Adms 4551 PDF

lOMoARcPSD|3243319
Acco 360 - This is the summary of chapters 1, 2, 4, 5,6 & 7 -

Auditing: the Art and Science of Assurance Engagements
Principles Of Auditing (Concordia University)
StuDocu is not sponsored or endorsed by any college or university

Downloaded by mo mo (joram998@outlook.com)
lOMoARcPSD|3243319
Chap 1
Definition of auditing:
- It is the accumulation and evaluation of evidence regarding declarations/claims about
information to determine the degree of correspondence between the declarations and
the established criteria (IFRS, ASPE) and to report the results to the interested users.
Accounting(Accountants) V.S Auditing (Auditors):

- Accounting is the recording, classifying and summarizing of economic events in a logical
manner for the purpose of providing financial information for decision making.
- Accountants must understand the principles and rules that provide the basis for
preparing the accounting information. They also help to develop the systems used to
record a company’s economic events in a timely way and at a reasonable cost. But as
we know the financial statements are prepared based on many judgemental evaluations
and estimates. This is where the auditors come in.
- Auditors need to understand the relevant accounting standards in accordance with the
company’s financial statements. When auditing accounting data, the concern lies in
evaluating whether recorded information reasonably reflects the economic events that
occurred during the accounting period within specified dollar ranges (called materiality).
- Information materiality is based on the judgement that the misstated information would
impact the economic decision of the decision makers.
- Auditors must have the knowledge of internal control, risk assessment processes, and
the accumulation and interpretation of audit evidence. This marks the line between an
auditor and an accountant.
- Tasks that are unique to an Auditor are procedures that: mitigate risks, deciding the
number and types of items to test and evaluating the results.
Economic demand for auditing:

- Auditing is needed in the world of business as it can impact the decision of creditors and
potential investors.
- For instance, a bank’s interest will depend on 3 factors:
1) Risk-free interest, which the bank could earn by investing into Canadian treasury bills
for the same period of time as the business loan.
2) Business risk for the customer, which is based on the possibility of the business not
paying back the loan.
3) Information risk, which is based on inaccuracy of the provided information.
Now, it is hard to reduce the risk of the first 2 factors, but by annual auditing, the banks can
have accurate financial information, which reduces the information risk factor, ultimately
resulting in a lower interest charge to the business. This can have a large impact on savings in
terms of interest.
lOMoARcPSD|3243319
Causes of information risk:
- Remoteness of information: Relying on information provided by others, which can

increase the chances of having misstated information, either intentionally or
unintentionally.
- Biases and motives of the provider: When the information is given by someone whose
goals are not aligned with those of the company or decision maker. The information can
be biased depending on the motive of that person. For instance a company making their
financial statements look good to obtain a loan or gain investors.
- Voluminous data: This occurs as the company gets larger and there is a large amount of
transactions happening. In those transactions, there is a chance that some are not
properly accounted for. Even if the transaction improperly recorded is not a big one and
left undiscovered, over a long period of time, multiple transactions like these can have a
material impact.
- Complexe exchange transactions: Refers to the difficulty of recording transactions that

are based on complex transactions such as a company buying a company.
Reducing information risk:
Reducing information risk depends on a company’s size, as to a small company it might be too
expensive to reduce risk. 3 ways to reduce the information risk:
1. User verifies information: The company may send a special audit to independently verify
and evaluate the key information of a specific company. Very costly.
2. Users share information risk with management: It is regarding the management sharing
reliable information to users. In case they fail to do so and the users incur losses, they
can be pursued in lawsuit. But the downside is the difficulty to collect losses incurred.
3. Audited financial statements are provided: Using the service of an external auditor to
provide assurances to users that the financial statements are reliable.
External users rely on financial statements to make business decisions. Therefore, having an
independent auditor indicating the reliability of the reports are used often. The decision makers
use the audited financial statements based on the assumption that it is reasonably complete,
accurate, and unbiased. They value the auditor’s assurance because of the auditor’s integrity,
independence, expertise, and knowledge of financial statement reporting matters.
Common types of Audits: Refer to table 1-1 on page 9
lOMoARcPSD|3243319
1. Financial statement audit: Conducted to determine whether the financial statements are
stated in accordance with specified criteria.
2. Compliance audit: To determine whether a company complied with specific laws,

regulations, rules or provisions of contracts or grant agreements.
3. Operational audit: Review of a company’s operating procedures and methods for the
purpose of evaluating economy, efficiency, and effectiveness.
Types of auditors:
Internal auditors:
- Work for individual companies, banks, hospitals, universities, and governments. The
institute of internal auditors (IIA) defines internal auditing as an independent, objective
assurance and consulting activity designed to add value and improve an organization’s
operations. They help the company achieve its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk management,
control, and governance processes.
- To effectively perform assurance engagements, an internal auditor must be independent
of the line functions in an organization but will not be completely independent of the
company as long as an employer-employee relationship exists. In order to maintain
independence, internal auditors report directly to the audit committee of the board of
directors and senior management.
- Even though the internal auditors provide valuable information to internal users, it is not
reliable for external users due to lack of independence. As the company can direct the
internal auditors to focus on specific areas of the company where an external auditor is
independent to focus on whichever area he/she finds more valuable for external users.
Government Auditors:
- These auditors have the general responsibility of auditing the ministries, departments,
and agencies that report to that government. They are appointed by either bipartisan
legislative committee or by the government in that jurisdiction.
- The primary responsibility of the government auditor is to generally perform the
following:
1. Internal audits into financial matters or compliance with regulations, and whether
or not the operations are conducted in an efficient, effective, and economic
manner.
2. External audits of the financial statements.
3. Special examinations of efficiency, effectiveness, and economy (every 5 years)
lOMoARcPSD|3243319
- In Canada, audits generally perform a performance audits (value for money audits),
which are based on the purpose of determining if the company or program is achieving
its objectives effectively, economically, and efficiently.
CRA auditors:
- These auditors deal with the federal tax laws as defined by Parliament and interpreted in
courts.
- They solely perform compliance audits.
- It can vary from simple individual tax return audits to multinational corporations.
Forensic Accountants and Fraud auditors:
- Fastest growing areas within the audit world.

- They are hired to investigate financial statement fraud, asset misappropriations, money
laundering, bribery, theft of information via computer hacking.
- The main aspect that differentiate these auditors from others is the investigative mindset.
Public accountants:
- They provide services of assurance in terms of accounting and tax advice to the public
on their financial statements.
- Only public accounting firms can conduct financial statement audits or reviews and only
Canadian CPAs with a public accountant’s license can sign an assurance report related
to financial statements.
The General characteristics of an Assurance Engagement:

• Existence of a three-party relationship
• Subject matter
• Criteria
• Gathering of sufficient appropriate evidence
• Expression of opinion or conclusion
Review v.s Audit of historical statements:

- Review has lower cost and lower level of assurance. Therefore, it has limited assurance.
- Audit has a higher cost and higher level of assurance. Therefore, it has high assurance,
because the management asserts that the financial statements are fairly stated in
conformity with an applicable financial reporting framework.
lOMoARcPSD|3243319
Chap 2
Main areas in which the auditing frameworks focus on to improve the quality of auditing are:
Professional Skepticism (Art), Quality Control and Group Audits.
The quality is composed of many factors such as firm leadership, independence, integrity,
objectivity, personnel management, client acceptance and continuation procedures,
engagement performance, and monitoring.
Staff Levels and responsibilities:

- Staff levels are as follows ( low to high): Staff accountant, senior or in-charge auditor,
manager, senior manager and partner.
- The hierarchy and the responsibilities are placed in such a way that everyone’s work is
reviewed at each level to ensure the high-quality audits.
Requirements for public accountant:

- Undergrad degree and CPA designation,
- CPA program are expected to develop two kinds of competencies during the practical
experience:
1. Pervasive qualities and skills
2. Six technical competencies: Financial reporting, strategy and governance,
management accounting, audit and assurance, finance, and taxation.
Organizations affecting the Canadian Public accounting profession:
Canadian Public Accountability Board (CPAB):

- Their mission is to contribute to the public’s confidence in the integrity of financial
reporting in reporting issuers (publicly held companies) in Canada by promoting effective
regulation and high-quality, independent auditing.
- To accomplish this goal, the CPAB focuses on 4 priorities: Effective inspections, risk
management, thought leadership and stakeholder engagement.
- The key role is its practice inspection program.
Canadian Auditing Standards: (CAS)

- The standards for the financial audits, which are based upon ISAs (international
Standards on Auditing) originally developed and released by the IAASB of the
international Federation of Accountants (IFAC).
- The framework that defines the purpose of the financial statement audit is as follows:
1. Purpose of the audit: Provide an opinion about the financial statements.
lOMoARcPSD|3243319
2. Personal Responsibilities: Possess appropriate competence and capabilities,

Comply with ethical and independence requirements, and Maintain professional
skepticism and exercise professional judgment.
3. Performance Responsibility: Obtain reasonable assurance about whether
financial statements are free of material misstatement through performing the
following: Plan audit and supervise engagement team - Determine and apply
materiality level or levels - Identify and assess risks of material misstatement
based on understanding entity and its environment including internal controls
(Adequacy of internal control matters on the decision if the data provided
is reliable or not) - Obtain sufficient appropriate audit evidence.
4. Reporting responsibility: Express opinion on financial statements in a written
report, State whether financial statements were presented in accordance with
financial reporting framework.
This framework's overall objectives of the financial statements audit is to:
- Provide reasonable assurance that the financial statements are not materially
misstated.
- Consider both potential fraud and error.
- Communicate whether the financial statements comply with an applicable
financial reporting framework using the expression of an opinion.
- Reporting on the financial statements
- Communicating auditor’s findings in accordance with CASs
Important term:
- Professional Skepticism: Auditors are to remain alert for the presence of material
misstatements, whether due to fraud or error, throughout the planning and performance
of an audit.
The Drivers of Audit Quality:

