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Chapter 5

BUS 426 Chapter Notes - Chapter 5: Engagement Letter, Internal Control, Financial Statement

Business Administration
Course Code
BUS 426
Michael Favere- Marchesi

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Chapter 5 - Audit Responsibilities and Objectives
Management’s Responsibility
Auditor’s Responsibility
Adopt sound accounting policies
Use profession skepticism
Maintain adequate internal control
Conduct the audit using a risk-
based approach
Make fair representations in the
financial statements
Conduct the audit to provide
reasonable assurance about
material misstatements
Acknowledge its responsibilities to
the auditors
Consider fraud and error
Provide documentation and
information for the audit process
Issue a management letter if
weaknesses are encountered that
could result in a material error
Issue an appropriate report
Professional Skepticism: The auditor should not assume that the
management is dishonest, but the possibility of dishonesty must be
Error: An unintentional misstatement of the financial
Fraud, Other Irregularity: An intentional misstatement
Defalcation, Employee Fraud: Theft of assets
o Management Fraud is “for” the company, whereas
Employee Fraud is “against” the company
Computer Fraud: Fraud conducted with the assistance of
computer software or hardware
Direct-Effect Illegal Acts: Illegal acts that directly impact the
financial statement, such as a violation of income tax law
Auditor has a responsibility to find these acts
Indirect-Effect Illegal Acts: Illegal acts that indirectly impact the
financial statement, such as violating the environmental laws, which
only when found, will be imposed a fine affecting the financial
Auditor does not have a responsibility to find these acts
Steps of an Audit, 3 Main Components: Risk Assessment, Risk
Response and Reporting
Risk Assessment: Auditor identifies what could go wrong with the
financial statements and the approaches for dealing with the risks
Preplanning the Audit
i. Client acceptance or Continuance
1. New auditors have to talk with previous auditors
ii. Identify the Client’s Reason for Audit
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