Auditing Quiz + Notes
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PREFINAL QUIZ 3 1.
Why do you want to become a Certified Public Accountant?
2.
Among the different fields in the accounting profession (i.e. public accounting, private accounting, government accounting and academe), which field do you plan to build your career? Why?
3.
What are your suggestions to make the study of Auditing Theory more efficient and effective?
FOCUS NOTES
PSQC 1: Quality Control for Firms that Perform Audits and Reviews of Historical Information, and Other Assurance and Related Services Engagements
•
The firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with the professional standards and regulatory and legal requirements, and that reports issued by t he firm or engagement partners ar e appropriate in the circumstances.
•
Elements of a System of Quality Control (IHEAL ME) 1.
Leadership responsibilities responsibilities for quality within the firm – the engagement partner should take responsibility for the overall quality of each audit to which the partner is assigned.
2. Ethical requirements (PCOPI)
3.
Professional competence and due care
Confidentiality
Objectivity
Professional behavior
Integrity
Acceptance and continuance of client cli ent relationships and specific engagements - before accepting the audit engagement, the auditor should consider the following:
Integrity of the client
Its competence to perform the engagement
Ability to comply with ethical requirements
4. Human resources - the firm should have policies ad procedures to address issues concerning:
5.
Recruitment
Performance evaluation, compensation and promotion
Capabilities and competence
Career development
Assignment of engagement teams
Engagement performance – the engagement partner should take re sponsibility for the direction, supervision, review and overall performance of the audit engagement; and the firm should establish policies and procedures that encourage firm per sonnel to seek assistance from authoritative sources either within or outside the entity (consultation).
6.
Monitoring
7. Independence*
The nature and extent of a CPA firm’s quality control policies and procedures depend on the:
CPA firm’s size
Nature of the CPA firm’s practice
Cost-benefit considerations
PSA 200: OBJECTIVES AND GENERAL PRINCIPLES GOVERNING THE AUDIT OF THE FINANCIAL STATEMENTS
AUDIT – the objective of an audit of the financial statements is to e nable the auditor to express an opinion to whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.
GENERALLY ACCEPTED AUDITING STANDARDS (GAAS) – represent measures of the quality of the auditor’s performance. These standards should be looked at as a minimum standard of performance that the auditors should follow.
General standards (TIP) 1.
Technical training and proficiency
2.
Independence
3.
Professional Care
Standards of fieldwork (PIE) 1.
Planning
2.
Internal Control Consideration
3.
Evidential matter
Standards of reporting (GIDO) 1.
Generally Accepted Accounting Principle
2.
Inconsistency
3.
Disclosures
4.
Opinion
PSA 240: The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements; PSA 250: Consideration of Laws and Regulations in Audit of Financial Statements
The fair presentation of the financial statements in accordance with the financial reporting standards is the responsibility of the client’s management . The responsibility
of the auditor is to design the audit to provide reasonable assurance of detecting material misstatements in the financial statements.
Misstatements may emanate from:
Error - unintentional misstatements in the FS 1.
Mathematical or clerical mistakes in the underlying records and accounting data.
2.
An incorrect accounting estimate arising from the oversight or misinterpretation of facts.
3.
Mistake in the application of accounting policies.
Fraud - intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain unjust or illegal advantage. •
Types of fraud 1.
Fraudulent financial reporting - involves intentional misstatements or omissions of amounts or disclosures in the financial statements to deceive financial statements users. This type of fraud is also commonly referred to as management
fraud . a.
Manipulation, falsification or alteration of records or documents
b. Misrepresentation in or intentional omission of the effects of transactions from records o r documents c. 2.
Intentional misapplication of accounting policies
Misappropriation of assets or employee fraud - involves theft of an entity’s assets committed by the entity’s employees. a.
Embezzling receipts
b. Stealing entity’s assets c.
Lapping of accounts receivable
Noncompliance with laws and regulations - refers to acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws and regulations.
It does not include personal misconduct (unrelated to business activities of the entity) by the entity’s management or employees.
PSA 260: COMMUNICATIONS OF AUDIT MATTERS WITH THOSE CHARGED WITH GOVERNANCE
The auditor should communicate audit matters of governance interest arising from the audit of financial statements with those charged with governance of an entity on a timely basis.