- It is hard to define an audit’s quality.
- CPAB suggested focusing on four key areas to increase the chances of a high-quality
audit assurance.
- To achieve a sustainable audit quality firm’s must focus on:
1. Build the right team: Meaning staff with the right technical competence and
industry experience. CPAB recommends to assess the team’s strengths and
weaknesses on a periodic basis.
2. Provide the right support: Consulting with seniors and partners for help.
3. Conduct In-Process reviews: Experienced partners and seniors should review
the audit report throughout the process and not at the end.
4. Assign accountability for audit quality: To ensure the accountability of the audit,
the firm must choose a specific qualified person that ensures the quality of the
report. This way is easier to improve upon errors.
lOMoARcPSD|3243319
Quality control:
- Policies put in place by PA firms to ensure that they meet its professional
responsibilities.
- Canadian Standard on Quality Control (CSQC) is close to CAS, but the fact that CSQC
policies are established for the entire firm rather than CAS applies to individual
engagements.
- It is monitored annually as the quality partner tests the quality control procedures to
ensure that the firm is in compliance.
lOMoARcPSD|3243319
Chap 4 The audit process and risk assessment
Objective of conducting an audit of financial statements:

- CAS 200 states that the purpose of the financial statement audit is to express an opinion
on the financial statements. The opinion represents the auditor’s assurance to the users
that the financial statements are presented fairly, in context of materiality, in accordance
with the applicable financial reporting framework as the criteria for assessment.
- CAS 200 highlights two other parties than the auditors: 1) Management and 2) those
with charged governance have certain responsibilities that are fundamental to the
conduct of the audit. (Explained both below)
Management’s responsibilities:
- Here are some responsibilities that rest with management rather than auditor:
1. Responsibility for adopting a sound and appropriate financial reporting framework

and corresponding accounting policies (Including assessing the appropriateness
of the going-concern basis of accounting)
2. Maintaining adequate internal control (determines the reliability of the data
provided to the auditor)
3. Making fair representations in the financial statements
- As the management has the privilege of determining which disclosures it considers

necessary, the auditor can ask for clarification and in case the auditor finds it
unacceptable, he/she can either issue a :
1. Qualified or adverse opinion, or
2. As a last resort, withdraw from engagement.
- In public companies, CEO and CFO must certify that:

1. Financial statements fully comply with requirements of the stock exchange.
2. Statements do not contain any misrepresentations of material omissions and
present fairly the financial condition of the company.
3. Disclosure controls and procedures or internal controls over financial reporting
have been designed, evaluated, and disclosed.
- Additional responsibility over the preparation of financial statements and internal control
of management that must be provided to auditor under CAS 200:
1. Access to all information that is relevant to the preparation of the financial
statements such as records, documentations and other matters
2. Any additional information that the auditor may request.
3. Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
lOMoARcPSD|3243319
Responsibilities of those charged with governance:

- Corporate governance is a set of relationships between the company’s management, its
board, shareholders and other stakeholders. They provide the structure through
which the objectives are set and the monitoring process is determined.
- The allocation of responsibilities regarding financial reporting and the audit between
management and those charged with governance will depend on the company’s
governance structure and relevant laws and regulations.
- Usually, management is responsible for financial reporting and internal controls and
those with charged governance are responsible for oversight of the financial
reporting process ( which includes management and the financial statement
audit). Also they are responsible for approving the audited financial statements.
- The company might have an audit committee, which is responsible for oversight of
management in relation to financial statement preparation and internal controls and the
external auditors.
- Publicly accountable entities are required by legislation to have an audit
committee, while it is optional for private entities.
Auditor’s responsibility:
CAS 200 highlight the overall objectives of the audit of the financial statements as:
1. To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, thereby enabling the
auditor to express an opinion on whether the financial statements are prepared, in all
material aspects, in accordance with an applicable financial reporting framework.
2. To report on the financial statements and communicate are required by CASs, in
accordance with the auditor’s findings.
Below are the important terms and phrases about the auditor’s responsibility to detect
material misstatements.
Material Vs Immaterial misstatements:

- Misstatements are considered material if the combined uncorrected errors and fraud in
the financial statements would have changed or impacted the decisions of a reasonable
person using the statements.
- Even though it is hard to quantify the measurability of the material misstatement,
auditors are responsible for obtaining reasonable assurance that this materiality
threshold has been satisfied.
Reasonable assurance:
- Assurance is a measure of the level of certainty that the auditor has obtained at the
completion of the audit.
- Auditing standards indicate that reasonable assurance is a high, but not absolute, level
of assurance that the financial statements are free of material misstatements.
lOMoARcPSD|3243319
- The auditor is responsible for reasonable, but not absolute, assurance for the following
reasons:
1. Most audit evidence results from testing a sample and this contains the risk of
not uncovering a material misstatement. Other factors that require auditor
judgement include: The areas to be tested - The type, extent, and timing of those
tests - The evaluation of test results.
2. Accounting presentations contain complex estimates, which involve uncertainty
and can be affected by future events. As a result, the auditor has to rely on
evidence that is persuasive, but not convincing.
3. Fraudulently prepared financial statements are very difficult if not impossible to
detect for the auditor.
Errors V.s Fraud:

- Error unintentional misstatement
- Fraud intentional misstatement
Auditor is mainly concerned with any fraud that may cause a material misstatement in the
financial statements. 2 types of intentional misstatements are:
1. Misappropriation of assets (employee fraud): A fraud involving the theft of an entity's
assets.
2. Fraudulent financial reporting (management fraud): Intentional misstatements or
omissions of amounts or disclosures in financial statements to deceive users.
Auditor’s Responsibilities for Detecting Material Errors:

- Auditors spend a lot of their time detecting unintentional mistakes made by management
and employees. They find a variety of errors resulting from the following mistakes:
Calculations, Omissions, misunderstanding and misapplication of accounting standards
and incorrect summerizations and descriptions.
- CAS 200 highlights the assertions where the auditor’s ability to detect material
misstatements are limited:
1. Fraud, particularly fraud involving senior management or collusion
2. The existence and completeness of related parties and transactions
3. Non-compliance with laws and regulations
4. Future events or conditions that may cause the entity to cease as a going
concern.
Auditor’s Responsibilities for Detecting Material fraud:

- Auditing standards do not make any distinctions between the auditor’s responsibilities for
detecting for errors and detecting for fraud. In both cases, the auditor must obtain
reasonable assurance whether the statements are free of material misstatements.
However, it is understandable that detecting fraud done by employees or management is
much harder to search. But it does not change the approach to handle these cases, as
the auditor still has the responsibility to properly plan and perform the audit.
lOMoARcPSD|3243319
Fraudulent Financial reporting (Management) V.s Misappropriation of Assets (Employee):

- Both are potentially harmful to financial statement users.
- The difference is as following:
1. Fraudulent financial reporting harms users by providing incorrect financial
statement information for their decision-making.
2. Misappropriation of assets harms stockholders, creditors and others, because
the assets are no longer available to their rightful owner.
- Fraudulent financial reporting is mostly done by management, as they have the power to
make accounting and reporting decisions without the knowledge of employees.
- Misappropriation of assets are mostly done by employees and the amounts are often
immaterial. But an accumulation of the immaterial amounts can have a material impact
on the financial statements.
Auditor’s responsibility for Related Party Relationships and Transactions:

- Under both ASPE and IFRS, the related parties are not independent, therefore they
have specific accounting and disclosures requirements for related party relationships,
transactions, and balances.
- CAS 550 highlights, Auditor’s Responsibilities Regarding Related Parties, given the
nature of related parties, there is an increased risk of misstatement, due to either fraud
or to error.
- CAS 200 and 550 highlights the following limitation to the auditor's ability to detect
misstatements that involve related parties:
1. Management may be unaware of the existence of all related party transactions or
relationships.
2. Related transactions create a greater chance for collusion, concealment, or
manipulation by management.
Auditor’s responsibility to consider Laws and Regulations:

- To obtain reasonable assurance that the financial statements are free of material
misstatement, the auditor must consider the applicable legal and regulatory framework
relevant to the client.
- CAS 250, Consideration of Laws and Regulations in an Audit of Financial
Statements, acknowledges that the auditor’s ability to detect material misstatements
that has a link with laws and regulations is impacted by the following factors:
1. There are many Laws and Regulations, which are related to the operating
aspects of the company, but it may not affect the financial statements. For this
reason they are hard to detect.
2. Non-compliance, which are acts of omissions or commissions to the auditor
either intentional or unintentional that are contrary to prevailing laws or
regulations. These are committed by company, those charged with governance,
by management or by other individuals working for or under the direction of the
entity.
lOMoARcPSD|3243319
3. Whether an act constitutes non-compliance (illegal acts) is decided by a

court or other appropriate adjudicative body.
- The reason why auditors have a hard time with responsibilities with laws and regulations
is to understand whether these non-compliance acts (illegal acts) have a direct or
indirect impact on the amounts and disclosures in the financial statements.
- Laws and regulation with a Direct Effect: These laws and regulations have a direct
impact on the amounts and disclosures of the financial statements. For example,
violation of federal tax laws will affect the amounts and disclosures of the income taxes.
Therefore to obtain sufficient (quantity) and appropriate (relevant) audit evidence about
the company’s compliance with laws and regulation. The auditor must perform a variety
of procedures to obtain reasonable assurance.
If the auditor finds out that the company is in non-compliance, he/she is required to
obtain an understanding of the nature of the act and how it occured, and obtain
information to evaluate its possible impact on the financial statements.
- Laws and Regulations with an Indirect Effect: This is where the compliance is
fundamental to the operating aspects of the company, to its ability to continue its
business, or to avoid material penalties. Examples are: expulsion of the company or
its assets due to bribery, this impacts both balance sheet and income statement. Failure
to respect the environmental laws could lead to fines and penalties.
Note: Even if the magnitude of the illegal act itself is not material, the consequences
could be.
The auditor is only responsible to perform specified audit procedures to help identify
non-compliance with the indirect laws and procedures. They are as follow:
1. Inquiring of management and those charged with governance about whether the
entity is in compliance with such laws and regulations.
2. Inspecting correspondence, if any, with the relevant licensing or regulatory
authorities.
- CAS 250 states that, other than inquiry of management, the auditor should not search
for illegal acts unless there is a reason to believe they may exist.
Auditor’s responsibility to Evaluate Going Concern:

