Auditing And Assurance 5 -10

Front 1

Ethics

Back 1

can be defined broadly as a set of moral principles or values; A sense of agreement in a society as to what is right and wrong. The person’s ethical standards are different from those of society as a whole.

Front 2

An ethical dilemma

Back 2

is a situation a person faces in which a decision must be made about appropriate behaviour.
1. Obtain the relevant facts
2. Identify the ethical issues from the facts
3. Determine who is affected
4. Identify the alternatives available to the person who must resolve the dilemma
5. Identify the likely consequence of each alternative
6. Decide the appropriate action

Front 3

Code of Professional Conduct

Back 3

• Principles- Ideal standards of ethical conduct stated in philosophical terms. They are not enforceable.
• Rules of conduct - Minimum standards of ethical conduct stated as specific rules. They are enforceable.
• Interpretations of the rules of conduct - Interpretation of the rules of conduct (e.g. AICPA Division of Professional Ethics). They are not enforceable, but a practitioner must justify departure.
• Ethical rulings - Published explanations and answers to questions about the rules of conduct submitted to the AICPA by practitioners and others interested in ethical requirements. They are not enforceable, but a practitioner must justify departure.

Front 4

Ethical Principles

Back 4

1. Responsibilities: Professionals should exercise sensitive and moral judgments in all their activities.
2. The public interest: Members should accept the obligation to act in a way that will serve and honor the public.
3. Integrity: Members should perform all responsibilities with integrity to maintain public confidence.
4. Objectivity and independence: Members should be objective, independent, and free of conflicts of interest.
5. Due care: Members should observe the profession’s standards and strive to improve competence.
6. Scope and nature of services: A member in public practice should observe the Code of Professional Conduct.

Front 5

An audit committee

Back 5

is a selected number of members of a company’s board of directors whose responsibilities include helping auditors remain independent of management. Most audit committees are made up of three to five or sometimes as many as seven directors who are not a part of company management.

Front 6

The objective of the ordinary audit of financial statements is

Back 6

the expression of an opinion of the fairness with which they present fairly, in all respects, financial position, result of operations, and its cash flows in conformity with GAAP.

Front 7

Auditor’s Responsibilities

Back 7

•Material versus immaterial misstatements
•Reasonable assurance
•Errors versus fraud
•Professional skepticism
•Fraud resulting from fraudulent financial reporting versus misappropriation of assets

Front 8

Management Assertions

Back 8

1.Assertions about classes of transactions and events for the period under audit
2.Assertions about account balances at period end
3.Assertions about presentation and disclosure

Front 9

General Transactions-related Audit Objectives

Back 9

Occurrence - Recorded transactions exist
Completeness - Existing transactions are recorded
Accuracy - Recorded transactions are stated at the correct amounts
Posting and summarization - Transactions are included in the master files and are correctly summarized.
Classification - Transactions are properly classified.
Timing - Transactions are recorded on the correct dates.
Existence - Amounts included exist
Completeness - Existing amounts are included
Accuracy - Amounts included are stated at the correct amounts
Classification - Amounts are properly classified
Cutoff - Transactions are recorded in the proper period
Detail tie-in - Account balances agree with master file amounts, and with the general ledger
Realizable value - Assets are included at estimated realizable value
Rights and obligations - Assets must be owned

Front 10

Audit Program

Back 10

It includes a list of the audit procedures the auditor considers necessary.
•Sample sizes
•Items to select
•Timing of the tests
•Most auditors use computers to facilitate the preparation of audit programs.

Front 11

Six Characteristics of Reliable Evidence

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1.Independence of provider
2.Effectiveness of client’s internal controls
3.Auditor’s direct knowledge
4.Qualification of individuals providing the information
5.Degree of objectivity
6.Timeliness

Front 12

Types of Audit Evidence

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1. Physical examination- It is the inspection or count by the auditor of a tangible asset. This type of evidence is most often associated with inventory and cash.
2. Confirmation
3. Documentation - It is the auditor’s inspection of the client’s documents and records.
4. Analytical procedures - Understand the client’s industry and business. Indicate the presence of possible misstatements in the financial statements.
Reduce detailed audit tests.
5. Inquiries of the client - It is the obtaining of written or oral information from the client in response to questions from the auditor.
6. Recalculation - It involves rechecking a sample of calculations made by the client.
7. Reperformance - It is the auditor’s independent tests of client accounting procedures or controls that were originally done.
8. Observation - It is the use of the senses to assess client activities. The auditor may tour the plant to obtain a general impression of the client’s facilities.

