC.&) •

• Statement regarding conformity with 78S8 "AA# (AC.&)Statement regarding conformity with 78S8 "AA# (AC.&)

Firm 9ame Firm 9ame eport .ate eport .ate

• The eport should be dated on or after the date on which appropriate audit e%idence sufficient to supportThe eport should be dated on or after the date on which appropriate audit e%idence sufficient to support

the opinion has been obtained the opinion has been obtained

Sample unqualified opinion – A1-14 Sample unqualified opinion – A1-14

"AAS in referenced to in the Scope paragraph "AAS in referenced to in the Scope paragraph "AA# is referenced to in the &pinion paragraph "AA# is referenced to in the &pinion paragraph #CA&' Standards $ for publicly traded companies #CA&' Standards $ for publicly traded companies

 Audits of Issuers (public companies)

 Audits of Issuers (public companies) $ #CA&' auditing standard 9o8 6 re1uires the auditor’s report to include $ #CA&' auditing standard 9o8 6 re1uires the auditor’s report to include 3a reference to the standards of the #CA&'

3a reference to the standards of the #CA&'

 Audits of nonissuers (private companies)

 Audits of nonissuers (private companies) $ An auditor may+ but is not re1uired to+ conduct the audit of a $ An auditor may+ but is not re1uired to+ conduct the audit of a nonissuer in accordance with both "AAS and #CA&. auditing standards

nonissuer in accordance with both "AAS and #CA&. auditing standards

nqualified opinion

nqualified opinion $ clean2 F/S presented fairly in all material respects+ doesn’t mean good in%estment $ clean2 F/S presented fairly in all material respects+ doesn’t mean good in%estment

 !odified nqualified opinion

 !odified nqualified opinion $ additional explanatory language $ additional explanatory language

"ualified opinion

"ualified opinion $ states except for!2 material "AA# or "ASS problem $ states except for!2 material "AA# or "ASS problem

 Adverse opinions

 Adverse opinions $ %ery material "AA# problems $ %ery material "AA# problems

 #isclaimer of opinion

 #isclaimer of opinion $ significant "AAS problem $ significant "AAS problem

$%art on A1-1& memori'e $%art on A1-1& memori'e

7ncertainties $ impairments+ intangibles+ lawsuits+ warranties 7ncertainties $ impairments+ intangibles+ lawsuits+ warranties 5anagement’s responsibility

5anagement’s responsibility

• -stimate the effect of future e%ents on the F/S and record and present this estimate+ or -stimate the effect of future e%ents on the F/S and record and present this estimate+ or  •

• .etermine that a reasonable estimate cannot be made and ma0e the re1uired disclosures to that effect.etermine that a reasonable estimate cannot be made and ma0e the re1uired disclosures to that effect

emember under "AA# emember under "AA#

'oth probable and reasonably estimatable

'oth probable and reasonably estimatable record record -ither probable or reasonably estimatable

-ither probable or reasonably estimatable disclose disclose

,f mgmt’s analysis is supported and properly reported or disclosed+ the auditor issues and un1ualified opinion ,f mgmt’s analysis is supported and properly reported or disclosed+ the auditor issues and un1ualified opinion with no reference to the uncertainty in the report

with no reference to the uncertainty in the report

7n1ualified opinion: "AA# 3 o02 "AAS 3 o0  7n1ualified opinion: "AA# 3 o02 "AAS 3 o0 

,f the auditor is unable to obtain sufficient e%idential matter in%ol%ing an uncertainty and its presentation or ,f the auditor is unable to obtain sufficient e%idential matter in%ol%ing an uncertainty and its presentation or disclosure+ the auditor should consider expressing a 1ualified ("AAS) opinion or to disclaim an opinion to disclosure+ the auditor should consider expressing a 1ualified ("AAS) opinion or to disclaim an opinion to scope limitation8

scope limitation8

;ualified or .isclaimer: "AA# 3 <2 "AAS 3 #roblem ;ualified or .isclaimer: "AA# 3 <2 "AAS 3 #roblem

(3)

http://www.cpa-cfa.org http://www.cpa-cfa.org

• Statement that the audit wasStatement that the audit was planned  planned  and and performed  performed  to obtain reasonable assurance that the F/S are free to obtain reasonable assurance that the F/S are free

from

frommaterial misstatement material misstatement 

• Statement that the audit includedStatement that the audit includedexamining evidenceexamining evidence on a test basis2 assessing the on a test basis2 assessing theaccounting principlesaccounting principles

used and significant estimates

used and significant estimatesmademade by by mgmt mgmt 2 and e%aluating the o%erall presentation2 and e%aluating the o%erall presentation

• Statement that the audit pro%ides a reasonable basis for an opinionStatement that the audit pro%ides a reasonable basis for an opinion

&pinion #aragraph &pinion #aragraph

• Statement referring to the F/S specifically identified in the introductory paragraphStatement referring to the F/S specifically identified in the introductory paragraph •

• An opinion as to the fair presentation of the F/S (AC.&)An opinion as to the fair presentation of the F/S (AC.&) •

• Statement regarding conformity with 78S8 "AA# (AC.&)Statement regarding conformity with 78S8 "AA# (AC.&)

Firm 9ame Firm 9ame eport .ate eport .ate

• The eport should be dated on or after the date on which appropriate audit e%idence sufficient to supportThe eport should be dated on or after the date on which appropriate audit e%idence sufficient to support

the opinion has been obtained the opinion has been obtained

Sample unqualified opinion – A1-14 Sample unqualified opinion – A1-14

"AAS in referenced to in the Scope paragraph "AAS in referenced to in the Scope paragraph "AA# is referenced to in the &pinion paragraph "AA# is referenced to in the &pinion paragraph #CA&' Standards $ for publicly traded companies #CA&' Standards $ for publicly traded companies

 Audits of Issuers (public companies)

 Audits of Issuers (public companies) $ #CA&' auditing standard 9o8 6 re1uires the auditor’s report to include $ #CA&' auditing standard 9o8 6 re1uires the auditor’s report to include 3a reference to the standards of the #CA&'

3a reference to the standards of the #CA&'

 Audits of nonissuers (private companies)

 Audits of nonissuers (private companies) $ An auditor may+ but is not re1uired to+ conduct the audit of a $ An auditor may+ but is not re1uired to+ conduct the audit of a nonissuer in accordance with both "AAS and #CA&. auditing standards

nonissuer in accordance with both "AAS and #CA&. auditing standards

nqualified opinion

nqualified opinion $ clean2 F/S presented fairly in all material respects+ doesn’t mean good in%estment $ clean2 F/S presented fairly in all material respects+ doesn’t mean good in%estment

 !odified nqualified opinion

 !odified nqualified opinion $ additional explanatory language $ additional explanatory language

"ualified opinion

"ualified opinion $ states except for!2 material "AA# or "ASS problem $ states except for!2 material "AA# or "ASS problem

 Adverse opinions

 Adverse opinions $ %ery material "AA# problems $ %ery material "AA# problems

 #isclaimer of opinion

 #isclaimer of opinion $ significant "AAS problem $ significant "AAS problem

$%art on A1-1& memori'e $%art on A1-1& memori'e

7ncertainties $ impairments+ intangibles+ lawsuits+ warranties 7ncertainties $ impairments+ intangibles+ lawsuits+ warranties 5anagement’s responsibility

