audit final study guide

Topics: Auditing, Auditor's report, Sampling Pages: 11 (2570 words) Published: March 10, 2015
Chapter 3

The client acceptance process
1. Obtain and review financial information
2. Inquire of third parties regarding client integrity
3. Communicate with the predecessor auditor
4. Consider unusual business or audit risks
5. Determine if the firm is independent
6. Determine if the firm has the necessary skills and knowledge 7. Determine if acceptance violates any applicable regulatory agency requirements or the Code of Professional Conduct

Communications with predecessor auditors
Information that might bear on the integrity of management
Disagreements with management about accounting policies, auditing procedures, or other similarly significant matters Communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity Communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control The predecessor auditor’s understanding about the reasons for the change of auditors

Engagement letters
Formalizes the arrangement reached between the auditor and the client Outlines the responsibilities of both parties and preventing misunderstandings between the two parties Arrangements for use of specialists or internal audits

Any limitations of liability of the auditor or client
Additional services to provided
Arrangements regarding other services

Materiality
The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement

Planning Materiality
The maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of users

Tolerable Misstatement
The amount of the planning materiality that is allocated to the financial statement account in order to establish a scope for the audit procedures for the individual account balance

Illegal acts, including auditor’s responsibility
Direct and material effects on the financial statements
Material but indirect: violations of securities acts, environmental protection, equal employment regulations Auditors responsibility for detecting illegal acts having a direct and material effect on the financial statements is the same as that for errors or fraud Audit should consider implications for other aspects of the audit, particularly the reliability of management representations Audit should ensure that the audit committee or those charged with governance are adequately informed about significant illegal acts May have duty to notify parties outside the client

Types of audit tests
Risk Assessment Procedures: used to obtain an understanding of the entity and its environment, including its internal control. Includes inquires of management and others, preliminary analytical procedures of material misstatement at the financial statement and assertion levels Tests of Controls: audit procedures performed to test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the relevant assertion level Inquires of appropriate management, supervisory, and staff personnel Inspection of documents, reports, and electronic files

Observation of the application of specific controls
Examples: observe and evaluate whether shipping personnel have access to the order entry or billing activities, inspect a sample of sales orders for presence of initials of Credit Department personnel, inquire of Billing Department personnel about missing sales invoice numbers Substantive Procedures

Test of Details
1. Substantive tests of transactions test for errors or fraud in individual transactions Examine a large purchase of inventory by testing that the cost of goods included on the vendor’s invoice for that purchase is properly recorded in the...
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