Charged with governance: role of persons entr usted with the supervision, control and direction of an entity (ex. Board of Directors)
The auditor is not required to design procedures for the specific purpose of identifying
matters of governance interest.
The auditor’s communication with those charged with governance may be made orally
or in writing.
PSA 230 AUDIT DOCUMENTATION
The auditor should prepare, on a timely basis, audit documentation that provides:
A sufficient and appropriate record of the basis of the auditor’s report;
Evidence that the audit was performed in accordance with PSAs and applicable legal and regulatory requirements.
Audit Documentation – means the record of audit procedures pe rformed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “work papers” are sometimes used).
Experienced auditor means an individual (whether internal or external to the firm) who has a reasonable understanding of
Audit processes
PSAs and applicable legal and reporting requirements
The business environment in which the entity operates
Auditing and financial reporting issues relevant to the entity’s industry
Audit documentation may be recorded on paper or on electronic or other media and it should be prepared to enable an ex perienced auditor, having no previous connection with the audit, to understand: the nature, timing and extent of audit procedures; the results of the audit procedures and audit evidence obtained; and significant matters arising during the audit and the conclusions reached thereon.
The auditor should complete the assembly of the final audit file 60 days from the date
of the auditor’s report as indicated in PSQC 1.
PSA 540: AUDIT OF ACCOUNTING ESTIMATES
Accounting estimate means approximation of the amount of an item in the absence of a precise means of measurement.
Management is responsible for making accounting estimate.
The auditor should obtain a sufficient appropriate evidence as to whether an accounting estimate is reasonable in the circumstances and when required is properly disclose.
Approaches in the audit of accounting estimate
Review and test the process used by management.
Use an independent estimate for comparison with that by management.
Review subsequent events which would confirm the estimate.
PSA 550: RELATED PARTIES
Related party – refers to persons or entities that may have dealings with one another in which one party has the ability to exe rcise significant influence or control over the other party in making financial and operating decisions.
Management is responsible for the identification and disclosure of related parties and transactions with such parties.
During the course of the audit, the auditor needs to be alert for transactions which appear unusual in the circumstances and may indicate the existence of previously unidentified related party transactions.
Examples of conditions in which related party transactions are likely would include:
Transactions which have abnormal logical business reason for their occurrence.
Transactions which differ in substance and in form.
Transactions which are processed in an unusual manner.
High volume of significant transactions with certain customers or suppliers compared with other unrecorded transactions.
Unrecorded transactions such as the receipt or provision of management services at no charge at all.
PSA 610: CONSIDERING THE WORK OF INTERNAL AUDITOR
Internal Auditing - an appraisal activity established within an entity as a service to the entity.
Consider internal auditing activities that are relevant to the audit of FS.
The responsibility for audit opinion and the nature, timing and extent of audit procedures lies solely with the external auditor.
Relationship between internal auditing and e xternal auditing.
Certain aspects of internal auditing may be useful in
determining the nature,
timing and extent of audit procedures.
The external auditor’s responsibility will not be reduced by t he use of the internal auditor’s work.
When obtaining an understanding and performing a preliminary assessment of the internal auditing function, the important criteria are to co nsider are the internal auditor’s:
Organizational status
Scope of function
Technical competence
Due professional care
PSA 620: USING THE WORK OF AN EXPERT
Expert – person or a firm possessing special skill, knowledge and experience in a particular field other than accounting and auditing.
Expert may be:
Contracted by the entity
Contracted by the auditor
Employed by the entity –the objectivity of the expert may be an issue
Employed by the auditor
In assessing the work of an expert, the auditor should consider:
Source data used
Assumptions and methods used by the expert
Results of the expert’s work in the light of the overall
knowledge of the
business and the results of other audit procedures.
Reference to the work of an expert
When issuing an unmodified auditor’s report, the auditor should not refer to the work of an expert for this might be understood as qualification of the auditor’s report or division of responsibility.
If as a result of an expert’s work, the auditor decides to issue a modified report , in some circumstances it might be appropriate, in explaining the nature of the modification, to refer to or describe the work o f an expert (including the identity and the extent of the expert’s involvement).
THE AUDIT PROCESS Accepting an engagement
Consider auditor’ qualification and client’s auditability
Perform “preliminary planning activities” (PSA 300: PLANNING AN AUDIT OF FS)
Procedures regarding the continuance of client’s relationship
Evaluating compliance with laws and regulations
Establishing the terms of the engagement
Considerations whether to accept or reject an engagement
Competence of the auditor
Independence of the auditor
Ability to serve the client properly
The integrity of the prospective client’s management a.