5anagement’s responsibility

• -stimate the effect of future e%ents on the F/S and record and present this estimate+ or -stimate the effect of future e%ents on the F/S and record and present this estimate+ or  •

• .etermine that a reasonable estimate cannot be made and ma0e the re1uired disclosures to that effect.etermine that a reasonable estimate cannot be made and ma0e the re1uired disclosures to that effect

emember under "AA# emember under "AA#

'oth probable and reasonably estimatable

'oth probable and reasonably estimatable record record -ither probable or reasonably estimatable

-ither probable or reasonably estimatable disclose disclose

,f mgmt’s analysis is supported and properly reported or disclosed+ the auditor issues and un1ualified opinion ,f mgmt’s analysis is supported and properly reported or disclosed+ the auditor issues and un1ualified opinion with no reference to the uncertainty in the report

with no reference to the uncertainty in the report

7n1ualified opinion: "AA# 3 o02 "AAS 3 o0  7n1ualified opinion: "AA# 3 o02 "AAS 3 o0 

,f the auditor is unable to obtain sufficient e%idential matter in%ol%ing an uncertainty and its presentation or ,f the auditor is unable to obtain sufficient e%idential matter in%ol%ing an uncertainty and its presentation or disclosure+ the auditor should consider expressing a 1ualified ("AAS) opinion or to disclaim an opinion to disclosure+ the auditor should consider expressing a 1ualified ("AAS) opinion or to disclaim an opinion to scope limitation8

scope limitation8

;ualified or .isclaimer: "AA# 3 <2 "AAS 3 #roblem ;ualified or .isclaimer: "AA# 3 <2 "AAS 3 #roblem

(4)

http://www.cpa-cfa.org http://www.cpa-cfa.org

,f the auditor concludes that the F/S are materially misstated due to a departure from "AA# related to ,f the auditor concludes that the F/S are materially misstated due to a departure from "AA# related to uncertainty+ the auditor should express a 1ualified ("AA#) or ad%erse opinion8 "AA# departures include uncertainty+ the auditor should express a 1ualified ("AA#) or ad%erse opinion8 "AA# departures include inade1uate disclosures+ use of inappropriate accounting principles+ and use of unreasonable acctg estimates inade1uate disclosures+ use of inappropriate accounting principles+ and use of unreasonable acctg estimates

;ualified of Ad%erse: "AA# 3 problem2 "AAS 3 o0  ;ualified of Ad%erse: "AA# 3 problem2 "AAS 3 o0 

 ass ey c%art on A1-1* memo  ass ey c%art on A1-1* memori'eri'e

5odified 7n1ualified opinion $ still represents an un1ualified opinion8 The additional language (modified 5odified 7n1ualified opinion $ still represents an un1ualified opinion8 The additional language (modified wording or explanatory paragraph) used to highlight the certain circumstances

wording or explanatory paragraph) used to highlight the certain circumstances 5odified wording

5odified wording

• .i%ision of responsibility2 auditors opinion is based in part on the report of another .i%ision of responsibility2 auditors opinion is based in part on the report of another 

-xplanatory paragraph -xplanatory paragraph

• =ustified departure from "AA#=ustified departure from "AA# •

• "oing concern"oing concern •

• To emTo emphasi>e phasi>e a matter a matter  •

• ?ac0 of consistency?ac0 of consistency •

• &ther2&ther2

 e1uired S-C regulation S@ 1uarterly financial data has been omitted or has not been re%iewed  e1uired S-C regulation S@ 1uarterly financial data has been omitted or has not been re%iewed  Supplementary information re1uired by "AA# has been omitted

 Supplementary information re1uired by "AA# has been omitted  &ther information (stuff in 6@) is inconsistent with F/S

 &ther information (stuff in 6@) is inconsistent with F/S

 #ivision of +esponsibility (refere

 #ivision of +esponsibility (reference in report)nce in report) $ The principal auditor dec $ The principal auditor decides to mention the wor0 donides to mention the wor0 done bye by other auditors+ the report will express a di%ision of responsibility8 The principal auditor will mention this other auditors+ the report will express a di%ision of responsibility8 The principal auditor will mention this

di%ision in all three paragraphs8 The name of the other auditor is not mentioned unless the auditor gi%es express di%ision in all three paragraphs8 The name of the other auditor is not mentioned unless the auditor gi%es express  permission and the repo

 permission and the report of the other auditor is rt of the other auditor is presented8 5a0e other C#A presented8 5a0e other C#A responsible by mentioning responsible by mentioning them inthem in the ,ntro+ Scope+ and &pinion paragraph8

the ,ntro+ Scope+ and &pinion paragraph8

 Assumption of +esponsibility (no re

 Assumption of +esponsibility (no reference to ot%er $ference to ot%er $AA)) $ The principal auditor must assure on the other $ The principal auditor must assure on the other auditors+ reputation+ independence+ professional competency+ program steps (,##)8 Bisit the other auditor to auditors+ reputation+ independence+ professional competency+ program steps (,##)8 Bisit the other auditor to discuss audit procedures and re%iew audit program+ documentation+ and e%aluation of internal controls

discuss audit procedures and re%iew audit program+ documentation+ and e%aluation of internal controls  performed by the other au

 performed by the other auditor ditor 

 ,ustified departure fro

 ,ustified departure from AA m AA  $ The explanatory paragraph should contain a description of the departure+ its $ The explanatory paragraph should contain a description of the departure+ its approximate effects (if possible) and the reasons why adherence to "AA# would ma0e the F/S misleading approximate effects (if possible) and the reasons why adherence to "AA# would ma0e the F/S misleading

oing $oncern –

oing $oncern – The auditor should perform the following procedures:The auditor should perform the following procedures: A $ A

A $ Analytical procnalytical proceduresedures . $ .ebt compliance . $ .ebt compliance

5 $ e%iew board minutes 5 $ e%iew board minutes

, $ ,n1uiry of client’s legal counsel , $ ,n1uiry of client’s legal counsel

T $ Confirm third party arrangements/agreements T $ Confirm third party arrangements/agreements S $ Subse1uent e%ents re%iew

S $ Subse1uent e%ents re%iew

Conditions or e%ents that may indicate substantial doubt: Conditions or e%ents that may indicate substantial doubt:

F $ Financial difficulties F $ Financial difficulties , $ ,nternal matters , $ ,nternal matters  9 $ 9egati%e trends  9 $ 9egati%e trends

- $ -xternal matters+ legal proceedings+ new legislation+ loss or expiration of intellectual property - $ -xternal matters+ legal proceedings+ new legislation+ loss or expiration of intellectual property The auditor is not precluded from choosing to disclaim an opinion in cases in%ol%ing uncertainties

The auditor is not precluded from choosing to disclaim an opinion in cases in%ol%ing uncertainties The explanatory paragraph occurs after opinion paragraph

The explanatory paragraph occurs after opinion paragraph ,t includes the terms substantial doubt! and going concern! ,t includes the terms substantial doubt! and going concern!

