Auditing pdf

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To learn more, view our Privacy Policy. Log In Sign Up. Download Free PDF. Gloria Ng. Download PDF. A short summary of this paper. Scope paragraph. Opinion paragraph. Audit report date. Identify the most important infor mation included in the scope paragraph.

The auditor followed generally accepted auditing standards. The audit is designed to obtain reasonable assurance about whether the statements are free of material misstate ment. Discussion of the audit evidence accumulated. Statement that the auditor believes the evidence accumulated was appropriate for the circumstances to express the opinion presented. Identify the most important infor mation included in the opinion paragraph.

The most important information in the opinion paragraph includes: 1. The three general standards have been followed in all respects on the engagement. What is the nature of the additional paragraphs in the audit report? The introductory and opinion paragraphs also refer to the framework used to evaluate internal control. Two addi. The separate paragraph should fully explain the departure and the reason why generally accepted accounting principles would have resulted in misleading statements.

The entity changed from one generally accepted accounting principle to another generally accepted accounting principle. A shared report involving the use of other auditors. What are the three options avail7 able to the principal auditor and when should each be used? No reference is made to the other auditor. Issue a shared opinion in which reference is made to the other auditor. A disclaimer may be issued if the segment audited by the other CPA is highly material.

Give an example of each. Change in accounting principle 2. Change in reporting entity 3. Corrections of errors involving accounting principles. A separate explanatory paragraph is required if the amounts are material.

Comparability refers to items such as changes in estimates, presentation, and events rather than changes in accounting principles. In that case, no explanatory paragraph for lack of consistency is needed, but the information may require disclo sure in the statements.

The scope of the audit has been restricted. The auditor is not independent. This type of opinion may not be used if the auditor believes the exceptions being reported upon are extremely material, in which case a disclaimer or adverse opinion would be used. That is, either the CPA is independent or not independent.

For failure to follow GAAP, there are three levels of materiality: immaterial, material, and highly material. Under which of these two would the auditor be most likely to issue a disclaimer of opinion? Under what circumstances is each appropriate. Determining which is appropriate depends entirely upon materiality. If users develop the attitude that auditors are not independent of management, the value of the audit functio will be greatly reduced, if not eliminated.

An exception is when one condition neutralizes the other condition. An example would be when the auditor is not independent and there is also a scope limitation.

In this sit uation the lack of independence overshadows the scope limitation. Accordingly, the scope limitation should not be men tioned. In general terms, how do auditors meet that objec tive? Fraud represents intentional misstatements. Further, the audit must be planned and performed with an attitude of professional skepticism in all aspects of the engagement. J: Misappropriation of assets represents the theft of assets by employees.

Misappropriation of assets ordinarily occurs either because of inadequate internal controls or a violation of existing con trols. There are also the cases of large theft of assets that result in bankruptcy to the company. J: True, the auditor must rely on management for certain information in the conduct of his or her audit.

The auditor must, whenever possible, obtain competent ev idential matter to support the representations of management. If management represents an account receivable as being fully collectible, the auditor should be able to examine subsequent payments by the cus tomer or correspondence from the customer that indicates a willingness and ability to pay.

Industry conditions. J: The cycle approach is a method of dividing the audit such that closely related types of transactions and account bal. For example, sales, sales returns, and cash receipts transactions and the accounts receivable balance are all a part of the sales and collection cycle. J: There is a close relationship between each of these accounts. Allowance for uncollectible accounts is closely tied to accounts receivable and should not be separated.

Bad debt expense is closely related to the allowance for uncollectible accounts. To separate these account from each other implies that they are not closely related. Including them in the same cycle helps the auditor keep their relationships in mind. Existence or occurrence 2. Completeness 3.

Valuation or allocation 4. Rights and obligations 5. Why are the general audit objectives more useful to auditors? J: General audit objectives follow from and are closely related to management assertions. Which trans action7related audit objective has been violated? Completeness is the opposite of existence.