Making inquiries of appropriate parties in the business community
b. Communicating with the predecessor auditor 1.
Reasons for the change of auditor
2. Disagreements 3.
Any facts that might have a bearing to the integrity of the prospective client
Engagement letter - to avoid misunderstandings with respect to the engagement and to document and confirm the auditor’s acceptance of the appointment
Objective of the audit of the financial statements
Management responsibility for the FS
Scope of the audit
Forms or any reports or other communication to the auditor expects to issue
The fact that because of the limitations of the audit, there is an unavoidable risk that material misstatements may remain undiscovered
Responsibility of the client to allow the auditor to allow the auditor to have
unrestricted access to whatever records, documentation and other information requested in connection with the audit
Billing arrangement
Expectations of receiving management representation letter
Arrangements considering the involvement of others (experts, other auditors, internal auditors and other client personnel
Request for the client to confirm the terms of the engagement
Acceptance of a change of engagement (i.e. from an audit engagement to a review engagement)
Change in circumstances affecting the need for the service
Misunderstanding as to the nature of an auditor or related service originally requested
A restriction on the scope of the engagement , whether imposed by client or by the circumstances (Note that A or B would ordinarily be a reasonable basis for requesting a change in engagement).
In order to avoid confusing the reader if there is a change in engagement, the report would not include reference to: 1.
The original engagement
2. Any procedures that may have been performed in the original engagement, except where the engagement is changed to undertake agreed-upon procedures.
Audit Planning
Involves developing a general audit strategy (overall audit strategy) and a detailed
approach (audit plan) for the expected conduct of the audit.
It helps ensure that appropriate attention is devoted to important areas of the audit
It helps identify potential problems.
It allows the work to be completed expeditiously.
It assists in the proper assignment and coordination of work.
It helps ensure that the audit is conducted efficiently and effectively.
Overall audit strategy sets the scope, timing and the direction of the audit , and guides the development of a more detailed audit plan.
Audit plan includes the nature, timing and extent of audit procedures.
PSA 315: UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISK OF THE MATERIAL MISSTATEMENTS - requires the auditor to obtain sufficient understanding of the entity and its environment, including its internal control.
The auditor shall perform risk assessment procedures to provide a basis for the identification and assessments of the material misstatements at
The financial statement level
The assertion level for classes of transactions, account balances and disclosures.
Risk assessment procedures by themselves do not provide sufficient appropriate audit evidence on which to base the opinion.
Risk assessment procedures shall include Inquiries of management and others
within the entity, Analytical procedures, Observation and Inspection.
Understanding the entity and its environment
Knowledge of the client’s business and industry
Identify and understand the events, transactions and practices that may have a significant effect on the FS
Identify and understand the entity’s objectives and strategies, the related business risks and the entity's measurement of performance
Sources of information in understanding the entity and its environment
Review of prior year’s working papers
Tour of client’s facilities
Discussion with people within and outside the entity
Reading books, periodicals and other publications related to the client’s industry
Reading corporate documents and financial reports
Developing an overall audit strategy – the auditor must consider carefully the appropriate levels of materiality and audit risk.
Materiality (PSA 320: AUDIT MATERIALITY) – Information is material if its omission or misstatement could influence the economics decision of users t aken on the basis of the FS.
Materiality may be viewed as: 1.
The largest amount of misstatement that the auditor could tolerate in the financial statements.
2.
The smallest aggregate amount that could misstate the FS
In accordance with PSA 320, materiality should be c onsidered: 1.
In the planning stage, to determine the scope of the audit procedures
2.
In the completion phase of the audit, to evaluate the effect of the misstatements.
PSA 330: THE AUDITOR’S PROCEDURES IN RESPONSE TO ASSESSED RISKS – The auditor should design the audit to provide reasonable assurance that the financial statements taken as a whole are free from material misstatements.
AUDIT RISK MODEL Audit risk=Inherent risk*Control risk*Detection risk
Audit risk – the risk that the auditor would conclude that the FS are fairly misstated when in fact they are materially misstated.
Inherent risks – the susceptibility of the account balances or classes of transactions to a material misstatement assuming that there were no related internal controls.