(5)

http://www.cpa-cfa.org

.on’t limit it for a time period

,f+ in the auditor’s *udgement+ the entity’s disclosures are inade1uate+ a departure from "AA# exists8 This may result in either a 1ualified or ad%erse opinion

 .mp%asis of a matter  $ auditor may wish to emphasis a particular matter but still express an un1ualified opinion8 -mphasis when a company is a -CC

• Arelated party transaction • Significant subse1uente%ents

• -ntity is acomponent of a larger business

• ,tems that affect thecomparability (except changes in accounting principles)

An explanatory paragraph is not re1uired

 /ac of consistency (*ustified changes) AC.& $ if a change is "AA# has occurred between accounting periods

and the effect is material+ the auditor should add an explanatory paragraph to the un1ualified report8 The explanatory paragraph comes after the opinion paragraph

hen selecting the type of opinion because of a lac0 of consistency+ determine is the change is *ustified "AA#: Acceptable/=ustified 3 5odified 7n1ualified

 9ot "AA#: 7nacceptable/7n*ustified 3 ;ualified or Ad%erse

;ualified except for! &pinion and Ad%erse &pinion for %ery material "AA# problems

68 9on "AA# un*ustified/unacceptable change $ ,ssue is consistency (AC.&)2 an explanatory paragraph

should appear before the opinion paragraph to describe the non"AA# acctg change and the financial impact 8 ,nade1uate disclosure $ when the auditor belie%es that the omitted items cause the F/S to be decepti%e D8 .eparture from "AA#

"AA#: Acceptable/=ustified 3 5odified 7n1ualified

 9ot "AA#: 7nacceptable/7n*ustified 3 except for! or Ad%erse E8 7nreasonable accounting estimates

;ualified except for! &pinion for material "AAS problems 68 7ncertainty

8 Scope limitation $ time constraints+ in ability to obtain sufficient competent e%idential matter+ refusal of mgmt to pro%ide mgmt letter which ac0nowledge their responsibility for the fair presentation of the F/S in conformity with "AA#+ refusal of clients attorney to respond to in1uiry

The scope limitation should be referred to in the scope and opinion paragraph (as an explanatory  paragraph preceding before the opinion paragraph: .ouble except for! whammy

.isclaimer &pinion for significant "AAS problems 68 7ncertainty

8 Scope limitation

D8 ?ac0 of independence

E8 7naudited $ only an opinion paragraph8 States reason of unaudited F/S and we do not express an opinion!

Changes to the report include ,ntroductory paragraph

 7se the words were engaged to audit! instead of ha%e audited!+ and  .eletion of the reference to the auditor’s responsibility

Scope paragraph $ omitted

(6)

http://www.cpa-cfa.org

 Reports on Comparative Statements

,f the prior year’s financial statements were not audited and that the current year’s financial statements are  being audited+ the auditor is facing a scope limitation (because the beginning balances may not be correct) and

may re1uire a disclaimer opinion8

hen updating (changing prior) periods the explanatory should disclose the: . $ .ate of the auditor’s pre%ious report

& $ &pinion type pre%iously issued  $ eason for prior opinion

C $ Changes that ha%e occurred

S $ Statement opinion4is different! &nly .&CS change their mind

7pdate or change opinion when now in conformity with "AA# (restate prior yr F/S) eport of a predecessor auditor $ presented

The prior (old) C#A should:

• ead the current period statements

• Compare the statements audited with the current period statements • &btain a letter of representation from the successor auditor 

• &btain a letter of representation from mgmt

• ,f the report is unre%ised use the original report date in any reissue • ,f the report is re%ised dual date

eport of a predecessor auditor $ not presented The current (new) C#A should:

• 9ot name the predecessor auditor 

• The date of the predecessors auditors report

• The type of opinion expressed by the predecessor auditor  • The substanti%e reasons for other than an un1ualified report

 Subsequent Events

Type , e%ents $ conditions on or before balance sheet date+ accrue+ loo0ing bac0ward e1uires a F/S ad*ustment

Type ,, e%ents $ conditions existing after the balance sheet date+ disclose in footnotes+ loo0ing forward 5ay re1uire footnote disclosure

Auditors responsibility for subse1uent e%ents $ #,5- is included in yr end fieldwor0  # $ #ost balance sheet transactions

 $ epresentation letter should be obtained from mgmt , $ ,n1uiry

5 $ 5inutes of stoc0holders+ directors+ and other committee meetings should be read - $ -xamine latest a%ailable interim F/S2 compare them with the F/S under audit Auditors responsibility after the original date of the auditors report

The auditor has no acti%e responsibility8 owe%er+ if the auditor becomes aware of a subse1uent e%ent+ auditor must use professional *udgement to decide whether to ad*ust the F/S or disclosures

(7)

http://www.cpa-cfa.org

-x8 =an+ 6+ + except for 9ote + as to which the date is Feb D+ ! Facts disco%ered after report is issued (the auditors missed it)

Auditor action

• Ad%ise client to issue re%ised F/S or ma0e additional disclosures • #ro%ide notification that the F/S can not be relied upon

,f the client refuses to follow procedures

• 9otify the board of the directors • .issociate with the client

• ,nform any regulatory agencies (if applicable) • 9otify parties relying on the F/S

&mitted audit procedures disco%ered after submission of the audit program (we forgot to do it)

• Auditor should determine whether other audit procedures tended to compensate for the omitted procedures • Apply the omitted procedures (or alternati%e procedures)

 Reportin on !ther "nformation

Auditor should perform limited procedures on supplementary information and report deficiencies G omissions 68 ,n1uire of mgmt

8 .etermine if the methods uses are consistent with mgmt’s responses+ audited F/S and other 0nowledge D8 Consider whether the client representation letter should refer to the supplementary information

Segment information is re1uired by "AA#

5aterial misstatement $ "AA# problem 1ualified or ad%erse opinion Scope limitation $ "AAS problem 1ualified or disclaimer opinion

hen an auditor submits a document containing audited F/S to a client or others+ the auditor has a responsibility to report on all information in the document

The auditor must indicate in the report whether the accompanying information is fairly stated in all material respects in relation to the basic F/S ta0en as a whole8 The report should also describe the character of the auditor examination and the degree of responsibility the auditor is assuming8

Condensed F/S

The Auditor must indicate:

• That the auditor audited and expresses an opinion on the complete F/S • .ate of the auditors report on the complete F/S

• Type of opinion expressed

• hether the information in the condensed statements is fairly stated+ in all material respects

Selected financial data

The auditor must indicate whether the selected financial data is fairly stated+ in all material respects+ in relation to the F/S from which it has been deri%ed8

An accountants report should include

68 'rief description of the nature of the engagement

8 Statement that the engagement was performed in accordance with A,C#A standards

D8 ,dentification specific entity+ descriptions of the transactions+ statement about the source of the information E8 A statement describing the appropriate acctg principles (including country of origin) to be applied

(8)

http://www.cpa-cfa.org

J8 estrict use of report to mgmt+ board of directors+ prior and current auditors eporting on F/S prepared for use in other countries

.istribution outside 78S8 only: auditor may use either   The report of the other country

 7S style report modified to the accounting principles of another country

.istribution within the 7S: auditors report should be the 7S standard report modified as appropriate for departures from 7S "AA#8

(9)

http://www.cpa-cfa.org

#ualit$ Control Standards

The fi%e interrelated elements of 1uality control are:

A $ Acceptance and continuance of client’s engagement , $ ,ndependence+ integrity and ob*ecti%ity

C $ Continuous monitoring # $ #ersonnel management

A $ Assurance regarding engagement performance

 Acceptance and continuance of clients and engagements

• Considers the ris0 associated with clients (don’t accept a client whose mgmt lac0s integrity)

• 7nderta0es only those engagements that the firm can reasonably expect to complete with professional care

 Independence0 integrity and obectivity

• #olicies and procedures which help maintain personnel independence in fact and appearance • ?ead partner and the re%iewing partner must rotate off the audit e%ery fi%e years

