ACCT10003 Lecture Notes - Lecture 9: Operating System, Engagement Letter, Internal Audit

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amaranthbadger280

19 Jun 2018

School

University of Melbourne

Department

Accounting

Course

ACCT10003

Professor

Annette Rea

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Accounting Processes and Analysis

Lecture 9: Internal Assurance

Auditing and Assurance

Assurance- The auditor’s ability to provide a degree of satisfaction regarding the reliability of the

information provided. The degree of satisfaction achieved is determined by the nature and extent of

procedures performed by the auditor, the results of the procedures and the objectivity of the evidence

obtained.

Assurance can be measured by:

degree of satisfaction

reliability of information

nature and extent of procedures

results of the procedures

objectivity of evidence

Accounting Processes and Financial Reports

Assertions made by Management

Existence or Occurrence- event reported is true

Completeness- nothing missing

Cut-off- asserting the sales correctly belong in the reporting period

Rights and obligations

Accuracy, classification, valuation and allocation

How do we have trust in the financial statements and how do we trust these assertions?

There will be external auditor’s reports attached to the financial reports, so see if they are in accordance

with accounting standards and corporations law. These reports are given to external users and give them

confidence in whether the reports have been prepared appropriately.

Key aspects of the external audit include:

Primary Objective: Enhance degree of confidence in financial statements by expressing opinion on

whether presented fairly

Applicable Professional Standards: IAASB including ISAs

Reporting Line: To owners

Reporting Format: Specified in ISA 700

Skills and Competence: Application of reporting and auditing standards

Engagement Terms: Engagement letter with management

Engagement Scope: Procedures to obtain evidence on financial statements (set in Auditing

standards and Corp. Act)

Evidence and Documentation: ISA 230 and 500

Employment and Remuneration: Organisation pays external audit firm which employs audit team.

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Corporate Governance and Internal Controls

A set of processes and policies in managing an organization with sound ethics to safeguard the interests of

its stakeholders. It promotes accountability, fairness, and transparency in the organisation’s relationship

with its stakeholders.

Internal control needs to be a part of a firm’s governance structure. It includes the policies, systems and

procedures put in place to aid an organisation in managing its risk exposure and achieving its objectives.

COSO Definition of Internal Control

A process, effected by an entity’s board of directors, management and other personnel, designed to provide

reasonable assurance regarding the achievement of objectives in the following categories:

Effectiveness and efficiency of operations

Effectiveness (doing the right things) and efficiency (doing the right things right) of operations

– Is the operational process meeting its process goals?

– Is the operational process meeting organisational goals?

– Are resources used/generated within a process used efficiently? Protected?

– OPERATIONALLY DRIVEN

Reliability of financial reporting

Reliability of reporting

– Financial statements– True & Fair view, Free of material misstatements

– Other reports

– INFORMATION DRIVEN

Compliance with applicable laws and regulations

– Corporations Act

– Privacy Act

– Trade Practices Act

– Potentially several laws and regulations that could impact on an organisation’s

operations.

– COMPLIANCE DRIVEN

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Document Summary

Assurance- the auditor"s ability to provide a degree of satisfaction regarding the reliability of the information provided. The degree of satisfaction achieved is determined by the nature and extent of procedures performed by the auditor, the results of the procedures and the objectivity of the evidence obtained. Assurance can be measured by: degree of satisfaction reliability of information nature and extent of procedures results of the procedures objectivity of evidence. Cut-off- asserting the sales correctly belong in the reporting period. There will be external auditor"s reports attached to the financial reports, so see if they are in accordance with accounting standards and corporations law. These reports are given to external users and give them confidence in whether the reports have been prepared appropriately. Primary objective: enhance degree of confidence in financial statements by expressing opinion on whether presented fairly. Skills and competence: application of reporting and auditing standards.

Related Questions

Assertions in Auditing:

1) Confirmation from debtors may provide audit evidence for existence and rights and obligations, but not for valuation, why not?

2) How do auditors apply assertions in the planning and testing stage of the audit?

3) Give an example for each of the following assertions: Occurrence, Completeness, Classification, Accuracy.

4) Describe how management assertions relates to the study of accounting information systems.

5) What are the auditing assertions about account balances at the year-end that cannot be usually address by the audit procedures? Why not?