Control risk – the risk that material misstatements that could occur in an account balance or classes of transactions will not be pre vented, detected and corrected on a timely basis by the entity’s accounting and infernal control systems.
Detection risk – the risk that the auditor’s substantive procedures will not detect a material misstatement
All audit risk components may be assessed in quantitative and qualitative terms.
Important relationships
Materiality vs risks – inverse
Assessed level of inherent risks and control risks vs acceptable level of detection risks – inverse
Materiality vs planned audit procedures – inverse
CONSIDERATION OF INTERNAL CONTROL •
Internal control is designed and implemented to achieve the entity’s objectives with regard to:
Reliability of financial reporting – most important consideration of the auditor
Effectiveness and efficiency of operations
Compliance with applicable laws and regulations
Obtain an understanding of the internal control (IC)
Evaluate the design of controls (Inspection, Inquiry, Observation)
Determine whether controls has been implemented (Perform walkthrough)
Documenting the auditor’s understanding of IC
Narrative description of the entity’s IC
Flowchart
IC questionnaire
Perform Tests of Controls (TOC) – to obtain evidence about the design of controls and operating effectiveness of controls (Inquiry, Observation, Inspection, Reperformance)
Operating effectiveness of IC – by whom were the controls applied, how were they applied and the consistency on which they were applied?
When do we perform TOC?
To support our assessment of Control Risk (CR) at less than high level and we intend to rely on those controls.
Documentation of the assessed level of CR
If substantive procedures alone are not sufficient to support our opinion.
If assessed at high level 1.
Understanding of the IC system
2.
Conclusion that CR is assessed at high level.
If assessed at less than high level 1.
Understanding of the IC system
2.
Conclusion that CR is assessed at less than high level.
3.
Basis for the conclusion (TOC)
Internal Control Components (CRICM)
Control environment (IMACPA) – foundation of all other components and sets the tone of the organization, provides discipline and structure , and influence the control consciousness of employees.
1.
Integrity and ethical values
2.
Management philosophy and operating style
3.
Active participation of those charged with
4.
Commitment to competence
5.
Personnel policies and procedures
6.
Assignment of responsibilities and organizational structure
Risk assessment procedures
governance
Information and communication systems
Control activities 1. Authorization 2. Performance reviews 3. Information processing 4. Physical controls 5. Segregation of duties
Monitoring 1.
Ongoing monitoring – are built into the normal recurring activities of an entity and include regular management and supervisory activities (ex. Preparation of monthly bank reconcilaition, review of the purchase function)
2.
Separate evaluation – are performed on a non-routine basis (ex. Functions performed by the internal auditors)
PERFORMANCE OF SUBSTANTIVE PROCEDURES
Substantive procedures are performed in order to detect material misstatements at the assertion level, and include:
Tests of details of classes of transactions, account balances and disclosures
Substantive analytical procedures
AUDITING IN A CIS ENVIRONMENT
Computer Information System (CIS) Environment – exists when a computer of any type or size is involved in the processing by the entity of financial information of significance to the audit, whether that computer is operated by the entity or by a third party.
CIS environment may affect the ff:
The accounting and internal control systems of the entity
The auditor’s design and performance of tests of control and substantive procedures to satisfy the audit objectives
The specific procedures to obtain knowledge of the entity’s accounting and internal control system.
Characteristics of a CIS environment
Lack of transaction trails
Consistency of performance
Ease of access to data and computer programs
Concentration of duties
Systems generated transactions
Vulnerability of data and program storage media
Internal control in a CIS environment
General Controls – are those control policies and procedures that relate to the overall computer information system.
1. Organizational controls a.
Segregation of duties between the CIS department and user departments. – All changes in computer files must be initiated and authorized by the users.
b. Segregation of duties within the CIS departments.
The function of systems analyst and computer programmer may be combined in small entities with limite number of personnel.
d
The functions of systems development and computer operations must be segregated.
2. System development and documentation controls a.
Software development as well as changes ther eof must be approved by the appropriate level of management and the user department.
b. Adequate systems documentation must be made in order to facilitate the use of the program as well as changes that may be introduced later into the system. 3.
Access controls - Every computer system should have adequate security controls to protect equipment, files and programs. (ex. P hysical controls, passwords)
4.
Data recovery controls - provides for the maintenance of back up files and off-site storage procedures. a.