• outine tax return preparation+ tax planning and employee personal tax ser%ices are allowed under

Sarbanes&xley but must be appro%ed by the audit committee in writing

$ontinuous monitoring 

• hat the title implies

#eer re%iew

 &ne C#A firm re%iews another C#A firms 1uality control system+ occurs e%ery D years for a C#A firm that is a member of the A,C#A8

 #urpose is to determine and report whether C#A firm being re%iewed has de%eloped ade1uate policies and procedures for 1uality control and they are following them

 7pon completion+ a report is issued with conclusions and recommendations

 ersonnel !anagement 

• Criteria for hiring+ assignment of the firms personnel to engagements+ professional de%elopment and

ad%ancement

 Assurance regarding engagement performance

• #olicies and procedures that assure that the engagement wor0 meets professional standards+ regulatory

re1uirements+ and the firms own standards of 1uality

"AAS relate to the conduct of each indi%idual engagement+ whereas 1uality control relate to the conduct of all  professional acti%ities of the firms practice as a whole

The 1uality control standards of a firm affect both the performance of each audit and the performance of the audit practice as a whole

.eficiencies in a firm’s 1uality control do not necessarily mean/indicate a lac0 of "AAS compliance8

!ther Enaements% Reports and Accountin Services

Auditing standards ha%e restricted special reports to the following H areas

68 &C'&A $ use of other comprehensi%e basis of accounting F/S (cash basis+ pricele%el ad*usted F/S)

The use of non"AA# re1uires the auditor to issue either a 1ualified or ad%erse opinion unless the non"AA# method is an &C'&A (in which case an un1ualified opinion is appropriate)

(10)

http://www.cpa-cfa.org

23 Specific elements0 accounts or items of a 5S  $ The auditor expresses an opinion on each of the specified elements+ if the element is farreaching or per%asi%e (9,+ ST@ -;+ or any item based thereon) the auditor must audit the complete set of financial statements8

A piecemeal opinion may be expressed if the items do not constitute a ma*or portion of the F/S8 A piecemeal opinion cannot be issued if the auditor has expressed a disclaimer or ad%erse opinion8

63 Issue special report on a clients compliance 7it% contractual agreements or regulatory requirements

Auditor must ha%e audited the F/S and may only issue negati%e assurance8 Cannot be issued if the auditor has expressed a disclaimer or ad%erse opinion8 ?imitedly distributed

43 Special purpose financial presentations to comply 7it% contractual agreements or regulatory provisions

H8 inancial information presented in prescribed forms or sc%edules $ the auditor may attest to the fairness on financial information presented in prescribed forms such as loan applications or regulatory filings8

The auditor may ma0e modifications to an un1ualified special report by adding an explanatory paragraph after the opinion paragraph

Compilation and Revie& of Financial Statements

C#A’s can perform two le%els of ser%ice (compilation and re%iew) with respect to unaudited F/S of a nonpublic company8

$ompilation engagement  $ 9o assurance or opinion8 C#A does not perform any audit or re%iew procedures8

 A +evie7 $ ?imited (negati%e) assurance8 C#A performs in1uiry and analytical procedures

hen a C#A performs more than one ser%ice (such as complication and an audit) the C#A should issue a report that is appropriate for the highest le%el of ser%ice rendered8

An engagement letter is recommended but not re1uired

Statements on Standards for Accounting and e%iew Ser%ices $ pronouncements issued by the accounting and re%iew ser%ices committee of the A,C#A

A compilation engagement may in%ol%e compiling and reporting on only one financial statement The compilation engagement report should include: A?A.

A $ Statement that a compilation has been performed in accordance with SSAS issued by the A,C#A ? $ Statement that a compilation is limited to presenting+ in the form of F/S+ information that is the representation of mgmt

A $ Statement that the accountant has not audited the F/S  $ Statement that the accountant has not re%iewed the F/S

. $ .isclaimer of opinion and a statement that the accountant gi%es no assurance on the F/S Kou’re A ?A. when all you do is compile F/S

Compiled F/S that omit "AA# disclosures are acceptable if:

• eason for omission was not to decei%e user 

• Compilation report warns user of missing disclosures

Compilation with limited disclosures are labeled Selected ,nformation $ Substantially All .isclosures e1uired 'y "AA# Are 9ot ,ncluded!

(11)

http://www.cpa-cfa.org

An opinion+ e%en 1ualified or ad%erse+ re1uires and audit8 hen an accountant performing a compilation or re%iew becomes aware of a "AA# departure+ the report should be modified or the C#A with withdraw from the engagement8 An opinion would not be expressed

An accountant who submits unaudited F/S to the client that are not expected to be used by a third party may use an engagement letter rather than a compilation report

e%iew of F/S $ a higher le%el of ser%ice than compilation because it results in an expression of limited

assurance8 e%iews include in1uiry and analytical procedures8 owe%er+ no re1uired to obtain an understanding of internal control or assess control ris0 

An auditor is re1uired to perform these in a e%iew: 7 $ 7nderstanding with client must be established

? $ ?earn and or obtain sufficient 0nowledge of the entity’s business , $ ,n1uires

A $ Analytical procedures  $ e%iew+ other procedures

C $ Client representation letter re1uired from mgmt (don’t need with a compilation) # $ #rofessional *udgement should be used

A $ Auditor should communicate results

The ob*ecti%e of a re%iew of financial information is to determine whether material modifications are necessary for the information to be in conformity with "AA#8

 9ot re1uired to communicate with predecessor auditor 

5a0e in1uires of internal personnel+ not external people or entities8

Client representation letter from mgmt is re1uired which co%ers all F/S’s and periods co%ered by the re%iew report

Audit test wor0+ including testing internal controls+ is not performed The accountants report in a re%iew engagement should include:

A $ the re%iew has been performed in accordance with SSAS standards established by the A,C#A 5 $ All F/S information is the representation of mgmt

, $ a re%iew consists principally of in1uiries of company personnel A $ a re%iew consists of analytical procedures applied to financial data S $ a re%iew is substantially less in scope than an audit

 9 $ no opinion is expressed

5 $ accountant is not aware of any material modifications that should be made to the F/S in order for them to be in conformity with "AA#

A5 , A S95

 Reportin on Comparative F/S

hen the continuing auditor performs a higher le%el of ser%ice (ser%ice upgrade) in the current period+ the report on the prior period should be updated and issued as the last paragraph of the current period’s report

.owngrade in ser%ice (last yr we re%iewed+ this yr we compile)8 ,ssue a compilation report and add a paragraph to describe prior period responsibility assumed8 &r issue both a re%iew report and compilation report

(12)

http://www.cpa-cfa.org

hene%er prior accountants are as0ed to reissue a prior report (audit+ re%iew or compilation) they should reas the new F/S and obtain a representation letter from the new accountant

eporting when one period is audited

• eissue the prior period report+ or 

• ,nclude an additional paragraph in the current report describing the responsibility assumed for the prior

 period statements

 Revie& of "nterim Financial "nformation

,n an initial re%iew of interim financial information+ the accountant should ma0e in1uires of the predecessor auditor+ and if allowed+ re%iew the predecessor’s documentation

,n1uiry of clients lawyer is not re1uired but may be appropriate in certain circumstances "oing concern is not re1uired but may be appropriate

?i0ely misstatement $ best estimate of the total misstatement in an account balance or class of transactions8 The accountant should:

• Accumulate all such estimates for further e%aluation

• Consider that the aggregated effect of se%eral immaterial misstatements • -%aluate potential effect on current and future periods

A re%iew of interim F/S of a public company is conducted in accordance with A,C#A auditing standards not SSAS

Should modify their report if+ during the re%iew+ they become aware of a departure from "AA# "oing concern no modification if disclosed

?ac0 of Consistency no modification if disclosed

 'etters for (nder&riters

A comfort letter is a letter from the C#A to the named underwriter8 ,t co%ers the period from the date of the last auditors’ report to the effecti%e date! of the registration8

hen a comfort letter is issued+ the C#A is re1uired to perform a re%iew of interim financial information in accordance with auditing standards

To obtain a comfort letter+ parties other than the names underwriter must pro%ide the C#A with an attorney’s opinion or representation letter+ confirming that such a party has a due diligence defense!