- This is management’s responsibility to prepare the financial statement on the going-
concern basis of accounting. This simply means that the company has no intention or
need to liquidate or stop the operations in the foreseeable future (usually 1 year).
- CAS 570, Going-Concern: It is the auditor's responsibility to obtain sufficient appropriate
audit evidence regarding and to conclude, the appropriateness of management’s use of
going-concern basis of accounting in the prep of financial statements.
lOMoARcPSD|3243319
Also, based on the evidence obtained, the auditor is responsible for concluding whether
there is a material uncertainty about the company’s ability to continue as a going-
concern.
- Limitations to the auditor’s ability to detect material misstatement are linked with the fact
that future events are based on assessments.
- CAS 570.7, states that the auditor cannot predict future events and that the absence
of any reference to going-concern uncertainty in the auditor's report is not a
guarantee of the company’s ability to continue as a going-concern.
Framework for professional judgment:
- Professional judgment is important to perform a quality audit. The auditors must make
quality judgments about the evidence, probabilities, options.
- By definition professional judgment is analytical and systematic, objective, prudent and
carried out with integrity and recognition of responsibility to those affected by its
consequences.
- In simple terms, it is a well thought-out, objective, meets the underlying principles of
GAAP and GAAS, has evidence to support the decision, maximizes the likelihood of
good consequences, carried out with truthfulness and forthrightness and considers
the impact on the financial statement users.
- Here is the FRAMEWORK for professional judgment: Auditor’s Mindset

1. Identify and define issues: Must be clear about “What”. The auditor must know
what he/she is looking for to find the right solution. This can be done by thinking
from different perspectives. Also, the auditor must consider the “WHY”, this will
test the application of the professional skepticism (investigative or awared mind-
skill).
2. Gather the facts and information: This task may look simple, but it is not, as
the auditor needs to be alert for disconfirming information and he/she cannot
over rely on the info from the accounting personnel. It means that the auditor
needs to involve the right people and they could be from different departments
than accounting. Also need to stay vigilant for management biases, as some
managers show false info to obtain bonuses.
3. Perform analysis and evaluate alternatives: This stage is highly affected by
step 2, as the auditor will identify and evaluate all the alternatives based on those
facts. At this stage, the auditor should be careful of potential judgment
tendencies, traps, and biases that can limit the auditor’s ability to
effectively evaluate alternatives. These traps can be avoided by consulting
with others.
4. Reach conclusions
5. Review and complete documentations and rationale for conclusions
lOMoARcPSD|3243319
- Stage 4 and 5: This is an important stage as the auditor reviews the relation between
the evidence and the conclusion. The documentation process can help the auditor make
quality decisions as he/she will look at the information which was discarded and why it
was discarded. This process helps with confirmation bias, which means that the
auditor might have given more importance to an evidence that might not have been that
valuable.
Professional Skepticism: refer to page 97

- A questioning mind and a critical examination of audit evidence.
- Qualities of professional Skepticism:
1. Questioning mind
2. Suspension of judgment
3. Search for knowledge
4. Interpersonal understanding
5. Autonomy
6. Self-esteem
- Judgment traps: Common systematic judgment tendencies and biases that can lower
the quality of the professional judgment process.
- Common judgment traps are:
1. Confirmation: Putting more weight on info that is consistent with initial belief or
preferences and avoiding looking at the other side of things or alternatives.
2. Overconfidence: Overestimating his/her own ability to perform tasks or to make
accurate risk assessments.
3. Anchoring: This happens when auditors are simply referring to the initial
numerical info provided by the management and not adjusting those numbers to
form their final judgment. Ultimately leading to the same mistake as the
management.
4. Availability: This happens when auditors rely on a recent case they have handled
by themselves or someone else to make a judgment of the case at their hand.
This can lead to a biased conclusion as the new case might be rare to the auditor
but he/she tries to find similarities, which can impact the professional judgment.
- The work environment such as time pressure, can contribute to applying less than
ideal professional skepticism.
Financial statement Cycles:

- This part is about how the auditors organize the audit’s financial statements.
Approach:
lOMoARcPSD|3243319
- Cycle approach to segmenting an audit: A method of dividing an audit by keeping closely

related types of transactions and account balances in the same segment.
Five cycles are:
1. Revenue and collections cycle
2. Acquisition and payment cycle
3. Human Resources and payroll cycle
4. Inventory and distribution cycle
5. Capital acquisition and repayment cycle
- Relationships among cycles: Simply explains the links between the cycles, Refer to
figure 4-4 on page 102.
- Entity-Level controls: Controls that have a pervasive effect (or spreading effect) on
multiple processes, transactions, accounts and assertions.
Setting Audit Objectives:

- This section helps to increase the overall level assurance by auditing the end balance of
accounts receivables.
- It helps the auditor set the right objectives to increase the level of assurance.
- It is almost impossible to find assurable balances of each account, therefore the most
efficient way to conduct audits is to obtain some combination of assurance for each
class of transactions and for the ending balance in the related accounts.
Management assertions and audit objectives: IMPORTANT

- Management assertions are implied or expressed representations by management
about:
1. Classes of transactions or events
2. Related account balances in the financial statements
3. The classification, presentation, or disclosure of information in the financial
statements
- Management assertions are directly linked to accounting standards (ASPE or IFRS), as

they have to use that criteria to record and disclose accounting info in the financial
statements.
- CAS 315, Classify assertions into 3 categories:
1. Assertions about classes of transactions and events for the period under audit.
2. Assertions about account balances at period end.
3. Assertions about financial statement presentation and disclosure.
- Audit objective: For all assertions, the audit objective is to prove with sufficient and
appropriate evidence that the assertion is true.
lOMoARcPSD|3243319
- Management assertions: Are to help the auditor to focus his/her attention on all the
various aspects of the transactions, account balances, and required disclosures that
need to be considered. In other words, they help pinpoint the most relevant assertions.
- Relevant assertions: assertions that have a meaningful bearing on whether an account
is fairly stated and are used to assess the risk of material misstatement and the design
and performance of audit procedures. To determine the relevant assertions, consider the
following:
1. Management bias, incentive and pressure.
2. The complexity or nature of the assertion. ( is it subjective, such as inventory
obsolescence?)
3. The risk of fraud and error.
Linking assertions with audit objectives:
Assertions and transaction-related audit objectives:

- 5 audit objectives that must be met before the auditor can conclude that the total for any
given class of transaction is fairly stated. The transaction-related audit objectives are:
1. Occurrence:
- Management asserts that all recorded transactions included in the
financial statements have actually occurred during the accounting period.
- Auditor must ask: “have the recorded transaction really occurred?”, the
objective of the auditor is to gather evidence that proves the recorded
transactions actually occurred.
- Error in occurence results in overstating the transaction, as the
management recorded what they should not have.
2. Completeness :
- Management asserts that all transactions that should be included in the
financial statements are included.
- The auditor must ask: “ Are all the transactions included and recorded?”,
the auditor’s objective is to gather evidence that all transactions that
should be included in the files or journals have actually been included.
- Error in completeness results in understating the transaction, as the
management did not record what they should have.
3. Accuracy:
- Management asserts that all the transactions have been recorded at
correct amounts.
lOMoARcPSD|3243319
- The auditor must ask: “Are transactions recorded correctly?”The auditor’s

objective is to gather evidence to prove the accuracy of information for
accounting transactions.
- The auditor can use the following components to develop accuracy
objectives:
1. Initial data entry:
- The accuracy of data entry is violated if the quantity of
goods shipped differs from the quantity actually billed due
to the wrong selling price.
2. Summarization:
- This is the process of grouping or totalling some
transactions for the purpose of posting.
- The error occurs if the daily total is added incorrectly.
3. Posting:
- The process of recording transactions to the general ledger
account.
- The posting error occurs if the wrong sales amount was
updated to the customer master files.
4. Cutoff:
- Management asserts that all transactions are recorded in the proper
accounting period.
- The auditor must ask: “Are transactions recorded on the correct dates?”,
the auditor’s objective is to gather evidence that cutoff transactions, those
that occur close to period end, correctly accounted for.
- Error in cutoff can lead to either understatement or overstatement of
accounts and for this reason they are closely related to the occurrence
and existence assertions.
5. Classification:
- Management asserts that all transactions are recorded in the appropriate
accounts.
- The auditor must ask: “Are the transactions included in the client’s
journals properly classified?”, the auditor’s objective is to gather evidence
that the transactions are properly classified.
Assertions and Balance-related Audit objectives:

- 5 audit objectives that must be met before the auditor can conclude that any given
account balance is fairly stated. The balance-related objectives are:
lOMoARcPSD|3243319
1. Existence:
- Management asserts that all assets, liabilities and equity interests
included on the balance sheet are genuine and actually existed on
balance sheet date.
- The auditor must ask: “Do all amounts included exist?”, the objective is to
gather info that proves the inventory actually physically exists.
- An important procedure when it comes to prove the existence of assertion
is the actual physical observation, as if the inventory is counted twice, it
would be overstated, which is an existence error.
2. Rights and obligations: (Ownership)

- Management asserts that the entity has proper rights to all assets and
proper obligation to pay liabilities that are the obligations at a given date.
- The auditor must ask: “Are the assets owned? Do the liabilities belong to
the entity? “, the objective is to gather info that proves ownership and
the obligation.
- To asses the following 2 objectives, the auditor will review contracts with
suppliers and customers and inquire of management for the possibility
that consigned goods are included in the inventory balance:
1. The company has title to all inventory items listed.
2. Inventories are not pledged collateral unless it is disclosed.
3. Completeness:
- Same as the transactions related to audit objectives.
4. Valuation : (Impairment of assets)

