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Audit review

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Yvonne Kwok

A UDITR EVIEW Type of opinions: Unqualified Qualifies Adverse Standard Auditors Report: Title Address Introductory paragraph declare that the financial statements were audited Management responsibilities (second paragraph) Auditors responsibilities (third paragraph) Description of the audit (forth and fifth paragraph) Option (sixth paragraph) Signature Date Auditors address Several circumstances may permit an unqualified opinion paragraph, but they raise the need to consider information and paragraphs that are additional to the stand report: CONSISTENCY: the effects of various changes in account and the appropriate disclosures UNCERTAINTY: a paragraph that draws attention to accounting and disclosure for contingencies EMPHASIS: additional explanatory paragraphs that emphasize a matter of importance GOING CONCERN: a paragraph that draws attention to problems of being able to continue as an entity. Auditors have a responsibility to society: Moral responsibility deals with character and doing the right thing Professional responsibility more formal; ethical responsibilities and rules for proper conduct Legal responsibility criminal and civil law Three key elements of ethics: Involves questions requiring reflective choice Involves guides of right and wrong Concerned with the consequences of decisions Ethical Theories: Imperative Principle / Kantian Ethics / Deontological Ethics universal principles must always be followed regardless of the consequences Utilitarian Principle the greatest good for the greatest number is all that matters Consequentialism aim to achieve the greatest good for the greatest amount of people; a minority might suffer Critical Thinking Process: Learn the views of others in the situation Identify the claims at issue Explain the reasons for the competing parts Evaluate the argument supporting the claim Reach a conclusion about the claim that is most likely to be true Fundamental Principles for Auditors: Maintain professions reputation Due care and professional competence Independence and appearance in fact Confidentiality Professional excellence Professional courtesy to other members Independence Threats: Self-review threat cannot check your own work effectively Self-interest threat financial or family interest in client impairs objectivity Advocacy threat promoting a clients position or opinion Familiarity threat getting to friendly with the client can make it harder to be skeptical Intimidation threat fear of losing economic relation or bad publicity can impair objective assessment Common law is based on precedents and past court decisions, not legislation. Statutory law is enacted by legislator. In common law actions, the auditors best defense is to show that at least one of these four elements of liability is missing: Duty of care existed Breach in that duty of care Damages resulted Connection between breach and resulting damages All of the above must be established by the plaintiff if he wants to sue and win the suit. Engagement Letter should cover the: Objective Scope Limitations Responsibilities of both parties Specify applicable financial reporting framework to be used Indicate the form of the report may change if the circumstances require it too A substantive audit approach focuses on gathering evidence directly substantiating the balances, transactions, and disclosures in the financial statements. In a combined audit approach, some of the required assurance is obtained indirectly through evidence that controls are likely to have prevented or corrected any material misstatements. Analytical Audit Procedures Analytical Procedures are powerful techniques for identifying unusual changes and relations in financial statement data. The purpose of doing analysis at the beginning of the engagement is attention directing to alter the audit team to problems that may exist in account balances, transactions and disclosures and to guide the design of any further audit work. Five general types of analytical audit procedures: Compare current year account balances with balances for one or more comparable periods Compare current year account balances and financial relationships (ratios) with similar information for the industry the company operates in Compare current year account balances with the companys anticipated results as found in the budgets and forecasts Evaluate the relationship of current year account balances to other current year balances for conformity to predictable patterns based on the companys experience Study the relationships of the current year account balances relevant to non- financial information Horizontal Analysis: examination of numbers and ratios across two or more years. Vertical analysis: examination of amounts expressed each year as a proportion of a base. Materiality: Financial statement materiality information is material and should be disclosed if it is likely to influence the economic decision of the financial statement users. Performance materiality the difference between the financial statement materiality and performance materiality is a cushion for undiscovered misstatements. Management Assertions: Existence the assets and liabilities exist and the revenues and expenses occurred (in this period consider cut-off) Completeness all transactions were recorded and all assets and liabilities were included o Identifying and recording all valid transactions, and ensuring that they are recorded in the proper accounting period satisfies the existence and completeness assertions Ownership the company owns all assets and owes all liabilities o Procedures ensuring that recorded transactions are authorized as proper rights or obligations achieves the ownership assertion Valuation all transactions have been valued/measured correctly and all assets and liabilities have been valued correctly o The valuation assertion is addressed when the dollar value of transactions are measured and calculated appropriately and in accordance with GAAP. Presentation all transaction/assets/liabilities are presented and disclosed in accordance with GAAP o When transactions are recorded in enough detail to properly classify and present them in financial reports, and to support related disclosures, the presentation assertion is accomplished. Compliance management asserts compliance with laws and regulations Audit Risk = Inherent risk * Control risk * Detection risk Audit Risk: risk of giving clean audit opinion on financial statements that are materially misstated Inherent Risk: probability of material misstatement being in account balances Control Risk: risk that clients internal control system will not prevent or detect a material misstatement Detection Risk: risk that any material misstatement not corrected by clients internal controls will also not be detected by the auditor. This is the only risk that can be managed by the auditor. Risk of Material Misstatement: results from both inherent risk and control risk Risks can be managed in any of four ways: Risks can be avoided by not performing activities that cause the risk Risk can be reduced to acceptable levels through management control Risk can be tolerated on a cost-benefit basis Risk can be transferred to another party by contract, as in insurance. Segregation of Responsibilities The responsibilities that should be segregated are: Authorization (to execute transactions) Recording (of transactions) Custody (of assets involved in the transactions) Periodic Reconciliation (of existing assets to recorded amounts) General Audit Procedures: Recalculation redoing calculations already performed by auditee personnel. Mathematical evidence can serve the objectives of existence and valuation.
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