Comments in a comfort letter a limited to:

• Financial info expressed in dollars+ and

• Financial info deri%ed from accounting records

A comfort letter is solely to assist the underwriters in conducting and documenting their in%estigation of the company in connection with the offering

(13)

http://www.cpa-cfa.org

• C#A’s independence

• Compliance of the F/S with the S-C Act+ assuming the F/S are audited

#ro%ide negati%e assurance on:

• 7naudited F/S $ if a re%iew has not been performed+ procedures performed and findings obtained should be

listed

• Changes in selected financial information during subse1uent period

• hether nonfinancial data in the registration statement complies with regulation S@

 Attest Enaements

 Attest engagements $ C#A is engaged to issue or does issue an examination+ a re%iew+ or an agreedupon  procedures report on sub*ect matter+ or an assertion that is the responsibility of another party (usually mgmt)8

5a*or attest ser%ices:

• Agreedupon procedures

• Financial forecasts and pro*ections • #ro forma F/S

• ,nternal control o%er financial reporting

The following standards apply to ser%ices a C#A may offer: Audit engagements $ SAS (Statements on Auditing Standards)

Compilation and re%iew engagements $ SSAS (Statements on Standards for Accounting and e%iew Ser%ices)

Attest engagements $ SSA- (Statements on Standards for Attest -ngagements) SSA- does not apply to:

• #ro%iding consulting/ad%isory ser%ices

• &perational audits (usually performed by internal auditors)

There are 66 attestation standards: T,##K #- ACS "eneral Standards $ T,##K

T $ Training and proficiency , $ ,ndependence

# $ #erformance/due professional care in planning and performance # $ #rofessional 0nowledge of sub*ect matter 

K $ Kour belief that the assertion and the criteria is ob*ecti%e+ measurable and complete Field wor0 Standards $

#-# $ #-#lanning and super%ision

- $ -%idence to pro%ide reasonable basis for the conclusion eporting Standards $ ACS

A $ Assertion or sub*ect matter should be identified C $ Conclusions should be expressed

 $ eser%ations or unresol%ed issues should be disclosed

S $ Statement restricting use of the report to specified parties should be included (if necessary)

 Agreed-upon procedures $ C#A is engaged to issue a report of findings based on specific agreed upon

 procedures (example is mutual fund performance)8 Agreed upon procedures may be performed is the following conditions exist:

, $ ,ndependence of the practitioner  A $ Agreement of the parties

(14)

http://www.cpa-cfa.org

S $ Sufficiency of the procedures

7 $ 7se of the report is restricted to the specified parties  $ esponsibility for the sub*ect matter rests with the client

- $ -ngagements to perform agreed upon procedures on prospecti%e financial statements , A5 S7- you can perform these agreed upon procedures

 inancial forecasts $ the expected financial results of a future period+ based on expected conditions (i8e8  budget)

 inancial proection $ financial results based on a what if! scenario+ based on hypothetical assumptions Forecasts and pro*ections are two types of prospecti%e F/S8 #ro forma F/S are different+ because it shows what  past financial results of an expired period would ha%e been if something had been different8

&nly a financial forecast is appropriate for general use8 hile both+ forecasts and pro*ections are appropriate for limited use8

Compilation of prospecti%e F/S $ the proper assembling of financial data based on the party’s assumptions

• 9o assurance of any 0ind gi%en

• The practitioner is not re1uired to gather supporting e%idence

(15)

http://www.cpa-cfa.org

 Plannin and Supervision

T,# #,- AC.&

The audit committee is responsible for the selection and the appointment of the auditor and the re%iewing the nature and scope of the engagement

,n a new client relationship+ it is mandatory to ma0e in1uiries of the predecessor auditor8 Client permission is needed8 ,f the client is unwilling it is a scope limitation8

'efore accepting the client+ in1uiry the old C#A regarding:

• ,nformation that may re%eal mgmt integrity

• .isagreements with mgmt (accounting principles+ auditing procedures) • easons for change of auditor 

• Communication to the audit committee regarding fraud+ illegal acts+ internal control matters

After acceptance+ in1uiry the old C#A regarding:

• 5a0e specific in1uiries about the audit

• e%iew predecessors audit documentation (wor0papers)

#reliminary -ngagement Acti%ities

• Assess the integrity of mgmt

• Assess the a%ailability and ade1uacy of the clients accounting records (lac0 of records 3 scope limitation) • -%aluate the firm’s 1uality control policies and procedures

 An engagement letter  $ a signed contract which documents the understanding with the client is re1uired for an audit engagement (should be signed and dated by the client)

5anagement’s is responsible for:

• The F/S

• ,nternal controls

• Compliance with laws

• epresentation letter (letter to auditor at end of the engagement that confirms the representation made)

Auditor is responsible for:

• Conduct the audit in accordance with "AAS (obtain reasonable assurance about whether the F/S are free

from material misstatements

An audit is not designed to detect error or fraud that is immaterial to the F/S

An audit is not designed to pro%ide assurance on internal control or to identify significant deficiencies

Audit is sub*ect to inherent ris0s that errors and fraud will not be detected8 ,f we disco%er fraud then we report it to the audit committee

#lanning the Audit

The nature+ extent and timing of planning procedures will %ary based on the engagement (the 9-T we cast o%er  the audit)

The auditor is re1uired to obtain an understanding of the entity+ its en%ironment and internal controls &btain 0nowledge about the clients industry and business through:

(16)

http://www.cpa-cfa.org

• Tour client facilities

• e%iew financial history of client

• &btain understanding of client accounting • ,n1uire of client personnel

Analytical #rocedures used for:

• For planning the nature+ extent+ and timing of other audit procedures (re1uired) • Substanti%e tests to obtain e%idential matter (optional)

• &%erall re%iew in the final stage of the audit (re1uired)

Analytical procedures performed during planning

• 7sed to enhance the auditors understanding+ and identify unusual transactions+ e%ents and amounts • .uring planning+ analytical procedures consist of a re%iew of data aggregated at a high le%el+ such as

comparing financial statements to budgeted amounts

• Financial data is used through rele%ant nonfinancial data (number of employees+ s1uare footage)

The audit plan

• 5ust be written

• Specific audit procedures are documented

• .escription of the nature+ extent+ and timing of:

 #lanned ris0 assessment procedures (assess ris0 of material misstatement) (re1uired)  #lanned further audit procedures

• Timing of audit procedures should be discussed with mgmt

5ateriality

 8no7n misstatements $ specific misstatements identified during the audit

 /iely misstatements $ misstatements the auditor considers li0ely to exist due to differences between auditor and mgmt *udgements or from audit e%idence