- Management asserts that assets, liabilities and equity interests have been
included in the financial statements at appropriate amounts, including any
valuation adjustments to reflect asset amounts at NET REALIZABLE
VALUE.
- The auditor must ask: “Are the assets recorded at the amounts estimated
to be realized?”, the objective is to review whether or not the value of the
assets have been reduced for declines from historical cost to NRV or
properly valued if FV accounting is being used.
- For Inventory, the objective considers whether or not appropriate write-
downs for obsolescence have been made.
5. Allocation:
- To develop allocation balance-related audit objectives, the auditor must
ask: “Are all amounts included appropriate?”.
lOMoARcPSD|3243319
- The allocation balance-related objective is closely linked to the

transaction-related audit objective of classification.
- The following are the concepts of allocation that are used evaluate the
amounts of the related assets:
1. Accuracy of adjustment/Recorded amount:

- This simply requires that the correct adjustment or
allocation be calculated.
- An example would be the write-down of inventory must be
correctly determined.
2. Timing of the adjustment:

- Simply refers to the allocation of the adjustment to the
correct financial periods.
- An example would be the write-down of inventory should
belong to the current fiscal period.
3. Adjustment to correct the accounts: (Retro and prospective)

- Requires that the ADJ be posted to the correct general
ledger accounts.
- An example would be that changes in inventory values
would be posted to COGS for the current period.
Assertions and Presentation and disclosure-related audit objectives:

- 4 audit objectives that must be met before the auditor can conclude that presentation
and disclosures are fairly stated:
1. Occurrence and Rights and Obligations:
- Management asserts that disclosed events have occurred and are the
rights and obligations of the entity and obligations of the entity. Example,
if the client discloses that it has acquired another company, it asserts that
the transaction has been finalized.
2. Completeness:
- Management asserts that all required disclosures have been included in
the financial statements.
- All material transactions have been disclosed with the related parties.
3. Accuracy and Valuation:

- Management asserts that financial info is disclosed fairly and at
appropriate amounts. Management’s disclosure of the amount of
lOMoARcPSD|3243319
unfunded pension obligations and the assumptions underlying these

amounts is an example of these assertions.
4. Classification and Understandability:

- Management asserts that the amounts are appropriately classified in the
financial statements and footnotes and the balance descriptions and
related disclosures are understandable.
Developing Presentation and Disclosure-Related Audit Objectives:

- The overall purpose of all presentation-and disclosure-related audit objectives is to
assess whether the financial statements portray (Through the transactions, accounts
and notes) the economic reality of what actually occurred as well as any significant
judgments management made.
- The understandability aspect comes in when the judgments related to a complex
investment are described in a confusing or incomplete manner.
- When developing the understandability, the auditor must ask: “Are classes of
transactions, account balances, and related disclosure requirements clearly presented in
the financial statements?”. The auditor will need to assess the financial statements
and notes from the perspective of a reasonably informed business user to
determine if the info is presented in a clear way.
The Audit process: How audit objectives are met:

- Audit evidence is needed to support the assertions made by the management in the
financial statements. This is done by gathering evidence in support of an appropriate
combination of Transaction-related, Balance-related, and presentation and
disclosure-related audit objectives.
- To find the right combo, the CAS has provided us with the methodology of the Audit
Process.
Recap before going deep:
- Chap 2 we learned that the relevant ethical requirements (Integrity, objectivity,
confidentiality and professional behaviour) and quality control processes (such as
in-process reviews and appropriate supervision) ensure that a quality audit is
performed.
- In chap 4, we learned that professional skepticism and professional judgment are key to
a critical evaluation of audit evidence.
Now going back to the audit process:
Client Acceptance:
lOMoARcPSD|3243319
- Before accepting the engagement, the audit firms considers the following factors about
themselves: the competence, capabilities and resources to take on the engagement.
- The firm will also assess the integrity of the client, as well as any threats to
independence and possible risks to the audit firm associated with accepting the specific
client.
Audit planning:
lOMoARcPSD|3243319
Chap 5 Audit Evidence
Nature of Audit Evidence: Persuasive Info= Effective Info

- Evidence includes info generated by the auditor, third parties and clients.
- Evidence can have persuasive (effective) info and some can have less persuasive, such
as client employee responses to auditor’s questions.
- Evidence is both info that supports and corroborates management’s assertions and any
info that contradicts those assertions.
- Evidence is gathered in all phases of the audit process and is used to help the auditor
make a variety of judgments and conclusions to:
1. Accept (or continue) the client
2. Plan the audit
3. Decide where there could be a Risk of material misstatement in the financial
statements
4. Develop an appropriate risk response
5. Conclude as to the type of audit report
Audit Evidence decisions: (LO-2)

- The 3 key decisions about what evidence to gather and how much:
1. Which audit procedures to use (the “nature”)
2. Which items to select for testing (the”Extent”)
3. When to perform the procedures (the “timing”)
Audit procedures: (LO-2)

- It is the detailed instruction for the collection of a type of audit evidence. The evidence
can be collected from a wide variety of sources, such as:
1. Physical inventory counts
2. Comparison of cancelled cheques with cash disbursements
3. Journal entries
4. Shipping documents
- The nature of the audit varies with the objectives of the phase and it refers to their
purpose (Risk assessment, test of controls, or substantive procedure) and type
(Inspection, observation, inquiry, confirmation, recalculation, reperformance or
analytical procedure).
Different purposes of the objectives: (LO-2)

- Risk assessment Procedures (Early phase): The purpose of risk assessment is to obtain
an understanding of the entity and its environment, including internal controls and
to identify and assess the risk of material misstatement in the financial
statements. Note: These procedures do not provide sufficient appropriate evidence on
which to base an audit opinion but are used for planning the audit, assessing risk of
lOMoARcPSD|3243319
material misstatement and developing appropriate risk response. The collection of

evidence for risk assessment procedures is done through:
1. Inquiries
2. Analytical procedures (Dollar amount)
3. Inspection
4. Observation
- Test of Controls (Tracking of Processes): An understanding of the internal controls is

used here by the auditor to evaluate the control risk at assertion level. If the auditor
understands the internal controls policies and procedures to be effective through the risk
assessment, he/she might use moderate or low level of assessment. Note: The
evidence collected via the risk assessment is not enough to have reasonable assurance
that the controls are operating effectively. The collection of evidence for internal controls
is done via:
1. Inquiry
2. Observation
3. Reperformance
- Substantive Procedures (Tracking of Monetary amounts): These procedures focus on

transactions and accounts and are designed to detect monetary misstatements. The
procedures include:
1. Tests of details: Look at the details of the transactions and accounts.
2. Analytical procedures: Broader and look at relationships amongst accounts and
transactions.
The auditors use these tests as supporting evidence for the figures and disclosures in
the financial statements and the focus is on the assertions, such the existence of a
certain account.
The Why, What, How and When of the audit procedures: (LO-2)
- Audit procedures need to be detailed and specific, as:
1. Why is it being done?
2. What is being done?
3. How is it being done?
4. When it is to be done?
- Which items to select: This choice depends on the auditor and the size of the audit
procedure to determine the most effective way of completing the audit by selecting the
items. The choice can be one of the following or a combination, as to:
1. Select all items in the population
2. Select Specific items in the population
3. Use audit sampling
4. Use the combo of the first 3.
lOMoARcPSD|3243319
- Timing: Normally, the financial statement audit is completed one to three months after
year-end. The timing decision is affected by client deadlines. The timing can influenced
by the following factors:
1. When the evidence will be the most effective, for example, periodic inventory
means the auditor will observe the inventory count at year-end to effectively
identify errors.
2. The availability of the audit staff.
Audit Program: (LO-2)

- The set of detailed instructions for the entire collection of evidence for an audit area or
an entire audit. This program includes audit procedures, sample size, items to select,
timing, and the relevant assertion (refer to table 5-3 on page 137).
Persuasive (Effectiveness) of evidence: (LO-3)

- GAAS requires the auditor to obtain sufficient appropriate audit evidence to be able to
draw reasonable conclusions on which to base the audit opinion.
- The determinants of Persuasiveness of evidence are:
1. Appropriateness is a qualitative judgment (Relevance and reliability): It is the
quality of evidence, as to what point the evidence is relevant and reliable in
meeting audit objectives. It deals solely with the audit procedures selected,
meaning that you cannot improve the appropriateness by selecting larger
samples or different population items. It can only improve by selecting audit
procedures that are relevant and provide more reliable evidence.
- Relevance: Deals with logical connections with the design of the audit
procedures and the assertion or control that is being tested. Basically is
comparing one set of information with a similar set of information to
determine whether the right procedure was respected. Also relevance of
information can be affected by the direction of the testing.
- Reliability: To determine if the evidence is worthy of trust or believable.
The reliability is affected by its source and nature. To increase the
reliability of audit evidence it is better to obtain from: IMPORTANT FOR
EXAM (refer to page 129)
1. Directly from the Auditor
2. From an Independent source ( needs to be at arm’s length)
3. From a qualified source (Bank or law firms)
4. From consistent or multiple sources
5. From client only if the internal controls are effective
6. Audit evidence that is Objective than Subjective
lOMoARcPSD|3243319
2. Sufficiency (Enough Evidence): The sufficiency is determined differently

depending on the auditor’s objectives. As for some objectives sufficiency is
determined by:
- A certain quantity of sample size
- The number and quality of procedures performed to meet the audit
objectives
- For analytical procedures, we must look at the degree of precision
- The two most important factors to consider for an auditor are:
1. Expectation of errors
2. Effectiveness of the client’s internal controls
3. Timeliness (Covering the appropriate period): Refer either to when it was

accumulated or to the period covered by audit. The evidence is more persuasive
when it is obtained as close to the balance sheet date as possible.
4. The combined effect: The persuasiveness of evidence must be evaluated on the

basis of the combination of sufficiency, appropriateness and timeliness. (refer to
table 5-1 for relationships between evidence decisions and effectiveness)
5. Persuasiveness and Cost: Auditor must consider the cost to obtain the effective
evidence. The auditor’s goal is to obtain a sufficient amount of timely, reliable
evidence to the information being verified and to do so at reasonable cost.
Specific Types of Audit Procedures: (LO-4)