Grandfather, father, son record retention – requires an entity to keep the two most recent generations of master files and transaction files in order to permit r econstruction of master file if needed.
b. Hot site – a disaster recovery control requiring the e ntity to establish and maintain an offsite CIS system where the equipments are already installed and recent information and data are readily available to enable the entity to continue processing its information a few hours after the occurrence of a disaster. c.
Cold site – similar to a hot site, however the equipments are not yet installed and would require the entity a few days before resuming its information processing after the occurrence of a disaster.
5. Monitoring controls
Application Controls – to establish specific control procedures over the application systems to provide reasonable assurance that all transactions are authorized, recorded and are processed completely, accurately and on a timely basis. a.
Controls over input – designed to provide reasonable assurance that:
Transactions are properly authorized before being processed by the auditor.
Transactions are accurately converted into machine readable form and recorded in the computer data files.
Transactions are not lost, added, duplicated or improperly changed.
Incorrect transactions are rejected and if necessary, resubmitted on a timely basis.
b. Controls over processing
Transactions, including system generated transactions , are properly processed by the computer.
Transactions are not lost, added, duplicated or improperly changed.
c.
Processing errors are identified and correcte d on a timely basis.
Controls over output
Results of processing are accurate.
Access to output is restricted to authorized personnel.
Output is provided to appropriate authorized personnel on a timely basis.
Audit approaches in a CIS environment
Auditing around the computer (black box approach) – the auditor ignores or bypasses the computer processing function of an entity’s EDP system, focusing solely on the input documents and the CIS o utput.
Use of Computer Assisted Audit Techniques (white box approach) – directly auditing the client’s computer program 1.
Test Data
A set of dummy transactions specifically designed to test the control activities that management claims to have incorporated into t he processing programs.
Shifts control over processing to the auditor by using client ’s
software to processing to the auditor by using client’s software t o process auditor-prepared test data that includes both valid and
invalid transactions.
2.
Ineffective if the client does not use the program tested.
Base Case Evaluation (BCSE)
Develops test data that purports to test every possible condition that an auditor expects client software will confront.
Provides an auditor with much more assurance than the test data alone, but expensive to develop and therefore cost-effective only in large systems
3.
Integrated Test Facility
A variation of test data whereby simulated data and actual data are run simultaneously with the client’s program and computer results are compared with the auditor’s predetermined results.
It provides assurance that the software tested is actually used to prepare financial reports.
4.
Parallel Simulation
It involves processing of client’s live (actual) data utilizing an
auditor’s generalized audit software.
If an entity’s controls have been o perating effectively, the client’s software should generate the same exceptions as the auditor’s software.
5.
Controlled Reprocessing
A variation of parallel simulation. It involves processing of actual
client data through a copy of the client’s application program.
COMPLETING THE AUDIT AND POST AUDIT RESPONSIBILITIES
Identifying subsequent events that may affect the FS under audit
PSA 560 – “subsequent events” refer to events occurring between the date of the FS and the date of the auditor’s report, and facts that become known to the auditor after the auditor’s report.
Classification of subsequent events 1.
Requiring adjustments – conditions existed at the Balance Sheet date
2. Requiring disclosure – arose subsequent to the Balance Sheet date
PSA 560 – The auditor should perform procedures designed to obtain sufficient appropriate evidence that all events up to the date of the auditor’s report that
may require adjustment of, or disclosure in, the financial statements have been identified. 1.
Inquiry of management of any subsequent events and of the e ntity’s lawyers concerning litigations, claims and assessments.
2.
Reviewing procedures management has established to identify subsequent events and the minutes of the BOD and stockholders meeting.
3.
Reading the latest available FS as we ll as management reports such as budgets and forecasts.
The auditor does not have responsibility to perform procedures to identify subsequent events occurring after the date of the auditor’s report .
If the auditor becomes aware of an event occurring after the date of the report but before the issuance of the financial statements, the auditor should take the
necessary actions to ascertain whether such event has been properly accounted for and disclosed in the notes to FS.
Failure on the part of the client to make the appropriate amendments to the FS, where the auditor believes they need to be amended, will cause the auditor to issue either a qualified or adverse opinion.
Effect on the date of auditor’s report 1.
If a material subsequent event requiring adjustment to the financial statements occurs after the date of the auditor’s report but before the issuance of the FS, the financial statement should be adjusted and the
auditor’s report should bear the original date. 2. If a material subsequent event requiring disclosure to the financial statements occurs after the date of the auditor’s report but before the issuance of the FS, the auditor should consider the adequacy of disclosures and date the auditor’s report as of the date of the subsequent event.