9olerable misstatements $ maximum error in a specific population that the auditor is willing to accept All misstatements must be communicated to mgmt

'ecause the F/S are interrelated+ the auditor should use the smallest le%el of misstatement that could be material to any one of the F/S

The auditor must consider the effects+ both indi%idually and in aggregate+ of the uncorrected misstatements (both 0nown and li0ely)

5isstatements are more li0ely to be considered if they:

• Affect trends in profitability

• Affect’s entity’s compliance with loan co%enants+ contracts or regulatory pro%isions • ,ncrease mgmt’s compensation

• Affect significant F/S elements • Can be ob*ecti%ely determined

The auditor should document:

• #lanning le%els of materiality and tolerable misstatement+ the basis for those le%els and any subse1uent

(17)

http://www.cpa-cfa.org

• @nown and li0ely misstatements that were corrected by mgmt

• A summary of uncorrected misstatements (0nown and li0ely)+ auditors conclusions on whether those

misstatements cause the F/S to be materially misstated+ and the basis for the conclusion .ocumentation of uncorrected misstatements should include:

• Separate identification of 0nown and li0ely misstatements • The aggregate effect on the F/S

• ele%ant 1ualitati%e factors affecting materiality *udgements

Audit is0 

Audit ris0 is the ris0 that the auditor may un0nowingly fail to modify appropriately the opinion on the F/S that are materially misstated (ris0 that the auditor will gi%e the wrong opinion)

A 3 55 L .  A 3 (, L C) L . 

Audit ris0 (A) should be low

 +is of !aterial !isstatement (+!! ) $ assessed by auditor and is independent of F/S audit

 In%erent ris (I+) $ susceptibility of a rele%ant assertion to a material misstatement+ assuming there are no related controls (mista0e in the clients acctg system)8 Auditor assesses , but can’t change

$ontrol ris ($+) $ ris0 that a material misstatement could occur in a rele%ant assertion will not be  pre%ented or detected on a timely basis by the clients internal controls (clients internal control does not

catch it)

 #etection ris (#+) $ ris0 that the auditor will not detect a misstatement that exists within a rele%ant assertion (auditor will miss the mista0e)8 .etection ris0 is a function of the effecti%eness of audit procedures8 The auditor  can change the detection ris0 

55 and . ha%e in%erse relationship8 hen ris0 of material misstatement is high+ detection ris0 should be set low (so we ha%e to do more wor0)

Substanti%e procedures are always re1uired

.irect relationship between 55 and assurance re1uired from Substanti%e procedures8 "reater the ris0 (55) the more persuasi%e e%idence needed8

Audit ris0 and materiality must be considered at both the F/S le%el and the account balance (item le%el)

• At the F/S le%el+ the auditor should consider ris0s that ha%e per%asi%e effect on the F/S+ potentially affecting

many rele%ant assertions

• The account balance le%el (transaction G item le%el) is used to determine the nature+ extent+ and timing of

audit procedures8 ,n%erse relationship between audit ris0 and materiality Audit #rocedures:

68 is0 assessment procedures

8 Test of controls $ test of internal controls (C,5-) D8 Substanti%e procedures $ tests M balances

F/S Assertions (made by mgmt) Transactions and e%ents

C $ Completeness

# $ #roper period cutoff  A $ Accuracy

(18)

http://www.cpa-cfa.org

Account balances

C $ Completeness

A $ Allocation and %aluation  $ ights and obligations - $ -xistence

#resentation and disclosure C $ Completeness

7 $ 7nderstandability and classification  $ ights and obligations

B $ Baluation and accuracy

After sufficient planning information has been gathered+ an audit plan should be drafted8 A written audit plan is re1uired for e%ery audit8

hen planning the audit+ the auditor should consider the extent of in%ol%ement of the client’s internal auditors in the audit8 ,nternal auditors are not independent+ thus+ the external auditor can’t share with the internal auditor  any responsibility for audit decisions8

• Auditor must obtain an understanding of the internal audit function

• ,f the auditor uses the wor0 of internal audit+ competence and ob*ecti%ity must be assessed • The higher the le%el the internal auditors report to+ the more ob*ecti%ity can be assumed

• The auditor remains solely responsible for the report on the F/S8 The internal auditor may not be utili>ed to

ma0e *udgement calls

,f a specialist is used must e%aluate the competence and ob*ecti%ity of the specialist8 Treat li0e one of your staff8

Fraud and "lleal Acts

 .rrors $ unintentional

 raud  $ intentional2  types

68 Fraudulent financial reporting (lying) $ designed to decei%e F/S users8 7sually in%ol%e manipulation+ misrepresentation+ intentional misapplication of accounting principles 8 5isappropriation of assets (stealing) $ theft of an entities assets

Fraud ris0 factors include:

• ,ncenti%es/pressures: a reason to commit fraud • &pportunity: lac0 of effecti%e controls

• ationali>ation/attitude: an attempt to *ustify fraudulent beha%iour 

,ts mgmt’s responsibility to design and implement programs and controls to pre%ent and detect fraud The auditor has a responsibility to plan and perform (referred to as design) the audit to obtain reasonable assurance about whether the F/S are free from material misstatement+ whether caused by error or fraud8 5gmt o%erride of controls is a ma*or factor in fraud8

,n1uire entire personnel regarding their %iews of fraud ris0 

 ,nconsistent responses indicate a need for additional e%idence

(19)

http://www.cpa-cfa.org

Attributes of ris0:

• Type of ris0: fraudulent F/S or misappropriation of assets • Significance of ris0: can it lead to a material misstatement • ?i0elihood of the ris0: how li0ely is this to happen

• #er%asi%eness of the ris0: does it affect the whole F/S or only specific accounts or transactions

 Areas of greatest fraud concern:

68 ,mproper re%enue recognition 8 5gmt o%erride controls

,tems are more susceptible to manipulation when they in%ol%e: 68 igh degree of mgmt *udgement and sub*ecti%ity 8 ighly complex accounting principles

The auditor is re1uired to respond to the results of the ris0 assessment on three le%els 68 &%erall+ general response

 assigning personnel to the engagement

 determining the appropriate le%el of super%ision of engagement personnel  e%aluating mgmt’s selection and application of accounting principles 8 esponse encompassing specific audit procedures

 change nature  change extent  change timing

D8 esponse addressing ris0s related to mgmt o%erride  examine *ournal entries and other ad*ustments  re%iew accounting estimates for biases

 e%aluate the business purpose for significant unusual transactions Significant fraud ris0 $ may consider withdrawing from the engagement e%enue recognition

 perform substanti%e analytical procedures relating to re%enue

 confirm with customers contract terms and the absence of side agreements e%enue recognition criteria

68 must ha%e an arrangement (signed agreement) 8 must be a deli%ery

D8 must be fixed or determinable price E8 collectability

,n%entory 1uantities

 concern that there may be a failure to reconcile boo0s to physical in%entory 5gmt estimates

 engage a specialist

 de%elop an independent estimate

 perform a retrospecti%e re%iew of prior period estimates (how good were last yr’s estimates)

5isstatements caused by fraud (e%en immaterial misstatements) may be indicati%e of an underlying problem with mgmt integrity8 The auditor may need to ree%aluate the assessment of fraud ris0+ the assessed effecti%eness of controls+ and the appropriateness of audit procedures applied8