- The audit procedures terms (defined by CAS 500) that you need to remember for the
exam purpose are:
1. Inspection:
It is a physical examination of two types of evidence:

- (1) Inspection or count of a tangible asset: It simply refers to verification of
an asset, if it actually exists (existence assertion) and ownership of the
asset (rights and obligations).
- (2) Inspection of the client’s documentation and records : These records

and documents are used by the client and they can be made available at
low cost. Also it helps with the objective of accuracy They can be:
1. Internal Document (less reliable): Only company has the copy of
such document or record, i.e Employee time report.
2. External Document (more reliable): Both company and customer
have the copy of such document, i.e Vendor’s invoice.
lOMoARcPSD|3243319
- There are 2 more types of documentation:

1. Vouching: When auditors use documentation to support recorded transactions or
amounts. It satisfies the occurrence objective.
2. Tracing: When auditors use the documentation to determine if the transactions or
amounts are included in the accounting records. It satisfies the completeness
objective.
- The difference between both is that the documentation has no

inherent value in terms of money and if it does it becomes an asset.
- Note: Financial statement assertions most affected by Electronic data
interchange (EDI) are completeness and accuracy.
2. Observation:
- Simply the auditor is looking at a process or procedure being performed
by others
3. External confirmation:
- It is when the auditor’s receipt of a written or oral response from an
independent third party verifying the accuracy of information.
- CAS 500 states that External Evidence is considered more reliable than
evidence obtained from within the company.
- But the auditor must make sure that the information is being provided
from a third party, which has the competence, are careful and not related
in any way to the company.
- Also the auditor must have full control in the preparation of the
confirmation, this is from; performing the mailing or receiving the
responses. If not this will defeat the purpose of independence and will
lower the reliability of the evidence.
4. Recalculation:
- Repeating or checking the mathematical accuracy of calculations
completed by the client.
5. Reperformance:
- It is simply a verification of the company’s procedures and internal control
system. An example would be comparing an approved price list with the
price on an invoice. Or the auditor reperforms the transfers of the same
information into more than one place to verify if it is recorded the same
way.
lOMoARcPSD|3243319
- Computer-assisted audit test (CAAT), is a process of checking posting

and summarization, which is done using computer software or using the
data or systems of the client.
- Test data: The use of fictitious transactions to determine whether client
programs are functioning as described.
- Generalized audit software: A software package that is used by the
auditor to run routines against client data. Commonly used packages in
Canada are: Audit Command Language for Personal Computers (ACL-
PC) and Interactive Data Extraction and Analysis (IDEA).
6. Analytical procedures:
- It is the use of comparisons and relationships to determine whether
account balances or other data appear reasonable.
- This procedure is used throughout the audit process, as part of planning
and assessing risk of material misstatement, in performing risk
response and in the completion phase of the audit.
- In order to perform the analytical procedures, you must:
1. Understand the client’s industry and business. This will help you
pinpoint the changes that can influence the audit planning.
2. Assess the Entity’s Ability to Continue as a Going-concern. You

must look at important ratios such as long-term debt to net worth
to figure out if the company has any likelihood of failure. If they do,
it requires an explanatory paragraph in the audit report.
3. Indicate the Presence of Possible Misstatement in the Financial

Statements: The term Unusual fluctuations when there are
significant unexpected differences indicated by analytical
procedures between the current year’s unaudited financial data
and other data used for comparisons.
- Attention Directing: it is an aspect of analytical
procedures, which helps the auditor identify areas that
have a risk of material misstatement and develop an
appropriate risk response in the form of more detailed
procedures in the specific audit areas where
misstatements might be found,
4. Provide Evidence Supporting an Account Balance: This is when a

predictable relationship exists and the analytical procedures is
based on reliable inputs, substantive analytical procedures
may be performed as part of the risk response stage.
lOMoARcPSD|3243319
- Substantive analytical procedures: A procedure which

the auditor develops an expectation of recorded amounts
or ratios to provide evidence supporting an account
balance.
- Depending on the significance of the account, the
predictability of the relationship and the reliability of
the underlying data, the substantive analytical
procedures may eliminate the need to perform detailed
tests of the account balance.
7. Inquiry: It is obtaining written or oral information from the client in response to

questions during the audit.
Appropriateness of types of Procedures: (LO-4)

- Look in the book page 137
Cost of types of Evidence: (LO-4)

- Look in the book page 138
Audit terms used in Audit procedures: (LO-4)

- Since Audit procedures are the detailed steps usually written in the form of instructions,
for the accumulation of the 7 types of audit evidence.
- Refer to table 5-5 on page 139
Design analytical procedures: (LO-5)

- The analytical procedure may be performed at any of 3 times in engagement:
1. In audit planning:
- This is the preliminary analytical review, which assist in determining the
nature, extent and timing of audit procedures
- This also helps the auditor identify significant matters requiring special
consideration later in the engagement.
2. During the risk response:

- Analytical procedures are mostly done as a substantive test in support of
account balances. These tests are frequently done in conjunction with
other audit procedures.
lOMoARcPSD|3243319
- The assurance provided by analytical procedures depends on the

predictability of the relationship, as well as the precision of the
expectation and the reliability of the data used to develop the
expectation.
3. During the completion of the audit:

- It serves as a final analytical review for material misstatement or
financial problems and helps the auditor take a final “objective look” at
the audited statements.
- The usefulness of analytical procedures as audit evidence depends on the auditor

developing an expectation of what a recorded account balance or ratio should be,
regardless of the types of analytical procedures used. Refer to table 5-5 for the terms
and types of evidence.
- Auditors develop an expectation of an account balance or ratio by considering

information from prior periods, industry trends, client-prepared budgeted expectations
and non-financial info, which then is compared to the client’s balances and ratios with
expected balances and ratios using one 1 or more of the following types of analytical
procedures:
1. Compare client and industry data:
- When you compare the client data with that of the industry, you get the
benefits of an aid to understanding the client’s business and an
indication of the likelihood of financial failure.
- A weakness of using the industry ratios for auditing is the difference
between the nature of the client’s financial info and that of the firms
making up the industry totals. The auditor must take into account the
unique characteristics of the client or else the comparison might be
useless.
2. Compare client data with similar prior-period data:

- You can use 1 of the following:
1. Compare the current Year’s balance with that for the Last year.
2. Compare the detail of a total balance with similar detail for the last
year.
3. Compute ratios and percentage relationships for comparison with
those of previous years (refer to table 5-7)
3. Compare Client data with client-determined expected results:

- Budgets are written records of the client’s expectations for the period and a comparison
of budgets with actual results may indicate whether or not misstatements are likely.
- The auditor must have 2 concerns when comparing the results:
lOMoARcPSD|3243319
1. Did the client plan the budget realistically?

2. Is there a possibility that current financial information in the budget was changed
by client personnel to conform to the actual results?
4. Compare client data with Auditor-Determined Expected Results:

- In this type of Substantive analytical procedure, the auditor develops an expectation
of what an account balance should be by:
1. Relating it to some other balance sheet or income statement account.
2. Making a projection based on some historical trend.
- CAS 520, describes the process of developing substantive analytical procedures:

1. Develop an independent expectation: The auditor makes assumptions by
identifying superficial relationships based upon his own knowledge of the
business, industry trends or other accounts.
2. Define a significant difference: The auditor must decide on the amount of
difference from the expectation that can be expected without further
investigation.
3. Compute the difference: In this step, the auditor compares the expected amount
to the recorded amount.
4. Investigate significant difference: The auditor will need to consider what evidence
and further audit procedures are needed in order to corroborate (or in simple
english, to support with evidence) management’s explanation.
5. Precision of the Analytical Procedures:

- The degree of precision of the analytical Procedures depends on the following:
1. Disaggregation of data:
- The more detailed the level at which the analytical procedure is
performed, the greater the potential precision.
2. Data reliability:
- The more reliable the data, the more precise the expectation, which is
based on the source of info, quality of controls in producing the info
and the independence of the source.
3. Plausibility and Predictability of relationship:

- Plausibility refers to whether the relationship to test the assertion makes
sense.
- Predictability depends on the factors used, the underlying assumptions
and data.
4. The type of analytical procedure:
lOMoARcPSD|3243319
- If the auditor needs a high level of assurance from substantive

analytical procedures, then he should develop a relatively precise
expectation by selecting the appropriate procedures.
Documentation: (LO-6)
- Audit documentation: The written or electronic audit documentation kept by the auditor to
support audit conclusions. This includes risk assessments, procedures or tests
performed, information obtained and conclusions reached.
Purposes of Audit documentation:

- The overall objective of audit documentation is to aid the auditor in providing reasonable
assurance that an adequate audit was concluded in accordance with GAAS. It is also
referred to as working papers.
- Proper controls need to be in place to ensure that the working papers are completed
within 60 days of the audit report date according to CAS 230 and that file is
archived at that time.
- Importance of the audit documentation:

1. Basis for planning the audit: The auditors use the working papers to plan the
current year’s audit adequately. The papers include diverse planning info as
conclusion on client risk analysis, descriptive info about internal control, a time
budget for individual audit areas, the audit program and the results of the last
year’s audit.
2. Record of the evidence Accumulated and the Results of the tests: The working
papers are the primary means of documenting that an adequate audit was done
in accordance with Canadian GAAS. If need be, the working papers can be used
to prove that the audit was planned and adequately supervised and the evidence
accumulated was appropriate, sufficient and timely and the auditor’s report was
proper considering the results of the examination.
3. Support for determining the proper type of Auditor’s report: The working papers
provide an important source of info to assist the auditor in choosing the
appropriate auditor’s report to issue in a given set of circumstances. The data in
the papers are useful for evaluating the adequacy of audit scope and the fairness
of the financial statements.
4. Basis for review: Primary frame of reference used by supervisory personnel to

evaluate whether sufficient appropriate evidence was accumulated to justify the
auditor’s report. Other purposes are:
- The basis for preparing tax returns and filing with provincial securities
commissions
lOMoARcPSD|3243319
- Communication tool to the audit committee and management concerning

various matters such as internal control weakness or operations
recommendations.
- Provide a frame of reference for training personnel and aid in planning
and coordinating subsequent audits.
File Archive: (File freeze)

- It is done when the file version of the audit file is assembled within 60 days after the date
of audit report. The file archive freezes the file, meaning that any other info that needs to
be added to the final version will go to a separate file. This is to ensure the integrity of
the audit conclusion.
- Content and organization: Refer to table 5-8 on page 148
Preparation of Working Papers: (LO-7)
- Working papers characteristics: refer to page 149
- Ownership of Working papers: They stay with the public accounting firm at the
completion of the engagement, unless the client has been subpoenaed by a court, the
client has the right to examine the working papers as legal evidence. Or if they are
required by the public accountants professional organization in connection with
disciplinary proceedings or practice inspection.
- Confidentiality of Working papers: The auditor cannot share any info in the working
papers. It can only be done with the express written permission of the client or if the
working papers are subpoenaed by a court or used in connection with disciplinary
hearings or practice inspection conducted by the auditor’s professional body.
EFFECT OF TECHNOLOGY ON AUDIT EVIDENCE AND AUDIT DOCUMENTATION: (LO-8)

- A major benefit of computerized analytical procedures is the ease of updating the
calculations when entries to the client’s statement are adjusted.
- The Software also facilitates tracking audit progress by indicating the performance and
review status of each audit area.
PROFESSIONAL SKEPTICISM, EVIDENCE AND DOCUMENTATION: (LO-9)

- Refer to figure 5-5 on page 153
For common financial ratios refer to page 154
lOMoARcPSD|3243319
lOMoARcPSD|3243319
CHAPTER 6 CLIENT ACCEPTANCE, PLANNING AND MATERIALITY
Main focus of this chapter will be on detailed audit planning, which includes gaining an
understanding of the client’s business and industry, performing preliminary analytical
procedures, developing an overall audit strategy and making a preliminary judgement about
materiality.
The importance of Audit planning: (LO-1)
Three main reasons for planning an audit engagements are:

1. To enable the auditor to obtain sufficient appropriate audit evidence
2. To help keep audit costs reasonable
3. To avoid misunderstanding with the client.
Here are the 3 risk terms that influence the conduct and cost of the audit:
1. Acceptable risk: A measure of how willing the auditor is to accept that the financial
statements may be materially misstated after the audit is completed and an unqualified
opinion has been issued.
2. Client business risk: The risk that the client will fail to achieve its objectives related to:
- Reliability of financial reporting
- Effectiveness and efficiency of operations
- Compliance with laws and regulations
-This can arise from factors such as regulatory changes or setting inappropriate objectives or
strategies.
3. Risk of material misstatement: The risk that the financial statements are materially
misstated prior to audit. It is based on the following 2 components:
- Inherent risk: A measure of the auditor’s assessment of the likelihood of material
misstatement.
- Control risk: It is the risk that material misstatement will not be prevented or
detected and corrected on a timely basis.
- Assessing these 3 risks is a vital part of audit planning as it helps determine the amount
of evidence that will need to be accumulated and the experience level of staff assigned
to the engagement.
- CAS 300.9 states that the auditor must develop an audit plan that includes the following
components:
1. The nature, timing and extent of audit procedures for the purpose of risk
assessment.
2. The nature, timing and extent of additional audit procedures, linked to the
individual audit assertions.
lOMoARcPSD|3243319
3. Any other audit procedures that are needed for the audit to be conducted in
accordance with GAAS.
CLIENT ACCEPTANCE AND CONTINUANCE: (LO-2)
Here are the prelim engagement activities to consider before planning:
1. Perform procedures to assist the auditor in deciding to Accept/continue the engagement:

- Quality control: policies put in place by the firm that it will only undertake
engagements where the firm:
1. Is competent to perform the engagement, including capabilities as well as
time and resources.
2. Can comply with relevant ethical requirements
3. Has considered the integrity of the client
- Investigate the new client

- Evaluate the existing client to decide for continuing serving them or not.
2. Consider Ethical requirements, including independence:

- Assess Competence: the auditor must consider whether there is staff with the
capabilities to perform the audit, the time and resources.
- Assess independence: The auditor must assess the five threats to independence
(Self-interest, self-review, advocacy, familiarity, and intimidation) and put in place
safeguards to the threat before accepting the engagement.
3. Identify the purpose of the financial statements:

- CAS 210, specifies 2 pre-conditions for an audit:
1. The use by management of an acceptable financial reporting framework
2. The agreement with management and those in charge of governance on
the terms of the engagement.
- Understanding the purpose of the financial statements requires the auditor to

consider the likely financial statement users and their intended uses of the
financial statements.
4. Obtain an understanding with the client about the terms of the engagement:
- CAS 210 requires that auditors obtain an understanding with the client in an
engagement letter.
lOMoARcPSD|3243319
- Engagement letter is a written agreement between the public accounting firm and
the client as to the terms of the engagement for the conduct of the audit and
related services.
- For possible scope limitations that would cause the auditor to decline an
engagement refer to TABLE 6-2 on page 171.
UNDERSTAND THE NATURE OF CLIENT’S BUSINESS AND ENVIRONMENT: (LO-3)

- CAS 315, requires the auditor to obtain knowledge of the entity’s business and its
environment in order to assess the risk of material misstatement.
- A thorough understanding of the client’s business, industry and knowledge about the
company’s operations, enable the auditor to identify those business risks that might
result in material misstatement. Then the auditor evaluates if the company has a quality
process in place to address those business risks.
- Figure 6-3 represents an overview of the approach to understanding the client’s

business and environment. In order to understand you need to know: Entity’s internal
control - Selection and application of accounting policies - Industry, regulatory and
external environment - Nature of entity (in terms of business operations and process,
management and governance, objectives and strategies and measurement and
performance). In this chapter we focus on Industry, regulatory and external environment
and Nature of entity’s business.
Industry, regulatory and external environment:

- In order to develop effective audit plans, the auditor must understand these 3
components of the company, as:
1. Risks associated with specific industries may affect the auditor’s assessment of
client business risk and acceptable audit risk and may even influence auditors
against accepting engagements in riskier industries.
2. Many risks are common to all clients in certain industries. Familiarity with those
risks aids the auditor in assessing their relevance to the client.
3. Many industries have unique accounting requirements that the auditor must
understand to evaluate whether the client’s financial statements are in
accordance with the applicable financial reporting framework.
- Overall points are:

1. Lack of understanding of the client’s business can lead to audit failure, as the
auditor needs to consider the factors such as the competitive environment,
supplier and customer relationships, and technological developments.
2. The auditor must know the regulatory environment as it includes the applicable
financial reporting framework and the legal and political environment of the
lOMoARcPSD|3243319
company. To assess the legal and political environment, the auditor would
consider factors such as legislation and regulation that significantly affect the
client’s operations, taxation and environmental requirements. You should
review the direct and indirect laws and regulation from chapter 4.
3. The auditor must understand the other external factors, such as general
economic conditions, interest rates and availability of financing and inflation or
currency revaluation.
Nature of Entity’s business:

- CAS 315, states that understanding the nature of an entity is important so that the
auditor can understand the organization’s structure and its ownership structure.
- The following are the components:
1. Business operations and processes:

- Factors to consider are; major sources of revenue, key customers and suppliers,
sources of financing, and information about related parties that may indicate areas of
increased client business risk.
- Tour of client’s facilities and Operations: It can be helpful to the auditor in obtaining a
better understanding of the client’s business operations, as it provides an opportunity to
observe operations firsthand and to meet key personnel.
- Identify related Parties: These transactions are important to identify, as there is a risk
that they were not valued at the same amount as they would have been if the
transactions had been with an independent party. This increases the inherent risk, which
means there is a high chance of material misstatements, because of both the accounting
disclosure requirement and the lack of independence between the parties.
2. Management and Governance:

- Since management establishes a company’s strategies and business processes, an
auditor should assess management’s philosophy and operating style, and its ability to
identify and respond to risk, as these significantly influence the risk of material
misstatements.
- To gain an understanding of the client’s governance system, the auditor should consider
the company’s code of ethics and evaluate the corporate minutes.
- Code of ethics: The auditor should become knowledgeable about the company’s code of
ethics and examine any changes and waivers of the code that have implications for the
governance system and related integrity and ethical values of senior management.
- Minutes of Meetings: The corporate minutes are the official record of the meetings of the
BOD and shareholders. They include summaries of the most important topics discussed
lOMoARcPSD|3243319
at these meetings and the decisions made by the directors and shareholders. This
information affects the inherent risk.
3. Client Objectives and strategies:
- Auditors should understand client objectives related to:

1. Reliability of financial reporting
2. Effectiveness and efficiency of operations
3. Compliance with laws and regulations
- Despite management’s best efforts, business risks come up that threaten management’s
ability to achieve its objectives. This can influence the financial statements.
- As for Laws and regulations, the auditor should be familiar with the terms of client
contracts and other legal obligations.
4. Measurement and Performance:
- Risk of material misstatement may be increased if the client has unreasonable

objectives or if the performance measurement system encourages aggressive
accounting. As the employees may record sales before they even occurred and the
occurrence and cut-off assertions might have a high risk of material misstatement.
PERFORMANCE PRELIMINARY ANALYTICAL REVIEW: (LO-4)
- Auditors are required to perform prelim analytical procedures as part of the risk
assessment procedures to better understand the client’s business and industry and to
assess the client’s business risk.
- An example would compare the client’s ratios with those of industry to identify the areas
with increased risk of material misstatements that require further attention during audit.
- Another procedure is :
1. Horizontal Analysis: In which the account balance is compared to the last period
and the percentage change in the account is evaluated.
2. Vertical Analysis: In which financial statement numbers are converted to

percentage of a common base, also called common-size financial statements.
This analysis allows comparison between companies or for the same company
over different periods, revealing trends and providing insight into how
different companies compare.
DEVELOP OVERALL AUDIT STRATEGY: (LO-5)