The completeness objective deals with whether all amounts that should be in cluded have actually been included. In the audit of accounts receivable, a nonexistent account receivable will lead to overstatement of the accounts receiv.

Explain their relationship to the general audit objectives. J: Management assertions and general balance. They were developed by the Auditing Standards Board, practitioners, and academics over a period of time.

Plan and design an audit approach. Perform tests of controls and substantive tests of transactions. Perform analytical procedures and tests of details of balances.

Complete the audit and issue an audit report. The accumulation of evidence is accomplished by performing the four phases of the audit. In addition, the consequences of an incorrect decision in both situations can be equally undesirable. For example, if a guilty person is set free, society may be in danger if the person repeats his or her illegal act. Finally, the guilt of a defen dant in a legal case must be proven beyond a reasonable doubt. As with a judge or jury, an auditor cannot be completely convinced that his or her opinion is correct, but rather must obtain a high level of assurance.

In a legal case, a judge or jury decides the guilt or innocence of the defendant. In an audit, the auditor issues one of several audit opinions after evaluating the evidence. Which audit procedures to use. What sample size to select for a given procedure. Which items to select from the population. When to perform the procedure. Why is it important for audit procedures to be carefully worded? Be cause audit procedures are the instructions to be followed in accumulating evidence, they must be worded carefully to make sure the instructions are clear.

What four things should be included in an audit program? The audit procedures, sample size, items to select, and timing should be included in the audit program. Explain the meaning of each of the major phrases of the standard. There are three major phrase of the standard. The cost of accumulating evidence.

It would be extremely costly for the auditor to gather enough evidence to be completely convinced. How are these two factors related to audit procedures, sample size, items to select, and timing?

Competency refers to the degree to which evidence can be considered believable or worthy of trust. Competency relates to the audit procedures selected, including the timing of when those procedures are performed.

For each characteristics, provide one example of a type of evidence that is likely to be competent. Use of duplicate sales invoices for a large well. Physical examina. Analytical proce. Receipt 2. Written or oral response 3. From independent third party 4. They are also useful in reviewing accounts or transactions for reason ableness to corroborate tentative conclusions reached on the basis of other evidence. Special care should be exercised by the auditor to determine that the 2.

In that case, the analytical procedure constitutes substantive evidence in support of the fair statement of the related account balances, and it is possible to perform fewer detailed substantive tests in connection with those accounts. Frequently, the same analytical procedures can be used for attention directing and for reducing substantive tests, de.

Simple procedures such as comparing the current year account balance to the prio year account balance is more attention directing and provides less assurance than more complex analytical procedures i. More sophisticated analytical procedures help the auditor examine relation ships between several information variables simultaneously.

The nature of these tests may provide greater assurance than simple procedures. To provide a basis for planning the audit. To provide a record of the evidence accumulated and the results of the tests.

This is the primary means of docu. To provide data for deciding the proper type of audit report. To provide a basis for review by supervisors and partners. One of the uses is the review by more experienced personnel.

A second is for planning the subsequent year audit. This is the primary means of documenting that an adequate audit was performed. The materials are created, sent, or received in connection with the audit or review.

Date of preparation Helps the reviewer to determine the sequence of the preparation of the audit schedules. It is also use ful for the subsequent year in planning the sequence of preparing audit schedules.

Indexing also facilitates in searching between related portions of the audit documentation. Articles of incorporation 2.

Bylaws, bond indentures, and contracts 3. Analysis of accounts that have continuing importance to the auditor 4. Information related to the understanding of internal control: 5.

The trial balance includes the detailed make. A test of reasonable ness schedule contains information that enables the auditor to evaluate whether a certain account balance appears to be misstated. Unanswered questions and exceptions may indicate lack of due care by the auditor. What is its purpose? An explanation of the tick mark must be included at the bottom of the audit schedule to indicate what wa done and who did it.