(20)

http://www.cpa-cfa.org

 to comply with certain legal and regulatory re1uirements  to a successor auditor 

 in response to a subpoena  to a funding agency

Complete documentation of the auditors ris0 assessment and response is re1uired

,f the auditor has not identified improper re%enue recognition as fraud ris0+ support for this conclusion ,llegal acts $ %iolation of law

The auditors responsibility to detect illegal acts are the same for fraud and errors8

The auditor has no obligation to loo0 for illegal acts ha%ing an indirect effect on the F/S The auditor generally does not include procedures to specifically detect illegal acts -ffect of illegal acts on the auditors report

.eparture from "AA# $ expect for! or ad%erse ,nsufficient e%idence $ except for! or disclaimer  Clients refuses to modify report $ withdraw

 Ris) Assessment

T,# #,- AC.& (fieldwor0) Audit Steps ,5AC#A

, $ ,nternal control+ understand 5 $ 5aterial misstatement+ assess A $ Assess ris0 control

C $ Control testing

# $ #erform substanti%e testing

A $ Audit e%idence+ e%aluate appropriateness and sufficiency

,  ,nternal control $ obtain an understanding of the entity and its en%ironment is0 assessment procedures

• ,n1uires

• Analytical procedures (re1uired for planning and final stages) • &bser%ation and inspection

• .iscussion among audit team • &ther procedures

• The auditor may choose to perform substanti%e procedures or tests of controls+ if its efficient to do so

Factors to understand

• ,ndustry+ regulatory+ and other external factors • 9ature of the entity

• &b*ecti%es+ strategies and business ris0s

 'usiness ris0s $ e%ents or circumstances that could ad%ersely affect the firm (ie competition)

• Financial performance

• ,nternal controls and accounting policies

5 $ 5aterial misstatement+ assessing the ris0s Factors that my be indicati%e of significant ris0s

• 7nusual+ complex transactions • 'usiness ris0s

(21)

http://www.cpa-cfa.org

• Significant related party transactions

• ighly sub*ecti%e accounting estimates and principles

esponse to significant ris0s

• -%aluate the design of the entity’s related controls

• .etermine whether the controls ha%e been implemented • -%aluate whether and how mgmt responds to such ris0s

Test of controls $ test strengths to be relied upon+ not wea0nesses

Controls that are more directly related to an assertion are more effecti%e in pre%enting+ detecting and correcting a misstatement in that assertion+ than controls which only relate indirectly to an assertion8

.ocumentation re1uirements

• .iscussion among the audit team

• @ey elements of the understanding of the entity and its en%ironment • The assessment of the ris0s of material misstatement

• The identified ris0s and related controls e%aluated by the auditor 

.ocument

68 control factors that were used/helped to plan the audit engagement

8 control factors that helped ensure mgmt rules and directi%es were followed Forms of documentation may include any item the auditor can F,9.

F $ Flowchart

, $ ,nternal control 1uestionnaire or chec0lists  9 $ 9arrati%e

. $ .ecision table

Flowcharts $ symbolic diagram representing the se1uential flow of authority+ processes and documents8 .epicts the auditors understanding of the system

• An ade1uate flowchart shows the origin of each document in the system+ its subse1uent processing+ and its

final disposition

• ,T flowcharts are initially created to document the logic and existing flow of a computer program

,nternal control 1uestionnaires $ used for each item of mgmt assertions

 9arrati%es $ a narrati%e is a written %ersion of a flow chart (hard to see! wea0nesses

.ecision tables or trees $ graphic illustrations that depict the logic of an operation or a process A flowchart is se1uential while a decision table/tree is logical

 "nternal Control

T,# #,- AC.&

-ntity ob*ecti%es

68 eliability of financial reporting (most rele%ant to the audit) 8 -ffecti%eness and efficiency of operations

(22)

http://www.cpa-cfa.org

Controls that pertain to the first ob*ecti%e (reliability of financial reporting) are the most rele%ant to the audit+ and these are the controls that the auditor must consider and understand8

Fi%e components of internal controls $

C,5-C $ C,5-Control en%ironment: o%erall tone of the organi>ation  $ is0 assessment $ mgmt’s identification of ris0 

, $ ,nformation and communication systems

5 $ 5onitoring: assessment of internal controls o%er time - $ -xisting control acti%ities: control policies and procedures ,t’s a C,5- not to ha%e strong internal controls

Control testing 3 internal controls (C,5-) Substanti%e testing 3 M balances

The auditor should obtain an understanding of C,5- as it pertains to financial reporting:

68 e%aluate the design of rele%ant controls and determine whether then ha%e been implemented 8 assess the ris0 of material misstatement

D8 design the nature+ extent and timing of further audit procedures (C#A tests internal controls in order to ade1uately plan the 9-T audit)

?imitations of internal controls

• uman error  • Collusion • 5gmt o%erride

• Segregation of duties may be difficult to achie%e in a smaller entity

,T system may ma0e it impossible to reduce detection ris0 through substanti%e testing alone (must do control testing as well)

,T benefits:

• Ability to process large %olumes of transactions accurately • ,mpro%ed timeliness and a%ailability of information

• Facilitation of data analysis and performance monitoring • eduction is the ris0 that controls will be circum%ented

• -nhanced segregation of duties through effecti%e security controls

,T is0s:

• #otential reliance on inaccurate systems • 7nauthori>ed access to data

• 7nauthori>ed changes to data+ systems and programs

• Failure to ma0e re1uired changes and updates to systems or programs

Auditor should document use of programs and perform tests more often during the yr  &rgani>ational structure of the ,T department

C $ Control group $ responsible for internal control within ,T dept8 & $ #rogram &perators $ input data

# $ #rogrammers $ write and de%elop computer programs

A $ System Analysts $ design the o%erall program+ while programmers do the detailed wor0  ? $ ?ibrarian $ maintains the storage of the data

(23)

http://www.cpa-cfa.org

Anyone doing for an 6 *ob or super%ising another area is a wea0ness

C,5-C $ C,5-Control -n%ironment $ has per%asi%e effect on the auditors ris0 of assessment and preliminary *udgements about its effecti%eness may influence 9-T of further audit procedures to be performed

• Sets the tone of an organi>ation+ influencing the control consciousness of its people • Communication and enforcement of integrity and ethical %alues

• 5gmt’s philosophy and operating style • &rgani>ational structure

• Assignment of authority+ responsibility and accountability • uman resource policies and practices

 $ is0 assessment

• C#A should obtain understanding and 0nowledge

, $ ,nformation and communication

• C#A should obtain understanding and 0nowledge

• Accounting process (automated and manual)+ from initiation of a transaction to F/S

• Accounting records (electronic and manual) supporting information and specific accounts in%ol%ed in

initiating+ authori>ing+ recording+ processing and reporting transactions

• The financial reporting process+ including the de%elopment of significant accounting estimates and the

inclusion of appropriate disclosure 5 $ 5onitoring

• C#A should obtain understanding and 0nowledge

• #rocess that assesses the 1uality of internal control performance o%er time • -stablishing and maintaining internal control is a responsibility of mgmt

- $ -xisting control acti%ities

Control acti%ities in a strong internal control system ha%e #A,. T,#S # $ #renumbering of documents

A $ Authori>ation of transactions

, $ ,ndependent chec0s to maintain asset accountability . $ .ocumentation

T $ Timely and appropriate performance re%iews

, $ ,nformation processing controls $ ensure that transactions are %alid+ authrori>ed+ and accurate  Application controls $ controls for processing of indi%iduals transactions