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1â28. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following best describes the relationship between assurance services and
attest services?
(1) While attest services involve fi nancial data, assurance services involve nonfi nancial data.
(2) While attest services require objectivity, assurance services do not require objectivity.
(3) Both attest and assurance services require independence.
(4) Attest and assurance services are different terms referring to the same types of services.
b. Which of the following has primary responsibility for the fairness of the representations
made in fi nancial statements?
(1) Clientâs management.
(2) Independent auditor.
(3) Audit committee.
(4) AICPA.
c. The most important benefi t of having an annual audit by a public accounting fi rm is to:
(1) Provide assurance to investors and other outsiders that the fi nancial statements are reliable.
(2) Enable offi cers and directors to avoid personal responsibility for any misstatements in
the fi nancial statements.
(3) Meet the requirements of government agencies.
(4) Provide assurance that illegal acts, if any exist, will be brought to light.
d. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board
(PCAOB). Which of the following is not one of the responsibilities of that board?
(1) Establish independence standards for auditors of public companies.
(2) Review fi nancial reports fi led with the SEC.
(3) Establish auditing standards for audits of public companies.
(4) Sanction registered audit fi rms.
e. Which of these organizations has the responsibility to perform inspections of auditors of
public companies?
(1) American Institute of Certifi ed Public Accountants.
(2) Securities and Exchange Commission.
(3) Financial Accounting Standards Board.
(4) Public Company Accounting Oversight Board.
f. Governmental auditing, in addition to including audits of fi nancial statements, often
includes audits of effi ciency, effectiveness, and:
(1) Adequacy.
(2) Evaluation.
(3) Accuracy.
(4) Compliance.
g. In general, internal auditorsâ independence will be greatest when they report directly to the:
(1) Financial vice president.
(2) Corporate controller.
(3) Audit committee of the board of directors.
(4) Chief executive offi cer.
h. Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002
to regulate public accounting fi rms:
(1) Disclosures related to accounting irregularities at Enron and WorldCom.
(2) Restatements of fi nancial statements by a number of public companies.

(3) Conviction of the accounting fi rm of Arthur Andersen LLP.
(4) Ethical scandals at the AICPA.
i. Which of the following organizations establishes accounting standards for U.S. government
agencies?
(1) The Financial Accounting Standards Board.
(2) The Governmental Accounting Standards Board.
(3) The Federal Accounting Standards Advisory Board.
(4) The Public Company Accounting Oversight Board.
j. Which of the following is correct about forensic audits?
(1) All audit engagements are forensic in nature.
(2) Forensic audits are performed by law fi rms; they are not performed by CPA fi rms.
(3) Forensic audits are equivalent to compliance audits.
(4) Forensic audits are usually performed in situations in which fraud has been found or is
suspected.
k. What best describes the purpose of the auditorsâ consideration of internal control in a
fi nancial statement audit for a nonpublic company?
(1) To determine the nature, timing, and extent of audit testing.
(2) To make recommendations to the client regarding improvements in internal control.
(3) To train new auditors on accounting and control systems.
(4) To identify opportunities for fraud within the clientâs operations.
l. Which of the following is an example of a compliance audit?
(1) An audit of fi nancial statements.
(2) An audit of a companyâs policies and procedures for adhering to environmental laws
and regulations.
(3) An audit of a companyâs internal control over fi nancial reporting.
(4) An audit of the effi ciency and effectiveness of a companyâs legal department.

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Auditing and Assurance Services (16th Edition)

question 7-29

objective (7-4) The following audit procedures were performed inthe audit of inventory to satisfy specific balance-related auditobjective as discussed in chapter 6. The audit procedures assumethat the auditor has obtained the inventory count sheets that listthe clients inventory. The general balance-related audit objectivesfrom chapter 6 are also included.

Audit procedures

1) select a sample of inventory items in the factory warehouseand trace each item to the inventory count sheets to determine ifit has been included and if the quantity and description arecorrect.

2) trace selected quantities from the inventory list to thephysical inventory to make sure that it exists and the quantitiesare the same.

3) compare the quantites on hand and unit prices on this yearsinventory count sheets with those in the preceding year as a testfor large differences.

4) test the extension of unit prices times quantity on theinventory list for a sample of the inventory items, test foot thelist, and compare the total to the general ledger.

5) send letters directly to third parties who hold the clientsinventory, and request that they respondf directly to theauditors.

6) examine sales invoices and contracts with customers todetermine whether any goods are out on consignment with customers.Similarly, examine vendors in-voices and contracts with vendors todetermine whether any goods on the inventory listing are owned byvendors.

7) question operating personnel about the possibility ofobsolete or slow-moving inventory.

General balance-related audit objective

existence,completeness,accuracy,classification,cutoff,detailtie-in,realizable vaule,rights and obligations

a) identify the type of audit evidence used for each aduitprocedure.

b) identify the general balance-related audit objective orobjectives satisfied by each audit procedure.

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ACCT10003 Lecture Notes - Lecture 9: Operating System, Engagement Letter, Internal Audit

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