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73 Cards in this Set
- Front
- Back
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Performance Standard 2210: Engagement Objectives
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Objects must be established for each engagement
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Reasons for Preliminary Survey
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1. To become familiar with the activities, risks, and controls to identify areas for engagement emphasis
2. To invite comments and suggestions from engagement clients |
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Components for a Preliminary Survey
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1. Input from the engagement client 2. Analytical procedures 3. Interviews 4. Prior audit reports and other relevant documentation 5. Process mapping 6. Checklists |
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Specific analytical procedures
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1. Ratio, trend and regression analysis 2. Reasonableness test 3. Period-to-period comparisons 4. Comparisons with budgets, forecasts, and external economic information |
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Why use analytical procedures?
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To obtain audit evidence by analyzing relationships among items of information. In the absence of known conditions to the contrary, certain relationships may reasonably be expected to exist and continue
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What is process mapping
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The pictorial representation or narrative description of a client process.
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Pictorial process - common flowcharting symbols
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Start/stop (Rounded rectangle) Action (Rectangle) Decision (Diamond) |
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Appropriate uses of internal control questionnaires
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1. Filling out the questionnaire while interviewing the responsible person 2. Drafting the questionnaire so that a "no response" requires attention 3. Supplementing the completed questionnaire with a narrative description or flowchart |
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Disadvantages of internal control questionnaires
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1. Difficult to prepare 2. Time consuming to administers 3. Engagement clients may anticipate the preferred responses and therefore may lie or give insufficient consideration to the task 4. Not all circumstances can be addressed 5. Less effective than interviewing |
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What does a formal pre-interview questionnaire accomplish
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1. Involves the engagement client's supervisors and employees in the engagement and minimizes their anxiety.
2. Provides an opportunity for engagement client self-evaluation
3. May result in a more economical engagement b/c the information it generates is prepared by those most familiar with it |
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Main purpose of interviews
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Gather facts related to the audit engagement
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How must the auditor gain the confidence of clients in an interview
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Demonstrating self-assurance, persuasiveness, fairness, empathy, and competence. Explain how the engagement may be helpful and by emphasizing that all parties are members of a team with the same objectives
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4 Types of Interviews
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1. Preliminary Interview 2. Fact-gathering interview 3. Follow-up interview 4. Exit interview |
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Use of preliminary interview
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1. Promote the value of internal auditing 2. Understanding the interviewee 3. Gather general information 4. Serve as a basis for planning future interview strategies |
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Use of fact-gathering interview
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Oriented to the specific details that can be provided by particular intervieww
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Use of a follow-up interview
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Intended to answer questions raised during the analysis of the fact-gathering interview. Tests the interviewee's acceptance of new ideas generated by the auditor |
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Use of an exit interview
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Helps to ensure the accuracy of conclusions, findings, and recommendations in the final engagement communication by discussing it with the interviewee
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Data-gathering techniques
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1. Observation 2. Checklists 3. Internal Surveys 4. External Data Sources |
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What is observation
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By watching the physical activities of employees to see how they perform their duties, the auditor can determine whether written policies have been implemented. Observing a phenomenon in its natural setting eliminates some experimental bias
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Disadvantages of observation
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Limited b/c employees who know they are being observed may behave differently while being observed. Unobtrusive measures may be preferable.
Lack of experimental control and measurement precision. Some things, such as private behavior, attitudes, feelings, and motives, cannot be observed |
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Best use of observation
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Most persuasive for the existence or occurrence assertion - whether assets/liabilities exist and whether transactions have occurred
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Advantages of checklists
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Increase the uniformity of data acquisition. Ensure that a standard approach is taken and minimize the possibility of omitting factors that can be anticipated
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Disadvantages of checklists
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1. Providing a false sense of security that all relevant factors are addressed 2. Inappropriately implying that equal weight is given to each item 3. Difficulty of translating the observation represented by each item 4. Treating a checklist as a rote exercise rather than a part of a thoughtful understanding of the unique aspects of the audit |
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Advantages of internal surveys
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Relatively cheap Eliminate interviewer bias Gather large amounts of data |
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Disadvantages of internal surveys
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Tend to be inflexible Have slow response time Nonresponse bias Sample will not be truly ransom if respondents as a group differ from nonrespondents |
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Sources of external data
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Lexis-Nexis National Automated Accounting Research System Authoritative and technical literature relevant to the issue being researched |
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Implementation Standards 2210.A1 - Risk assessment
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Auditors must conduct a preliminary assessment of the risks relevant to the activity under review. Engagement objectives must reflect the results of this assessment
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Define: Risk
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The possibility that an event will occur having an impact on the achievement of objectives. It is measured in terms of impact and likelihood
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Considerations in the preliminary risk assessment
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1. Reliability of management's assessment of risk 2. Management's process of monitoring, reporting, and resolving risk and control issues 3. Management's reporting of events that exceeded the limits of the organization's risk appetite and management's response to those reports 4. Risks in related activities relevant to the activity under review |
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CAAT
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Computer-assisted audit techniques
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GAS
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Generalized Audit Software
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Leading GAS packages
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ACL - Audit Command Language
IDEA - Interactive Data Extraction and Analysis |
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Use of GAS
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Auditor loads a copy of the client's production data onto the auditor's own computer to perform various analytical procedures
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Point of test data/test deck
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Allows the auditor to assess the controls embedded in an application by observing: 1) whether the good data are correctly processed 2) How well the system handles bad data |
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Test data
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A set of dummy inputs containing both good and bad data elements. Subjects auditor-created data to the client's programs
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What does parallel simulation do
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Subjects client data to auditor-created programs
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Why parallel simulation?