Under what circumstances can they be used by other people? Under what circumstances is this a violation of the code of professional conduct?

Spreadsheet software packages can also be used by auditors to per form audit tests on data that is available only in machine.

Accept client and perform initial planning 2. Assess client business risk 4. Perform preliminary analytical procedures 5. Set materiality, and assess acceptable audit risk and inherent risk 6.

Understand internal control and assess control risk 7. Gather information to assess fraud risks 8. This enables the successor to obtain information about the client so that he or she may evaluate whether to accept the engagement. The successor auditor should be wary if the predecessor is reluctant to provide information about the client. The primary purpose of new client investigation is to ascertain the integrity of the client and the possibility of fraud.

The auditor should be especially con. The auditor does not want to needlessly expose himself or herself to the possibility of a lawsuit for failure to detect such fraud.

What subjects should be covered in such a letter? In addition, the engagement letter informs the client that the auditor cannot guarantee that all acts of fraud will be discovered. Auditors use the knowledge of these risks to determine the appropriate extent of audit evidence to accumulate.

Management and Governance — Read the corporate charter and bylaws, read minutes of board of directors and stockholders, and inquire of management.

For example, the audit of a company engaged in the custom. He or she will also be alert for points at which scrap is generated or spoilage occurs. In this re gard, the auditor will notice the various storage areas and how the materials are stored. The auditor may also keep in mind for further investigation any apparently obsolete inventory. He or she will also meet some of the key manufacturing personnel who may give the auditor an insight into production problems and other matters such as excess or obsolete materials, and scrap and spoilage.

The auditor will be alert for the attitude of the manufacturing personnel toward accounting controls. The CPA may make some inquiries about the methods of production scheduling, timekeeping procedures and whether work standards are employed.

How does the acquisition of this knowledge aid the auditor in distinguishing between obsolete and current inven7 tory? Oxley Act prohibits related party transactions that involve personal loans to executives.

In an ongoing engagement, this work has been performed in the past and is unnecessary each year. List the information in a mortgage that is likely to be relevant to the auditor. The parties to the agreement 2. The amounts included in the agreement 4.

The repayment schedule required by the agreement 5. Assets pledged or encumbered by the agreement 8. Liquidity restrictions imposed by the agreement 9. Purchase restrictions imposed by the agreement Operating restrictions imposed by the agreement Requirements for audit reports or other types of reports on compliance with the agreement Explain why it is important to read the minutes early in the engagement.

Declaration of dividends 2. Acceptance of contracts and agreements 4. Authorization for the acquisition of property 5. Approval of mergers 6. Authorization of long. Approval to pledge securities 8. Authorization of individuals to sign checks 9. For instance, if a long. If the client were in violation of the provisions of the pension plan docu ment, inherent risk and planned evidence for pension.

Give examples of key performance indicators for the following business: 1 a chain of retail clothing stores; 2 an internet portal; 3 a hotel chain.

Performance measurement includes ratio analysis and benchmarking against key competitors. This increase would most likely in. Other top management controls include a well. What types of comparisons are useful when performing preliminary analytical procedures? What is the primary purpose of analytical procedures performed during the completion phase of the audit?

Analytical procedures are also often done during the testing phase of the audit, but they are not required in this phase. For several engagement, he computed the industry ratios included in publications by Robert Morris Associates and compared them with industry standards. How could Gordon improve the quality of his analytical procedures? Making internal comparisons to ratios of previous years.

In some cases, these discussions with management have been the basis for management consulting engagements. By that time, the audit procedures are completed. SAS 56 AU requires that analytical procedures be performed in the planning phase of the audit and near the completion of the audit.

Liquidity activity — Accounts receivable turnover, days to collect receivables, inventory turnover, and days to sell in ventory. Ability to meet long. Which part is the evaluation of ma teriality and risk?

The auditor must therefore make an assessment of the likely users and the decisions they will make. The auditor must, therefore, exercise considerable professional judgment in the application of materiality.