Front 13

Audit documentation

Back 13

is the principal record of auditing procedures applied, evidence obtained, and conclusions reached by the auditor in the engagement. The Sarbanes-Oxley Act requires auditors of public companies to prepare and maintain audit working papers for a period of no less than seven years. In UK, no shorter than 5 years from audit report (see ISA 230).

Front 14

Permanent Files

Back 14

are intended to contain data of a historical or continuing nature pertinent to the current audit.

Front 15

Three Main Reasons for Planning

Back 15

1.To obtain sufficient appropriate evidence for the circumstances
2.To help keep audit costs reasonable
3.To avoid misunderstanding with the client

Front 16

Audit involves various stages

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1. Pre-engagement/Procedures covering acceptance of a new audit
2. Planning, that is establishing an overall audit strategy-Developing an audit plan
3. Evidence Collection and Evaluation
4. Opinion Formulation and Reporting

Front 17

Planning an Audit and Designing an Audit Approach

Back 17

1. Accept client and perform initial audit planning.
2. Understand the client’s business and industry.
3. Assess client business risk.
4. Perform preliminary analytical procedures.
5. Set materiality and assess acceptable audit risk and inherent risk.
6. Understand internal control and assess control risk.
7. Gather information to assess fraud risks.
8. Develop overall audit plan and audit program.

Front 18

Engagement risk

Back 18

The risk the audit firm encounters because it is associated with the a particular client:
•may manifest as a lawsuit, loss of professional reputation, loss of fees, or loss of other clients
•may occur because of misstatements in the financial statements, questionable management integrity, client going bankrupt

Front 19

Initial Audit Planning

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1. Client acceptance and continuance (ISA 210)
2. Identify client’s reasons for audit
3. Obtain an understanding with the client
4. Develop overall audit strategy

Front 20

Understanding of the Client’s Business and Industry

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Factors that have increased the importance of understanding the client’s business and industry: Complexity, Information technology, Global operations and Human Capital.
•Industry and external environment - Reasons for obtaining an understanding of the client’s industry and external environment
•Business operations and processes

Front 21

Client business risk

Back 21

is the risk that the client will fail to achieve its objectives. A business risk approach allows the auditor to:
•Identify threats faced by the organisation
•Recognises that most business risks will eventually have an effect on the financial statements

Front 22

Five Types of Analytical Procedures (compare client data with):

Back 22

1. Industry data
2. Similar prior-period data
3. Client-determined expected results
4. Auditor-determined expected results
5. Expected results using nonfinancial data.

Front 23

Summary of Analytical Procedures

Back 23

They involve the computation of ratios and other comparisons of recorded amounts to auditor expectations. They are used in planning to understand the client’s business and industry. They are used throughout the audit to identify possible misstatements, reduce detailed tests, and to assess going-concern issues.

Front 24

Steps in Applying Materiality

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1.Set preliminary judgment about materiality
2. Allocate judgement to segments
3.Estimate total misstatement in segment
4.Estimate the combined misstatement
5.Compare combined estimate with judgment about materiality

Front 25

Types of fraud

Back 25

Fraudulent financial reporting - Misstatement of amounts.

Misappropriation of assets - Theft of an entity’s asset

Front 26

Corporate Governance Oversight to Reduce Fraud Risks

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•Culture of honesty and high ethics
•Management's responsibility to evaluate risks of fraud
•Audit committee oversight

Front 27

Responding to the Risk of Fraud

Back 27

Change the overall conduct of the audit to respond to identified fraud risks. Design and perform audit procedures to address identified risks.
Design and perform procedures to address the risk of management override of controls.

Front 28

Specific Fraud Risk Areas

Back 28

•Revenue and accounts receivable fraud risks
•Purchases and accounts payable fraud risks
•Inventory fraud risks

Front 29

Types of Inquiry Techniques

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•Informational inquiry
•Assessment inquiry
•Interrogative inquiry
•Evaluating responses
Listening techniques
•Observing behavioral cues

Front 30

SAS 99 & ISA 240 provides guidance to auditors in assessing the risk of fraud. SAS 1 states that,

Back 30

in exercising professional skepticism, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty.”