In the event that the auditor’s report has been released to the entity, the auditor would notify those persons ultimately responsible for the overall direction of an entity not to issue the FS. If the FS are subsequently released, the auditor needs to take action to prevent reliance on the auditor’s report.
Identifying contingencies such as litigation, claims and assessment
Management (not the client’s lawyers) is the primary source of information about litigation, claim, and assessment as a basis for the preparation of FS in conformity with PFRS. However, PSA 501 requires the auditor to carry out procedures in order to become aware of any litigation and claims involving the entity which may have material effect on the FS.
When litigations or claims have been identified or w hen the auditor believes they may exist, the auditor should seek direct communication with the entity's lawyers.
Letters of audit inquiry – a letter prepared by management and s ent by the auditor to lawyers, requesting the lawyers to communicate directly to the auditor regarding material litigations and claims of the entity.
Obtaining written management representation
Confirm oral representations made by management.
Reduce the possibility of misunderstanding.
Document management’s acceptance for its re sponsibility for fair presentation of the FS.
Management representation are part of the evidential matter the auditor accumulates, but they are not substitute for the performance of audit procedures designed to obtain necessary evidence for e xpression of an opinion. However, in some circumstances, representation by management may be the
only evidence which can reasonably be expected to exist. (ex. Classification of an investment property)
PSA 580 states that the auditor should obtain written representations from management on matters material to the FS when other appropriate audit evidence cannot be reasonably expected to exist.
The representation letter would ordinarily be dated the same as the auditor’s
date.
Should be signed by the CEO and CFO
If management refuses to provide representation letter that the auditor considers necessary, this constitutes a scope limitation.
Performing wrap-up procedures
Final analytical procedures
Identify unusual fluctuations that were not previously identified.
Assessing the validity of the conclusions reached and evaluating the overall financial statement presentation.
Evaluation of the entity’s ability to continue as a going concern (PSA 570)
Management is required to make a specific assessment of the entity’s ability to continue as a going concern.
If there is reasonable assurance that the entity is a going concern – unqualified audit report
If there are substantial doubt against an entity’s going concern:
1. These factors are adequately disclosed – unqualified audit report with emphasis of a matter paragraph. 2. These factors are not adequately disclosed – qualified or disclaimer of opinion.
If going concern assumption is not appropriate, the FS should be prepared using the appropriate basis, otherwise, adverse opinion.
Evaluating the audit findings and obtaining client’s approval for the PAJE.
If management accepts all PAJEs, issue an unqualified opinion.
If management refuses to correct the FS, issue a qualified or an adverse
opinion.
Post audit responsibilities – events after the FS are issued
The auditor does not have any responsibility to additional audit procedures after the FS are issued. However, when the auditor becomes aware that the audit report issued in connection with the F S may be inappropriate, he must take steps to prevent future reliance on those reports.
Subsequent discovery after the FS are issued which existed at the date of the auditor’s report; and which if known at that date, may have caused the auditor to modify the report would require the auditor to discuss the matter appropriate level of management and consider whether the FS need revision and advise management to take the necessary steps to ensure that the users of the FS are informed of the situation.
If management makes the appropriate disclosures to the users of the FS, the auditor should issue a new audit report that includes an emphasis of a matter
paragraph to highlight the reason for the revision of the previously issued FS.
If management refuses to revise the FS, or to inform the users of the newly discovered information, the auditor should notify those persons of the ultimate direction of the entity about the management’s refusal and about the auditor’s intent of preventing the users from r elying on the audit report.
OTHER IMPORTANT CONSIDERATIONS
PSA 505: EXTERNAL CONFIRMATIONS – is the process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a request
Positive external confirmation – asks the respondent to reply to the auditor in all cases either by indicating the respondent’s agreement with the given information, or by asking the respondent to fill in the information.
Negative external confirmation – asks the respondent to reply only in the event of disagreement with the information provided on the request 1.
The assessed risk of material misstatement is lower
2.
A large number of small balances is involved
3.
A substantial number of errors is not expected
4.
The auditor has no reason to believe that t he respondents will ignore the request.
PSA 320:MATERIALITY IN PLANNING AND PERFORMING THE AUDIT
Materiality should be considered by the auditor when: 1.
