MGAD10H3 Chapter Notes - Chapter 3: Audit Risk, Internal Audit, Audit Evidence

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Published on 23 Sep 2012
Chapter 2: Ethics, Legal Liability, and Client Acceptance
Audit Process in Focus
at planning and reporting stages, auditor adopts a broad view of client as a whole and industry in which it operates
during the planning stage, an assessment is made of the risk that a material misstatement (significant error or fraud)
could occur in the client’s financial statements
during the planning stage, an auditor will gain an understanding of their client, their client’s internal controls, their
client’s IT environment, their client’s corporate governance environment, and their client’s closing procedures
3.1 Stages of an Audit
planning stage gaining an understanding of the client, identifying risk factors, developing an audit strategy, and
assessing materiality
materiality information that impacts the decision-making process of the users of the financial statements
audit strategy a strategy that sets the scope, timing, and direction of the audit and provides the basis for a developing
a detailed audit plan
the risk of a material misstatement is the risk that the financial statements include a significant error or fraud
execution stage detailed testing of controls and substantive testing of transactions and accounts
reporting stage evaluating the results of the detailed testing in light of the auditor’s understanding of their client and
forming an opinion on the fair presentation of the client’s financial statements
3.1.1 Planning an audit
audit risk is the risk that an auditor issues an unmodified opinion when the statements are in fact materially misstated
sufficient appropriate evidence the quantity and quality of the evidence that has been gathered
fraud an intentional act through the use of deception to obtain an unjust or illegal advantage
going concern the viability of a company to remain in business for the foreseeable future
corporate governance the rules, systems, and processes within companies used to guide and control
during the planning stage, an auditor will also consider the adequacy of their client’s closing procedures
closing procedures processes used by a client when finalizing the books for an accounting period
3.2 Gaining an Understanding of the Client
at the outset of every audit, an auditor must gain an understanding of their client
the purpose of this procedure is to assess the risk that the financial statements contain a material misstatement due to:
o the nature of the client’s business
o the industry in which the client operates
o the level of competition within that industry
o the client’s customers and suppliers
o the regulatory environment in which the client operates
CAS 315 provides guidance on the steps to take when gaining an understanding of a client; it requires the auditor to do:
a) Make inquiries of management and of others within the entity who may have information to help identify the risk
of material misstatements. This includes making inquiries of both financial and non-financial staff at all levels of
the organization, including those charged with governance, internal audit, sales, and operational personnel.
b) Perform analytical procedures at the planning stage of the audit to identify any unusual or unexpected
relationships that may highlight where risks exist. Analytical procedures are a study of plausible relationships
between both financial and non-financial data.
c) Perform observation and inspection procedures to corroborate the responses made by management and others
within the organization. These procedures provide information about the entity and its environment. Examples of
such audit procedures include observation or inspection of the entity’s operations, premises, and facilities;
business plans and strategies; internal control manuals; and any reports prepared and reviewed by management
(such as management reports, interim financial statements, and minutes of board of directors’ meetings).
3.2.1 Entity level
knowledge about the entity is gained through interviews with client personnel, including those charged with governance
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