Textbook Notes (362,789)
Canada (158,053)
MGAD10H3 (23)
Kevin Ha (16)
Chapter 3

Chapter 3 - Audit Planning I.docx

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University of Toronto Scarborough
Financial Accounting
Kevin Ha

Chapter 3 – Audit Planning I Learning objectives 1. Identify the different stages of an audit 2. Explain the process used in gaining an understanding of the client 3. Explain how related parties can impact risk 4. Define fraud risk and understand audit procedures to reduce the risk 5. Explain the going concern assumption 6. Describe corporate governance 7. Explain how a client’s information technology (IT) can affect risk 8. Explain how client closing procedures can affect reported results CAS 240 – the auditor’s responsibilities relating to fraud in an audit of financial statements CAS 300 – planning an audit of financial statements CAS 315 – identifying and assessing the risks of material misstatement through understanding the entity and its environment CAS 550 – related parties CAS 570 – going concern 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 developing a detailed audit plan  Execution (performing) 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  CAS 300 requires that an auditor plan their audit to reduce audit risk to an acceptably low level  Audit risk is the risk that an auditor issues an unmodified or clean audit opinion when the financial statements are in fact materially misstated  Efficiency refers to the amount of time spent gathering audit evidence. Effectiveness refers to the minimization of audit risk  Preliminary risk identification  understand the client, identify related parties, fraud risk, going concern risk, corporate governance, understand internal controls, understand IT environment, significant accounts, significant classes of transactions, closing procedures, and materiality 3.2 Gaining an understanding of the client  Risk due to: nature of the client’s business, industry, level of competition, client’s customers and suppliers, and regulatory environment  CAS 315 requires the following: make inquiries of management and others of entity to identify risks, perform analytical procedures at the planning stage to identify unusual or unexpected relationships, and perform observations to corroborate responses made by management and others. These steps allow an auditor to understand potential issues at the entity level, industry level, and the economy level 3.2.1 Entity level  The auditor will ask questions about what the client does, how it functions, how its ownership is structured, and what its sources of financing are  Major customers – consideration of payment, future sales, long-term contracts, number of clients  Major suppliers – quality of goods, contracts, payment to suppliers  Importer vs. exporter – stability of international countries, currency, and risk management (hedging)  Adapting to changes in technology – going concern  Warranties – contingent liabilities  Discounts – profit margin ris
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