- The overall audit strategy helps the auditors establish the scope, timing and direction
of the audit. It lays out:
lOMoARcPSD|3243319
1. Types and allocation of resources to be deployed for specific audit areas

2. Timing of audit procedures
3. Materiality
- This strategy takes into account the nature of the client’s business and industry,
including areas with greater risk of material misstatements.
Breakdown of the lay-outs:
1. Resources Required for Engagement:

- Select staff for engagement: In order to ensure the audit effectiveness and efficiency and
to meet quality control standards by GAAS, the auditor needs to gather the appropriate
staff with the right level of competence and experience.
- Evaluate the need for outside Specialists: CAS 620, requires the auditors for selecting
specialists and reviewing their work (i.e lawyers). Keep in mind that the use of a
specialist does not affect the auditor’s responsibility for the audit and the audit report
should not refer to the specialist unless the specialist’s report impacts the audit opinion.
- Evaluate Whether Internal Audit Work can contribute: If the company has internal
auditors, the external auditor can ask them to either use their internal audit report or
direct assistance. (CAS 610) But the auditor must make sure that the internal auditors
have the competence, integrity and objectivity about their work. The general guideline is
that the higher the risk of RMM the more restricted the nature and extent of work should
be given to the internal auditors.
- Evaluate Reliance on Other Auditors: In cases where the client has multiple locations or
subsidiaries the audit firm may need to engage other auditors.
2. Timing of engagement: Depends on the client reporting deadlines, practical matters,

effectiveness of the client’s internal control and the risk of material misstatement in
specific accounts.
3. Materiality: (LO-6):
- If a misstatement or omission changes the economic decision of the users, then
it is considered material.
- The materiality is very much subjective as one item could be material for a client
and the same item could be immaterial for another. Therefore it depends on the
size of the organizations. CAS 320.2 states in determining overall materiality:
1. Judgments are made in light of circumstances surrounding the company
and are affected by the size and nature of the misstatement or combo of
both.
2. Judgments about what is material to users of the financial statements are
based on a consideration of the common financial information needs of
users as a group, not each user individually.
lOMoARcPSD|3243319
DETERMINE OVERALL MATERIALITY: (LO-7)

- Overall materiality by definition means that the auditor must determine materiality for the
financial statements as a whole.
- The 3 steps for determining are:
1. Select an appropriate Benchmark:

- It is selected upon understanding the users needs of the audit report.
- CAS 320, states the factors that affect the selection of an appropriate benchmark
as follows.
- Elements of the financial statements
- Whether there are items on which the users tend to focus
- Past history with audits
- The nature of the entity and the industry
- The entity’s ownership structure and the way it is financed
- The relative volatility of the benchmark
- Identify the financial data: refer to book page 187
2. Determine the benchmark Percentage:

- You can refer to table 6-6 on page 187 to have some starting threshold to set a
percentage. But the reality is that the percentage depends on the user’s
sensitivity or tolerance for misstatements.
- User’s sensitivity or tolerance to misstatements depend upon the purpose of the
financial statements
3. Justifying the materiality decisions:

- CAS 320, The auditor must use his/her professional judgment in materiality, as
there are specific guidelines.
Additional steps:
- Determining trivial amounts: Matters that are clearly inconsequential, whether taken
individually or in aggregate and whether judged by any criteria of size, nature or
circumstances.
- Revise Overall Materiality
DETERMINE PERFORMANCE MATERIALITY: (LO-8)
- This is an amount less than overall materiality that the auditor uses to plan and conduct
the financial statement audit engagement, to reduce the likelihood that uncorrected
errors exceed materiality. It serves for the following to functions:
lOMoARcPSD|3243319
1. To reduce aggregation risk, which is the risk of accumulated uncorrected and

undetected misstatements individually below materiality will be above the overall
materiality for the financial statements
2. To provide a “safety buffer” against the risk of undetected misstatements
- The auditor sets a performance materiality as a percentage of overall materiality and the
auditor must be careful as if it is set too high, the auditor might not perform enough
procedures to detect material misstatements, vice-versa.
- Considering factors when setting performance materiality are:

1. Overall engagement risk is considered high
2. Fraud risks
3. A history of identified misstatements in prior period audits
4. Increased number of accounting issues that requires significant judgement and
more estimates with high estimation uncertainty
5. Identified misstatements during the course of the current year audit that indicate
that the remaining margin for possible undetected misstatements is insufficient
6. A deficient control environment
7. A history of material weakness, significant deficiencies and high number of
deficiencies in internal control.
8. High turnover of senior management or key financial reporting personnel
9. The entity operates in a number of locations.
- It is used in the planning stage to identify what areas need to be audited and how much
and what type of work is needed and to calculate sample sizes.
- Adjusting Performance Materiality according to particular accounts
DETERMINING SPECIFIC MATERIALITY: (LO-9)
- Refers to materiality level based upon a specific group of users’ needs and determined
for a particular class of transactions, account balance or disclosure.
APPLYING MATERIALITY- EVALUATING RESULTS AND COMPLETING THE AUDIT: (LO-10)
- In this section we learn the relationship of applying the materiality to the decisions
related to evaluating the results, completing the audit, and reporting.
1. Accumulating Misstatements During the Audit:
lOMoARcPSD|3243319
- CAS 450, requires the auditor to request that uncorrected misstatements be corrected,
while clearly trivial amounts can be ignored when proposing adjustments to the client
management.
- Here the 3 categories of misstatements:
1. Factual misstatements: The ones that are backed up by facts and are clear
misstatements.
2. Judgmental misstatements: The differences in management judgments about
recognition, measurement, presentation and disclosure in the financial
statements and the auditor’s judgment.
3. Projected misstatements: The auditor’s best estimate of misstatements in
populations, involving the projection of misstatements identified in audit samples
to the entire populations from which the samples were drawn.
2. Assessing the materiality of misstatements:

- In assessing the materiality of misstatements, the auditor will consider both the
quantitative and qualitative nature of misstatements
- Refer to table 6-6 for some factors to consider before judging a quantitative is
immaterial.
lOMoARcPSD|3243319
CHAPTER 7 ASSESSING THE RISK OF MATERIAL MISSTATEMENT
Audit Risk: (LO-1)

- The risk of material misstatement is highly based on professional judgment therefore
these risks need to be treated carefully to achieve the highest quality of audit.
- The RMM exists at 2 levels: (1) At the overall financial statement level and (2) at the
assertion level for classes of transactions, account balances and presentation and
disclosures.
Assessing RMM at The Overall Financial statement level:

- It is important for the auditor to consider risks at the overall financial statement level, as
these risks will increase the RMM across a number of accounts and assertions for these
accounts.
- Factors that may increase RMM are:
1. Deficiencies in management’s integrity or competence
2. Weak entity level controls, such as ineffective oversight by the BOD or
inadequate accounting systems and records
3. Declining Economic conditions or significant changes in the industry may
increase the RMM.
Assessing RMM at Assertion Level:

- The auditor needs to assess the RMM at assertion level for classes of transactions,
account balances, presentation and disclosure in order to determine the nature, timing
and extent of further audit procedures.
- The RMM assessment is done at 2 components:
1. Inherent risks: Auditor’s measurement of material misstatement before looking
into client’s internal controls
2. Control risk: The assessment of material misstatement that cannot be prevented
or detected on a timely basis by the internal controls.
Develop an Appropriate Risk Response:

- Auditor develops 2 risk responses; 1.Overall risk response for pervasive (or spreading)
risks at the financial statement level and risk response at assertion level.
- These involve tests of controls and substantive audit procedures that will test the specific
assertions regarding the relevant classes of transactions, account balances and
disclosures.
lOMoARcPSD|3243319
RISK ASSESSMENT PROCEDURES: (LO-2)
Risk assessment procedures:
1. Inquiries of Management and Others Within the entity: Communicating with Staff
members, those charged with governance, internal auditors and others to receive a
variety of information about the entity and its environment.
2. Analytical Procedures: Refer to Chapter 6, but in general the analytical procedures help
the auditor identify unusual amounts, ratios, trends that might reveal unusual
transactions or events having audit implications.
3. Observation and inspections: Refer to Chapter 5, in general this procedure is about the
auditor going to the entity and observing the work firsthand and the inspection of
documents such as the organization’s strategic plans. This procedure helps the auditor
learn about the business and its environment.
4. Discussions Among Engagement Team Members: This helps to brainstorm ideas and
get insight from the engagement partners and key team members about the entity and
its environment. The underlying factor is building the right team and providing the right
support.
5. Other Risk Assessment Procedures: This procedure is in reference with using external
sources such as predecessor auditors, credit agencies, etc.
IDENTIFICATION OF SIGNIFICANT RISKS: (LO-3)
Significant Risk: It is an identified and assessed risk of material misstatement that, in the
auditor’s professional judgment, requires special audit consideration.
To identify significant risk the auditor must consider (CAS 315.28):
1. Risk fraud
2. Risk related to recent significant economic, accounting, or other developments
3. Complexity of transactions: The client’s lack of experience and expertise in the

underlying accounting treatment and estimation process will increase the RMM.
4. Significant transactions with related parties
5. Degree of subjectivity in the measurement of financial information, especially

