Bus 426 - Lecture 2.docx

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Simon Fraser University
Business Administration
BUS 426
Michael Favere- Marchesi

Lecture 2 Why we Audit  To see if the financial statements fairly presented and in accordance with GAAP  We audit because we want to express an opinion  Auditor must be independent and competent Management Responsibilities (CAS 210)  Maintenance of adequate internal controls  Adopt sound accounting policies  Provide fair representation in the financial statement Overall Objective of the Independent Auditor (CAS 200)  Expression of opinion  Provide reasonable assurance that there are no material misstatements  Plan and perform audit in accordance with GAAS Misstatements, two types:  Intentional o Management Fraud or fraudulent financial reporting: Management trying to trick investors, creditors, etc. o Employee Fraud: Theft of company assets o Computer Fraud: Fraud committed on the computer  Unintentional: Due to error  Illegal Acts: For example: Company is violating income tax, which has direct-effect on the financial statements o Direct-Effect: A direct effect on your financial statement o Indirect-Effect: An indirect effect on your financial statement, ex. Dumping chemical waste into the river, which when found, will change your balance sheet Audit Process  First ask yourself, “Am I independent?” o Different threats to independence  Interest: Stake in the company  Review: You designed part of the company  Advocacy: When the firm or member is perceived to promote the client’s position  Familiarity: When it is difficult to behave with skepticism because you know the client too well  Intimidation: Client threatens the auditor 1. Preplanning o Do we want to continue with this client or dump this client? (Has the client become too risky?) o Required to talk to the previous auditor, client must also give permission for previous auditor to talk to the new auditor o Find out why the company wants to do this audit o Write engagement letter: A commercial contract between 2 parties o Consider staffing requirement  Do we have enough staff  Do we have enough qualified, experienced staff in this industry? 2. Client Risk Profile o Requires a knowledge of the business environment and industry and of the control environment (internal controls)  Very often large auditing firms hire private investigators  Tour client’s company o Find the significant related parties o Understand the company’s corporate governance (Anyone to oversee and how they oversee the corporation) o Preform Analytical Procedures o See the Company’s Code of Ethics o Assess risk of fraud Management Attitude o Incentives Opportunities o Document system of internal controls  Document using a flow chart o  Conclusion
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