Determining the nature, timing and extent of audit procedures.
2.
Evaluating the effects of misstatements
If the auditor concludes that the aggregate of uncorrected misstatements may be material, the auditor needs to consider: 1.
Reducing the risk by extending audit procedures
2.
Requesting management to adjust the financial statements for the misstatements identified.
PSA 520:ANALYTICAL PROCEDURES
An analytical procedure means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviate from pre dicted amounts.
Analytical procedures include the consideration of comparisons of the entity’s financial information with, for example: 1.
Comparable information for prior periods
2.
Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an e stimation of depreciation.
3.
Similar industry information
Analytical procedures also include re lationships: 1.
Among elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as the gross profit rate.
2.
Between financial and nonfinancial information, such as payroll costs to the number of hours used.
Analytical procedures can be used: 1.
In the planning stage, to assist the auditor in understanding the business and in identifying areas of potential risk.
2.
As a substantive test.
3.
In the completion stage of the audit when forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditor’s knowledge of the business.
Analytical procedures are required in the planning and completion stage of the
audit.
PSA 500: AUDIT EVIDENCE
Audit Evidence – is all the information used by the auditor in arriving at the conclusions on which the opinion is based, and includes information contained in the accounting records underlying the FS and other corroborating
information.
Accounting records include book of accounts, related accounting manuals, worksheet, supporting cost allocations and reconciliation prepared by the client personnel. Accounting records alone cannot be considered as sufficient appropriate evidence to support an opinion. They must be supported by corroborative information.
Corroborating information supporting the underlying accounting data obtained from the client includes documents such as invoices, contrac ts, bank statements, purchase orders, checks and other information obtained or developed by auditor through confirmation, recalculation, observation and reconciliation.
The auditor should perform audit procedures to have re asonable assurance that it could support its opinion with sufficient appropriate evidence.
Generalizations can be made about the reliability of audit evidence: 1.
Audit evidence is more reliable when it is obtained from independent sources outside the entity.
2.
Audit evidence that is generated internally is more reliable when the related controls imposed by the entity are effective.
3.
Audit evidence obtained directly by the auditor (ex. Observation) is more reliable than audit evidence obtained by inference (ex. Inquiry).
4.
Audit evidence is more reliable when it exists in documentary form than an oral representation.
5.
Audi t evidence provided by original documents is more re liable than audit evidence provided by photocopies or facsimiles.
CATEGORIES OF ASSERTION
Assertions about classes of transactions and events for the period under audit (generally assertions regarding income statement accounts) CuClaCOA
1.
Cutoff
2.
Classification
3.
Completeness
4.
Occurrence
5.
Accuracy
Assertions about account balances at period end (generally assertions regarding balance sheet accounts) VREC
1.
Valuation and Allocation
2.
Rights and Obligations
3.
Existence
4.
Completeness
Assertions about presentation and disclosure (generally affects the notes to FS) 1.
Existence
2.
Rights and Obligations
3.
Completeness
4.
Valuation and allocation
Examples of audit procedures
Inspection – consists of examining records and documents, whether internal or external, in paper form, electronic form, or other media. Inspection of tangible assets consists of physical examination of assets.
Observation – consists of looking at a process or a procedure being performed by others
Inquiry – consists of seeking information of knowledgeable persons, both financial and non-financial, throughout the entity or outside the entity
Confirmation – is the process of obtaining a representation of information or of an existing information directly from a third party
Recalculation – consists of checking the mathematical accuracy of documents or records
Reperformance – is the auditor’s independent execution of procedures or controls that were originally performed as part o f the entity’s internal control, either manually or through the use of C AATs
Analytical procedures – consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. It also encompasses the investigation of identified fluctuations and relationships that are inconsistent with other re levant information or deviate significantly from predicted amounts.
PSA 501: AUDIT EVIDENCE-ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS
Attendance at physical inventory count 1. When inventory is material to the F S, the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting unless impracticable. 2.
If unable to attend the physical inventory count on the date planned due to unforeseen circumstances, the auditor should take or observe some physical counts on an alternative date, and when necessary, per form tests of intervening transactions.
3.
When attendance is impracticable, the auditor should consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to conclude that the auditor need not make reference to a scope limitation.
When inventory is under the custody and control of a third party , the auditor would ordinarily obtain direct confirmation from third parties as to the quantities and condition of inventory held on behalf of the entity.
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