-Risk assessments
-Test internal controls. because if internal controls
4 phases of financial statement
audits
Analytical procedure
Auditor's responsibility
Balance-Related Audit Objectives
Capital acquisition and repayment
are tested, it can reduce other tests to be done, AND
doing substantive tests of transactions
-Detail testing: sending confirmation -- proving to
the dollar that the balance on the balance sheet is
stated correctly
-Complete audit and issue audit report
Example: Look at current and prior year financial,
and if transaction has a huge fluctuation, it is
investigated. Needs to make sense. Or create an
expectation for the account, then test it, which tests
reasonableness.
Evaluations of financial information through analysis
of plausible relationships among financial and non-
financial data
Conducting audits in accordance
with GAAS (private) or PCAOB
(public)
Have professional skepticism
Following procedures to find most
errors and fraud (but not all)
...
This is your equity.
Income statement: interest expense
Balance sheet:
cash
Notes payable
LT liabilities...
 Common example of
An employee steals inventory
misappropriation of assets?

Describe the key elements of an

effective professional judgment ...
process.

Describe the need to maintain

professional skepticism when ...
conducting an audit

Describe why the auditor obtains

assurance by auditing transactions
...
and ending balances, including
presentation and disclosure.

Distinguish among the

management assertions about ...
financial information
Explain the relationship between
audit objectives and the ...
accumulation of audit evidence

Think in terms of journal entries. How

How should you think about cycle
audits?
journal entries are recorded, and in
which accounts.
What do you book in relation to making
a sale? or some other segment

IAS AICPA auding standards

...
Assertions

Identify the benefits of a cycle

...
approach to segmenting the audit

Inventories and related allowances

Inventory and warehousing cycle
COGS
 Link balance-related and
presentation and disclosure-
...
related audit objectives to
management assertions

Link transaction-related audit

objectives to management
...
assersions for classes of
transactions

includes payroll payable or

Payroll and personnel cycle
expense

PCAOB Auditing Standards

...
Assertions

Adequacy of disclosure
per GAAP
Classification of accounts
Presentation and disclosure
All financial statements are included
(BS, IS, SE, CFS, Comprehensive
Income) as well as notes to financial
statements
 Are there real rights to assets? Are there existing
obligations/liabilities.

Liability: commitment, agreement/arrangement,

Rights and obligation guarantee. Most of this are in footnotes. Is it
necessary to disclose

Rights

Substantive test AND internal Test for control and for dollar
control tests amount

Specific procedures designed to test

for monetary misstatements in the
balances in the financial statements
Tests of Details
Prove out to the dollar if something
is fairly stated

Occurrence
Completeness
Transaction-Related Audit
Accuracy
Objectives
Classification
Cutoff

Missappropriation of assets
Types of fraud
Fraudulent financial reporting
 What are audit objectives? in
regards to balance sheets and
income statement?
What are management assertions?
What are the audit objectives?
What are the cycles in an audit?
What are the objectives of
conducting an audit of financial
statements and an audit of internal
controls?
Balance sheet: ending balances
Income Statement: Transactions
Management is telling us things about the
financials. They assert that transactions have
occurred during the period, balances are
correct, and presentation and disclosure.
Audit objectives are to prove that
management assertions are correct, fairly
stated, and reasonably disclosed
Provide reasonable assurance that
there are not material
misstatements on financials
Sales and collection
Acquisition and Payment Cycle
Payroll and Personnel Cycle
Inventory and Warehousing Cycle
Capital Acquisition and Repayment
Cycle
The objectives of conducting an audit of financial statements is
to provide financial statement users with an opinion by the
auditor on whether the financial statements are presented fairly,
in all material respects, in accordance with the applicable
financial accounting framework.
The objective of an audit of internal controls is to ensure that
future errors and potential fraud is prevented.
An auditor's opinion enhances the degree of confidence that
intended users can place in the financial statements.

What are the responsibilities of
auditors on illegal acts?
What are the steps to develop
audit objectives?
What are the three buckets of
audits objectives?
What does Existence and
Occurrence mean?
What do you do when you
uncover an illegal act?
If the law directly impacts financial statements, the auditor is responsible
As it relates to other things (environment), the auditor can't regulate these
things.
If there is no direct affect, the burden of responsibility is less for auditing it.
You just need to inquire management about it.
You're responsible for asking the questions.
"Any violations on environmental acts?" If they say no, and they haven't had
communication with those agencies, then auditors are off the hook. If they
say yes, then auditors are on the hook.
1. Understand objectives and responsibilities for the audit
2. Divide financial statements into cycles
3. Know management assertions about financial statements
4. Know general audit objectives for classes of transactions,
accounts, and disclosures
5. Know specific audit objectives for classes of transactions,
accounts, and disclosures
Transactions
Ending Balance
Presentation and disclosure
Existence: Balance related objectives.
Does it exist at some point in time?
Occur: Related to income statement and
transaction. Did it really happen during
the period?
Obtain an understanding of the nature and
circumstance of the act. (do your research, find
complete facts)
Find more information on the effects on the financial
statements
Then, go to management (go one level above where
the issue occurred.

What is completeness?
What is cutoff?
What is management's
responsibility?
What is management's
responsibility for the financial
statements versus the auditor's
responsibilities for verifying those
statements?
What is professionally skeptical?
Is something missing? Is
everything recorded and
represented?
This is important when looking at
understatements.
Focused on balance sheet and
when something is reco
Financials are disclosed correctly in
presentation and disclosure
Implementing and monitoring
internal controls
Certification of financial statements
Create management reports
Management's Responsibility:
-Adopting sound accounting Policies
-Maintaining adequate internal control
-Making fair representations in the
financial statements
Auditor's Responsibility:
Having a questioning mind. Neither
believing or disbelieving.
What is the auditor's responsibility
for discovering material
...
misstatements due to fraud or
error?

Acquisition and payment, because

it covers most of the expense
accounts, and things you acquire
What is the biggest cycle?
(besides inventory).

Has the most GL accounts

covered

What is the cycle approach to Breaks audit down into segments

doing an audit? to make it easier to manage.

What is the difference between

Intent
fraud and error?

Test debit balances for over

What is the main testing done on statements
the balance sheet? Test credit balances for
understatement
 Test debits for under statements
What is the main testing done on Test credits for over statement
the income statement? (Opposite of testing the balance
sheet)

Did something get recorded in the

What is timing?
period in which it occurred

Has to do with numbers. Is the

What is valuation accuracy? amount correct, and calculation
extended correctly?

Is it valued correctly? Gaap is

What is valuation (gross) properly applied, properly
classified

Seeing if something is reported at

a correct value? Is it appropriate?
Best Estimate of real worth.
What is valuation net?
Applies to receivables, inventory
(NRV, LCM).
 Two people working together to
What's collusion? comit fraud. Makes it harder to find
fraud

You conducted an audit in

What's your best defense against
accordance with auditing
not finding fraud?
standards

If you know controls are terrible.

When is it not efficient to test It's too difficult and expensive if
internal controls? you know that they sucks, and end
up doing more testing anyway

Which general ledger account hits

every cycle with the exception of Cash
the inventory cycle?

Which is more difficult to detect,

Fraud
errors or fraud?
Why do larger public companies
It is required by section 404 of the
require an audit on internal
Sarbanes-Oxley Act.
controls?