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Allows an auditor to determine whether the data are subjected to the processes that the client claims the application performs
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What does parallel simulation require
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Requires the auditor to have considerable technical knowledge. Must also have extensive communications with client personnel to learn the designated functions of the application being imitated
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What is an Integrated Test Facility (ITF)
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Auditor creates a fictitious entity on the client's live production system. All transactions are processed by the live system, and the auditor con observe the restuls
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Embedded audit module
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Integral part of an application system. Designed to identify and report actual transactions and other information that meet criteria having audit significance
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Advantage of embedded audit modules
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Permits continuous monitoring of online, real-time systems
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Disadvantage of embedded audit modules
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Must be programmed into the operating system and application programs to permit insertion of audit modules
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Application Tracing
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Uses a feature of the programming language of the applications. Follows the step-by-step operations of a source code
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System Mapping
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Similar application tracing. Mapping is performed by another computer program instead of by the auditor
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Advantages of electronic working papers
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1. Uniformity of format 2. Ease of storage 3. Searchability and automated cross-indexing 4. Backup and recovery functions 5. Built-in audit methodologies, such as sampling routines |
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Security issues with electronic media
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1. Should be protected from unauthorized access and change 2. Info recorded by scanning workpapers should be adequately controlled to ensure its continued integrity 3. Retention policies should consider changes made in the original O/S, etc to ensure the continued retrievability of working papers throughout the retention cycle |
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Use of spreadsheet analysis
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1. Evaluate "what if" scenarios 2. Create graphs 3. Analyze variances between actual and budgeted amounts 4. Perform other analytical procedures |
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Performance Standards 2320 - Analysis and Evaluation
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Internal auditors must base conclusions and engagement results on appropriate analyses and evaluations
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What are analytical procedures useful in identifying?
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1. Unexpected differences 2. The absence of differences when they are expected 3. Potential errors 4. Potential fraud of illegal acts 5. Other unusual or nonrecurring transactions or events |
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Considerations when determining the extent of analytical procedures
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1. Significant of the area being audited 2. Assessment of risk management in the area 3. Adequacy of the internal control system 4. Availability and reliability of financial and nonfinancial information 5. Precision with which the results of analytical audit procedures can be predicted 6. Availability and comparability of information regarding the industry in which the organization operates 7. Extent to which other procedures provide evidence |
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Current ratio
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Current assets/current liabilities
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A/R Turnover Ratio
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Number of times the average balance in receivables is converted to cash during a cycle
= net credit sales/average balance in receivables |
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Inventory Turnover Ratio
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Number of times the average balance in inventory is converted to cash in the space of a cycle
= COGS/Average balance in inventory |
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3 measures of liquidity
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Current ratio A/R Turnover Ratio Inventory Turnover Ratio |
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3 measures of profitability
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Gross profit margin Operating profit margin Net profit margin |
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Gross profit margin
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Ratio of gross margin to sales. Key issue is the relationship of gross profit to the increase or decrease in sales
= Gross profit/Sales |
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Operating profit margin
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Operating profit/Sales
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Net profit margin
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Important because it measures the proportion of the organization's revenues that it can pass on to its owners
= Net profit/Sales |
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Trend analysis
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Tracks the changes in a ratio over time, helps assess the effects of changes in the overall economy or the relative success of a marketing campaign
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Period-to-period analysis
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Compares performance for similar time periods. Especially informative in seasonal industries, such as retailing and agriculture
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Industry analysis
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Compares the organization's ratios with those of competitors or with published averages for the entire industry. Must be used with caution because different organizations in the same industry may have different cost strucgtures
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Regression analysis
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Determines the degree of relationship, if any, between two variables, which can be used as a benchmark to test for reasonableness
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Variance analysis
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Studies the difference between an amount based on actual result and the corresponding budgeted amount. Is a method of planning and control that focuses attention on the causes of significant deviations from expectations. Is a form of reasonableness tests
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What is benchmarking
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A continuous evaluation of the practices of the best organizations in their class and the adaptation of processes to reflect the best of these practices
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What does benchmarking involve
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1. Analyzing and measuring key outputs against those of the best organizations 2. Identifying the underlying key actions and causes that contribute to the performance difference |
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Kinds of benchmarking
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1. Competitive - studies an organization in the same industry
2. Process (function) - studies operations of organizations with similar processes regardless of industry
4. Strategic - search for successful competitive strategies
5. Internal - application of best practices in one part of the organization to its other parts |
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First phase in the benchmarking process
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Select and prioritize benchmarking projects - must understand critical success factors and business environment to identify key business processes and drivers and to develop parameters defining what processes to benchmark
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Second phase of benchmarking
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Organize benchmarking teams
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Third phase of benchmarking
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Researching and identifying
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Critical steps in researching and identifying benchmarking phase
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1. Setting up databases 2. Choosing information-gathering methods 3. Formatting questionnaires 4. Selecting benchmarking partners |
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Steps in data analysis benchmarking phase
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1. Identifying performance gaps 2. Understanding the reasons 3. Prioritizing the key activities that will facilitate the behavioral and process changes needed to implement recommendations |
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Most important aspect of implementation benchmarking phase
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Leadership - the team must justify its recommendations. Process improvement teams must manage the implementation of approved changes
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Define: Root Cause
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The identification of why an issue occurred (vs .only identifying or reporting on the issue itself)
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