Bus 426 - Chapter 5

4 Pages

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 Conduct the audit to provide financial statements reasonable assurance about material misstatements Acknowledge its responsibilities to Consider fraud and error the auditors Provide documentation and Issue a management letter if information for the audit process 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 considered  Error: An unintentional misstatement of the financial statements  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 statement  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 Chapter 5 -Audit Responsibilities and Objectives 1. To see what evidence is needed to be gathered iii. Conduct Independence Threat Analysis iv. Obtain Engagement Letter 1. Engagement Letter: An agreement between the accounting firm and the client as to the terms of the audit engagement v. Select Staff for Engagement 1. Continuity is a factor for future similar audits  Client Risk Profile i. Obtain knowledge of the industry and business environment ii. Obtain knowledge of the client’s business iii. Document corporate governance processes and control environment (Client’s internal controls; aka Entity-level Controls) iv. Assess Entity-level Controls v. Asses Risks of Fraud vi. Document Internal Controls and Evaluate Design Effectiveness of Internal Controls vii. Identify Significant Risks/Transactions that require more than substantive (basic) tests  Plan the Audit i. Determine the level of misstatement  Risk Response: Specific audit programs and processes are designed and tests conducted to obtain reasonable assurance with respect to the financial statements in the context of assessed risks  Design Further Audit Procedures i. Decide on what tests and sampling need to be used  Tests of Control i. Test the effectiveness of control policies and procedures in support of a reduced assessed control risk  Substantive Tests i. Analytical Procedures: Use of comparisons and relationships to determine whether data appears reasonable ii. Test of Details of Balances: Testing of monetary errors or frauds in the balance sheet and income statement iii. Test of Key Items: Audit tests that focuses on specific transactions likely to be at risk of material error  Ongoing Evaluation, Quality Control, and final Evidence Gathering i. Links other phases o
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