measurements involving a wide range of measurement uncertainty
lOMoARcPSD|3243319
6. Non-routine Transactions and Related Party transactions: Transactions that are unusual,
either due to size or nature, and that are infrequent in occurrence.
CONSIDERING FRAUD RISK: (LO-4)
As we know detecting material misstatements due to fraud are very hard, if not impossible.
Therefore, CAS 240 outlines the following procedures in order to assess fraud risk:
1. Discuss with audit team members the risks of material misstatement due to fraud: simply
discussing with more experienced audit team members and asking the right questions.
They should include the external and internal factors of committing fraud such as:
- An incentive or pressure for management to commit fraud
- Provide the opportunity for fraud to be perpetrated
- Indicate a culture or environment that enables management to rationalize
fraudulent acts.
2. Make inquiries to management, those in charge of governance and others regarding

processes for identifying and responding to fraud risk.
3. Evaluate unusual and unexpected relationships identified when performing analytical

review procedures.
4. Evaluate the risk for revenue fraud and management override and understand period-
end.
CONDITIONS FOR FRAUD: (LO-5)
CAS 240, presents the fraud triangle, which represents the 3 conditions under which the fraud
can be committed: (these are risk factors for fraudulent reporting)
1. Incentives/Pressures: Management or other employees have incentives or pressures to
commit fraud
2. Opportunities: Circumstances provide opportunities for management or employees to

commit fraud.
3. Attitudes/Rationalization: An attitude, character, or set of ethical values exists that allows
management or employees to intentionally commit a dishonest act, or they are in an
environment that imposes pressure sufficient to cause them to rationalize committing a
dishonest act
lOMoARcPSD|3243319
Risk Factors for Misappropriation of Assets:

- The same Fraud Triangle applies, but emphasis is placed on individual incentives and
opportunities for theft.
RESPONDING TO RISKS OF MATERIAL MISSTATEMENTS DUE TO FRAUD: (LO-6)
Once the RMM due fraud is identified, it need to be respond at 3 levels (CAS 240):
1. Overall responses:
- This is relating the adjustments to the overall audit strategy. If RMM due to has
increased, the audit team might need to add a fraud specialist.
- The auditors should give more importance to professional skepticism, in terms of
selection and extent of documentation examined in support of transactions.
- BE CAREFUL about the management’s choice of accounting principles as most
fraud is done in the revenue recognition.
- Fraud perpetrators are often knowledgeable about audit procedures and for this
reason, the auditors need to incorporate unpredictability factors in the audit
strategy.
2. Responses at the assertion level:

- The auditor needs to design appropriate audit procedures to respond to specific
fraud risks related to the account being audited and type of fraud risk identified.
- The auditor may need to change the nature, timing and extent of audit
procedures to obtain more reliable and relevant audit evidence.
3. Responses related to management override:

- As the management has the power to override controls, they are more likely to
commit fraud. In order to detect it, auditors need to perform 3 procedures:
1. Examine Journal Entries and other adjustments for evidence of possible
misstatement due to fraud.
2. Review accounting estimates for biases
3. Evaluate the business rationale for significant unusual transactions.
THE AUDIT RISK MODEL: (LO-7)

- It is a conceptual model which auditors use as a planning tool to determine how much
and what type of evidence to collect for each relevant class of transactions, account
balances and disclosures. The model reflects the relationship among acceptable audit
risk (AAR), Inherent risk (IR), Control Risk (CR), and detection risk (DR).
lOMoARcPSD|3243319
DR: The risk that the audit evidence for an audit assertion will fail to detect misstatements
exceeding performance materiality.
AAR: how willing the auditor is to accept that the financial statements may be materially
misstated after the audit is completed and an unqualified opinion has been issued.
Audit Assurance: A complement to acceptable audit; An AAR of 2% is the same as audit

assurance of 98%, also called overall assurance and level of assurance.
Distinction Among risks in the audit risk model:
- AAR: The auditor decides the risk the PA firm is willing to take that the financial
statements are misstated after the audit is completed, based on certain client-related
factors.
- Inherent and Control risk are based on auditor’s expectations or predictions of client
conditions
- DR is dependent completely on the other 3 risks.
ASSESSING ACCEPTABLE AUDIT RISK: (LO-8)
- The auditor needs to consider the factors related to engagement risk, which is the risk
that the auditor will suffer harm after the audit is finished even if the audit report is
correct. (i.e the client declares bankruptcy and therefore there is a likelihood of a lawsuit
against PA firm)
Factors Affecting AAR:
1. The degree to which external users rely on the statements: If the external rely heavily on
the financial statements, the auditor must decrease AAR. To judge the degree to of
reliance, consider the following factors:
- Client’s size
- Distribution of ownership
- Nature and amount of liabilities
2. The likelihood that a client will have financial difficulties after the audit report is issued:
In case the auditor thinks that the client will fail financially or suffers heavy losses, then the
engagement risk will increase, and AAR will decrease. Because if the client has to declare
bankruptcy, the auditor might need to defend his quality of the audit report. Here are some
factors that help the auditor to assess the entity’s ability to continue as going concern:
lOMoARcPSD|3243319
- Liquidity position: Shortage of cash and working capital

- Profits (losses) in previous years
- Method of financing growth: refers to debt of the client
- Nature of the client’s operations:
- Competence of Management
3. The auditor’s evaluation of management’s integrity:

- The auditor must be aware of the client’s integrity as the AAR will be dependent.
ASSESSING INHERENT RISK: (LO-9)

- Inherent risk is considered very important as the auditor predicts where the
misstatements are most and least likely to occur in the financial statement segments.
This info affects the amount of evidence that the auditor needs to accumulate, the
assignment of staff and the review of the audit documentation.
Factors affecting inherent risk or simply increasing inherent risk at assertion level:
1. Nature of the client’s business: (i.e obsolescence of assets and client business risk)
2. Results of previous Audits: Misstatements found in the last year’s audit have a high
chance of recurring as many types of misstatements are systemic in nature and
company’s are often slow to make changes.
3. Related parties
4. Complexe or Nonroutine transactions
5. Judgment required to correctly Record account balances and transactions
6. Makeup of the population:
7. Factors Related to Fraudulent financial reporting (management) and (employee)

Misappropriation of Assets.
8. Management motivation and biases
9. Initial Versus repeat engagement: Refers to the experience in the field of auditing for
auditors. New versus Old auditors.
RELATIONSHIP OF RISKS TO EVIDENCE AND FACTORS INFLUENCING RISK: (LO-10)
- Refer to figure 7-5 on page 231
lOMoARcPSD|3243319
- Here are the other ways an auditor can change the audit to respond to risks:
1. The engagement may require more experienced staff, if the AAR is low.
2. The engagement will be reviewed more carefully than usual when AAR is low.
Audit Risk for segments: Refer to book page 232.
Measurement Limitations:
- The difficulty in measuring the components of the model, as the risk factors are highly
subjective. Refer to table 7-5 on page 233.

Adms 4551 PDF

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Adms 4551 PDF

Hochgeladen von

Copyright:

Verfügbare Formate

lOMoARcPSD|3243319

Acco 360 - This is the summary of chapters 1, 2, 4, 5,6 & 7 -

StuDocu is not sponsored or endorsed by any college or university

Accounting(Accountants) V.S Auditing (Auditors):

Economic demand for auditing:

Causes of information risk:

- Remoteness of information: Relying on information provided by others, which can

- Complexe exchange transactions: Refers to the difficulty of recording transactions that

Reducing information risk:

2. Compliance audit: To determine whether a company complied with specific laws,

Forensic Accountants and Fraud auditors:

- Fastest growing areas within the audit world.

The General characteristics of an Assurance Engagement:

Review v.s Audit of historical statements:

Staff Levels and responsibilities:

Requirements for public accountant:

Organizations affecting the Canadian Public accounting profession:

Canadian Public Accountability Board (CPAB):

Canadian Auditing Standards: (CAS)

2. Personal Responsibilities: Possess appropriate competence and capabilities,

The Drivers of Audit Quality:

Chap 4 The audit process and risk assessment

Objective of conducting an audit of financial statements:

1. Responsibility for adopting a sound and appropriate financial reporting framework

- As the management has the privilege of determining which disclosures it considers

- In public companies, CEO and CFO must certify that:

Responsibilities of those charged with governance:

Material Vs Immaterial misstatements:

Errors V.s Fraud:

Auditor’s Responsibilities for Detecting Material Errors:

Auditor’s Responsibilities for Detecting Material fraud:

Fraudulent Financial reporting (Management) V.s Misappropriation of Assets (Employee):

Auditor’s responsibility for Related Party Relationships and Transactions:

Auditor’s responsibility to consider Laws and Regulations:

3. Whether an act constitutes non-compliance (illegal acts) is decided by a

Auditor’s responsibility to Evaluate Going Concern:

Framework for professional judgment:

- Here is the FRAMEWORK for professional judgment: Auditor’s Mindset

Professional Skepticism: refer to page 97

Financial statement Cycles:

- Cycle approach to segmenting an audit: A method of dividing an audit by keeping closely

Setting Audit Objectives:

Management assertions and audit objectives: IMPORTANT

- Management assertions are directly linked to accounting standards (ASPE or IFRS), as

Linking assertions with audit objectives:

Assertions and transaction-related audit objectives:

- The auditor must ask: “Are transactions recorded correctly?”The auditor’s

Assertions and Balance-related Audit objectives:

2. Rights and obligations: (Ownership)

4. Valuation : (Impairment of assets)

- The allocation balance-related objective is closely linked to the

1. Accuracy of adjustment/Recorded amount:

2. Timing of the adjustment:

3. Adjustment to correct the accounts: (Retro and prospective)

Assertions and Presentation and disclosure-related audit objectives:

3. Accuracy and Valuation:

unfunded pension obligations and the assumptions underlying these

4. Classification and Understandability:

Developing Presentation and Disclosure-Related Audit Objectives:

The Audit process: How audit objectives are met:

Now going back to the audit process:

Chap 5 Audit Evidence