Beruflich Dokumente
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5
where internal controls may be relied upon
CHAPTER NET: Nature, extent and timing of audit
procedures is planned.
Where internal controls may be relied upon,
test those controls to justify reliance
Apply substantive procedures for everything
else. ROUTINE
VS.
NON-ROUTINE TRANSACTIONS
1
THIRD STANDARD OF FIELDWORK Competence of Evidential
So management makes the COVERD assertions.
Matter
It is then the auditors responsibility to validate To be appropriate evidence must be:
those assertions, as required by the third Relevant- does it apply to the objective we are
standard: testing?
Reliable/ Valid- Is the evidence any good?
Sufficient Appropriate Audit Evidence is to be Independent sources have greater reliability
obtained to afford a reasonable basis for an than those within the client organization.
opinion regarding the financial statements Strong internal control increases reliability of
Bob Anderson, UCSB Chapter 5-5 Bob Anderson, UCSB Chapter 5-6
Inquiries
Letters of representations
Bob Anderson, UCSB Chapter 5-7 Bob Anderson, UCSB Chapter 5-8
2
Vouching vs. Tracing INTERNAL CONTROLS
MUST obtain an understanding of the internal controls (thats the 2nd standard
When we examine audit evidence we often look of fieldowkr the I in PIE from Chapter 2)
for one thing to match another. We could be
Many classes of transactions are very routine to a client. Accordingly the
vouching or tracing we vouch FROM the client may establish strong internal controls over those transactions to
financials and we trace TO them: ensure that misstatements are Prevented or Detected in a timely fashion.
If the internal controls over a class of transactions is strong the auditor
MAY rely upon those controls. However, in order to rely, the auditor must
perform:
Tests of Design (TODs): Would the controls prevent/ detect errors?
When testing existence (of something recorded Tests of Operational Effectiveness (TOEs): Are the controls functioning as
in the financial statements) we designed?
There are several risk factors which can be categorized into three groups:
1. Inherent Risk--Risk of a material misstatement occurring in an SPECIFIC
assertion assuming no related internal controls. Impacted by
TO THE
AR = IR ~ CR ~ DR
factors such as: RMM
Complexity of transactions and/ or accounting issues;
Number of transactions; CLIENT
~
Degree of judgment involved AR = Audit risk
AND ITS Interpret as: reduction of inherent risks, depending
Volatility of valuations IR = Inherent risk on the strength of the control or audit procedure.
3
An Illustration of Audit Risk Basic Approaches to Auditing Accounting
BEFORE application of Estimates
Sand internal controls,
potential for
misstatements is
unmitigated.
USE OF SPECIALISTS
Auditing Fair Values The auditor is responsible for the adequacy of the
procedures applied. Maybe they need a specialist to
supplement where they lack specific expertise. If
If the item is traded on an organized they do, they are responsible for the work of the
market, fair value may be obtained from specialist, and at a minimum must (DONT FORGET
TO DOCUMENT)
market prices Satisfy themselves with the professional qualifications
If the item does not trade on an organized of the specialist
market determine fair value by: Obtain an understanding of the methods and
Bob Anderson, UCSB Chapter 5-15 Bob Anderson, UCSB Chapter 5-16
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Sufficiency of Audit Documentation Functions of Working Papers
Audit documentation should be sufficient to Provide a means of assigning and
enable members of the audit team AND coordinating audit work
future reviewers of the workpapers to: Aid in supervising and reviewing the audit
To understand who performed and reviewed work
the work Provide support for the auditors opinion
To understand what work was performed Document the auditors compliance with
To show that the accounting agree or reconcile generally accepted auditing standards,
to the financial statements especially the standards of field work
Aid in planning and conducting future audits
SHOULD ALLOW FOR REPERFORMANCE!!
Bob Anderson, UCSB Chapter 5-17 Bob Anderson, UCSB Chapter 5-18
Bob Anderson, UCSB Chapter 5-19 Bob Anderson, UCSB Chapter 5-20
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CLIENT REPRESENTATIONS FIRST THING FIRST
Client representation is a weak form of evidential matter- but It is beneficial to complete internal control testwork before the
more prevalent than it probably ought to be. Client makes other procedures as it provides an indication of how much
specific written representations in a letter called the reliance can be placed on the client. The greater the reliance,
Management representation letter at the conclusion of the the lesser the other procedures.
audit (dated same date as the audit). They formally represent:
Remember that IR & CR combined =RMM.
Their responsibility for the financial statements, internal controls & fraud
programs; Auditor is required to PLAN (means look at IRs) and to assess
That they have made available all records, data and minutes of the internal controls (CR). So right out of the gate, the auditor must
meetings og the BOD have a sense of the RMM for planning their substantive
Financial statements are GAAP and all disclosures have been made procedures and internal controls testwork.
That uncorrected misstatements are not material
Specific representations as required by the auditors (auditors have a We call those other procedures substantive procedures.
standard form & MAY ADD SPECIFIC ITEMS when considered
necessary)
Bob Anderson, UCSB Chapter 5-21 Bob Anderson, UCSB Chapter 5-22
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EXAMPLE FROM PRIOR SLIDE INTERIM PROCEDURES
When the client year end comes, youve got a LOT to do and a
Beginning debt balance 1,000,000 short time to do it:
Expected reduction (120,000) 45 days now if public company
ENDING BALANCE SHOULD BE 880,000
90 days general bank requirement
Bob Anderson, UCSB Chapter 5-25 Bob Anderson, UCSB Chapter 5-26
PUTTING IT TOGETHER
Client closes their books and book Adjusting Journal Entries as they deem necessary
to properly present.
Auditor performs their work on adjusted financial statements. Auditor keeps track of
differences noted in a summary of audit differences
Auditor and client agree on what audit differences will be booked and passed.