 "eneral controls $ apply to information processing throughout the company # $ #hysical controls for safeguarding assets $ simply security

S $ Segregation of duties $ client should separate: A+$ 

 Authori>ation  ecord0eeping

 Custody of related assets

The internal control en%ironment should be detected in the ordinary course of business by an employee+ not  Collusion

 5gmt o%errides

For internal controls the auditor should

(24)

http://www.cpa-cfa.org

• #erform substanti%e procedures

eport on controls placed in operation $ may aid the auditor in obtaining an understanding of controls+ howe%er+ it is pro%ided when tests of operating effecti%eness were not performed+ and therefore it does not  pro%ide the user with a basis for reducing the assessment of control ris0 

 Respondin to Assessed Ris)s

,5AC#A

Audit approach $ the auditors specific approach to identified ris0s at the rele%ant assertion le%el may consist of either a substanti%e or combined approach

7se substanti%e approach when:

• Controls are not strong for an assertion

• 9ot cost/benefit to test the effecti%eness of the controls

Combined approach $ both control testing and substanti%e procedures are used8 ,f controls are operating effecti%ely+ less assurance will be re1uired from substanti%e procedures8

Test of controls may be re1uired in highly electronic en%ironments+ substanti%e procedures alone may not be sufficient

Audit approach

Status of internal control is0 le%el #erform control tests #erform substanti%e tests  9one or wea0 high 9o (because nothing to rely on) yesmaximum

Some medium Kes

Strong low Kes minimal(but ne%er

eliminate for material  balances+ transaction classes+ or disclosures)

Test of Controls  ,5AC#A

Test of controls are performed when the auditors ris0 assessment is based on the assumption that controls are operating effecti%ely+ or when substanti%e procedures alone are insufficient8 (test control strengths+ not

wea0nesses)

&btaining an understanding of internal controls includes e%aluating the design of controls and determining whether they ha%e been implemented

&nly controls that are suitably designed to pre%ent or detect material misstatements are sub*ect to tests of operating effecti%eness

,nspect client records documenting use and changes to ,T programs  9ature of tests of controls

• Tests of operating effecti%eness of controls include: in1uiries+ inspection+ obser%ation+ and reperfornance • As the planned le%el of assurance (about operating effecti%eness) increases+ the auditor should obtain more

reliable or more extensi%e audit e%idence -%idence hierarchy:

68 #ersonal obser%ation and 0nowledge 8 -xternal e%idence

(25)

http://www.cpa-cfa.org

D8 ,nternal e%idence E8 &ral e%idence

Timing of tests of controls

• hen tests of controls are performed at one particular time+ they pro%ide e%idence that controls operated

effecti%ely only at that time8 Controls tested throughout the period pro%ide e%idence of operating effecti%eness during that period

• Controls that are tested only during an interim period should be supplemented by additional e%idence for

the remaining period (roll forward)

• ,f controls ha%e changed since they were last tested+ operating effecti%eness must be retested in the current

 period

• -%en if controls ha%e not changed+ operating effecti%eness must be tested at least one e%ery third year 

#erform substanti%e testing $ ,5AC#A

• 7sed to detect material misstatements at the rele%ant assertion le%el

• Substanti%e procedures should be designed to be responsi%e to assessed ris0s+ howe%er+ regardless of the

assessed ris0+ substanti%e procedures are re1uired for each material transaction class or account balance  types of substanti%e procedures

68 Test of details $ applied to transaction classes+ account balances and disclosures8 M balances+ ratios 8 Substanti%e analytical procedures $ used for large %olume predictable transactions

.irectional testing

To test existence or occurrence assertion $ Top down+ start from F/S8 ?oo0 for support 3 %ouching Test existence for o%erstatement of assets and re%enues

To test completeness assertion $ 'ottom up+ start from item+ loo0 to see its included/co%ered in F/S 3 tracing Test completeness for understatement of liabilities and expenses

,f substanti%e procedures are performed at an interim date+ the auditor should perform further substanti%e  procedures (maybe with test of controls) to pro%ide reasonable basis for extending audit conclusions to period

end

,f ris0 of material misstatement is low+ performing substanti%e procedures at interim increases the ris0 that the auditor will not detect material misstatements in the F/S

,n certain situations+ such as those in which there is an identified fraud ris0+ the auditor may choose to perform substanti%e procedures at or near period end8

Audit e%idence+ e%aluate appropriateness and sufficiency $ ,5AC#A

• Audit e%idence obtained may cause the auditor to modify this or her initial ris0 assessment

• The auditor should not assume that an identified instance of fraud or error is an isolated occurrence • hen there is a change in the assessed le%el of ris0+ the auditor should modify planned procedures

accordingly

(26)

http://www.cpa-cfa.org

Transaction C$cles

T,# #,- AC.& $ whole chapter E

e%enue cycle $ includes sales re%enues+ recei%ables and cash receipts Sales (serially number documents are #A,. T,#)

68 #reparation of sales order $ a serially numbered sales order is prepared and sent to the credit department for appro%al

8 Credit appro%al $ %aluation assertion+ credit department determines (AC)

D8 Shipment $ Shipping department prepares a serially numbered bill of lading (AC)

E8 'illing $ 'illing dept8 prepares serially numbered sales in%oice8 Shipping documents+ sales orders+ and in%oices are compared to ensure that all shipments were based on customer orders and properly billed8 The in%oice is then sent to the customer and A/ dept8 (AC)

H8 Accounting $ the sale is entered into the sales *ournal and a recei%able is recorded (AC) Accounts recei%able

68 Sales

8 Collection of cash receipts

D8 7ncollectible recei%ables $ an aging schedule is prepared and sent to the credit department for use in carrying out its collection program8 Auditor obser%es the preparation of aging schedule to support assessing control ris0 below maximum

E8 Sales returns $ a serially numbered recei%ing report may be used as a sales return slip8 &nce the return is appro%ed+ the related recei%able is eliminated

Cash receipts

68 Collection $ incoming mail must be opened by a person who does not ha%e access to the A/ ledger8 &ne receipt copy should be sent to cashier (or treasury) for ban0 deposit8 Another copy sent to A/ dept8 for entry into the A/ subsidiary ledger8 A third copy should be sent to acctg dept8 for entry into the general ledger 

Testing controls for Sales

• ,n1uire about credit procedures for new customers (%aluation) (AC) • Compare sales *ournal to subsidiary ledgers

• ,nspect a sample of prenumbered shipping documents and

 agree to sales order (existence)

 account for prenumbered (completeness)

• Bouch a sample of sales in%oices+ trace a sample of shipping documents

• ,nspect customer exception file and disposition (existence+ completeness+ rights and %aluation) • Send confirmations $ follow up on error reports (rights and obligations)

• Test cutoff 

• Test ade1uacy of uncollectible accounts

-xpenditure cycle #urchases

68 #urchase re1uisition $ the dept8 needing an asset or ser%ices sends an appro%ed serially numbered re1uisition to the purchasing dept

8 #urchase orders $ obtain competiti%e bids from %arious suppliers to ma0e sure that the best price is obtained8 7se prenumbered purchase orders

D8 eceipt of goods or ser%ices it is preferable that the copy not indicate the 1uantity ordered (blind copy)+ thus the recei%ing dept is forced to count the goods upon arri%al

Figure

Updating...

References

Related subjects :