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CLIENT EVALUATION
AUDIT RISK ASSESSMENT
Course Content
GENERAL
1)
2)
3)
4)
AUDITING PROCESS
PLANNING
5) Client evaluation & planning the audit (Chapter 8)
MIDTERM EXAM (APRIL 8)
6) Audit risk, materiality concepts and audit evidence (Chapters 9 & 10)
SCHOOL BREAK (April 16-May1)
DELIVERY
7)
Control risks & tests of controls and Designing substantive procedures (Chapter 11 & 12)
8)
Auditing transactions & balances 1 (Chapters 14 & 15)
9)
Auditing transactions & balances 2 (Chapters 16 & 17)
COMPLETION
10) Completing the audit (Chapter 18)
11) The Auditors report (Chapter 7)
FINAL EXAM
Audit Risk
Audit risk is the risk that an auditor
expresses an inappropriate audit opinion
when a financial report is materially
misstated
In other words, it is the risk of not
detecting material misstatements.
Therefore, all audit work should focus on
preventing this risk. Audit planning is
critical from this perspective.
2. Planning the
Audit
Risk
Assessme
nt
3.Execution of
the Audit
Program
Risk
Response
4. Completion
of the Audit and
the Auditors
Report
Reporting
CLIENT
EVALUATION
Engagement Letter
Phase 4 - Reporting
2. Planning the
Audit
Risk
Assessme
nt
3.Execution of
the Audit
Program
Risk
Response
4. Completion
of the Audit and
the Auditors
Report
Reporting
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(2)
Ethical & legal
considerations
(3)
Engagement
Evaluate
integrity of
management
Evaluate
independence
Prepare
engagement
letter
Identify special
circumstances
and unusual risks
Assess
competence
to perform audit
Determine ability
to use due care
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in
1. Client
Evaluation and
Getting the
Engagement
2. Planning the
Audit
Risk
Assessme
nt
3.Execution of
the Audit
Program
Risk
Response
4. Completion
of the Audit and
the Auditors
Report
Reporting
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Stages of an Audit
Overview of the audit
Risk
Assessme
nt
Understandi
ng the
client
Risk
identificati
on and
strategy
Risk
Response
Risk and
materiality
assessmen
t
Test of
Controls
Substantiv
e Testing
Reporting
Conclusio
n and
forming
an opinion
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Make preliminary
judgments about
materiality levels
Develop preliminary
audit strategies
for significant
assertions
Consider the
audit risk
Obtain an
understanding
of the entitys internal
control structure
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Gaining an Understanding of a
Client
According to ISA (NZ) 315, gaining an
understanding of the client is necessary to
assess the risk that the financial report contains
a material misstatement due to:
Gaining an Understanding of a
Client
Stages
(1) ENTITY LEVEL
(3) ECONOMIC
LEVEL
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Ownership
structures
Major suppliers
Sources of
financing
Client reputation
and operations
Major customers
ENTITY
LEVEL
Warranties and
discounts
Client relations
with employees
International
Transactions
Capacity to adapt
to changes in
technology
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INDUST
RY
LEVEL
Level of
Governm
ent
regulatio
n
Client
Reputati
on
Level of
Governm
ent
Support
Additional Special
Topics that impact
Audit Planning
Regulatory issues
The regulatory environment can have direct
economic consequences or affect the accounting
and disclosure requirements.
Specific regulatory requirements for particular
industries must be considered.
The auditor should be aware that noncompliance with relevant laws and regulations
may materially affect the financial statements.
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Performing analytical
procedures
Analytical procedures involve a study and comparison
of relationships among data to identify expected or
unexpected fluctuations and other unusual items.
Identify fluctuations in accounts that are inconsistent
with auditors expectations based on their understanding
of the client ISA (NZ) 520
Analytical procedures can be conducted throughout
the audit process
Risk assessment phase risk identification
Risk response phase estimating account
balances
Reporting overall37
review
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Enhance the
understandi
ng of the
client
Highlight
unusual
fluctuations in
accounts
Identify accounts at
risk of material
misstatement
Performing analytical
procedures
4. RATIO ANALYSIS
Assess relationship between various financial report balances, and
between them and non-financial items (Profitability ratios, Liquidity
ratios, Solvency ratios)
Consideration of fraud in
planning
The importance of considering fraud in the planning of an
audit has increased in recent years
ISA 240
The auditor shall evaluate whether the information
obtained from the other risk assessment procedures
and related activities performed indicates that one or
more fraud risk factors are present.
Auditor must asses risk of material misstatement due to fraud
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Fraud Risk
Auditor adopts attitude of
professional scepticism
Maintaining an independent questioning
mind
Search thoroughly for corroborating
evidence to validate information
provided by the client
Dont just rely on past experience with
client
Fraud Risk
Indicators (Red Flags) of Possible Fraud:
Fraud Risk
Two Types of Fraud:
1. Financial reporting fraud
Fraud Risk
I need to meet my monthly targets!
Incentive/
Pressure
FRAU
D
RISK
Rationalisati
Opportunity
on
relationships
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fraud
Judging Managements
Going Concern Assumptions
https://www.youtube.com/watch?v=yyy5Uq4zEbo
Corporate Governance
Corporate governance is the rules,
systems and processes within companies
used to guide and control activities
IT Environment
Auditor should consider particular risks faced by
client related to IT (ISA (NZ) 315) such as:
Audit Documentation
Audit Documentation
Auditor must document each stage of
the audit in working papers (ASA 230;
ISA 230)
Provides evidence of work completed,
details evidence gathered to support
opinion
Include in a working paper
Audit Documentation
Purpose and function of working papers:
Demonstrate that the audit was performed in
accordance with the auditing standards.
Monitor the progress of the audit.
Provide a guide to the planning and performance
of subsequent audits.
Record the nature, timing and extent of audit
procedures performed.
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Audit Documentation
Working paper files include:
Permanent file
Current file
Working trial balance
Schedules and analyses
Audit memoranda and corroborating information
Proposed adjusting and reclassifying entries
Audit program
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Audit Documentation
Permanent File
Client information and documentation that apply to
more than one audit
Current File
Client information and documentation that apply to
current audit
Evidence gathered for this audit