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U of U ACCTG 5510 - Audit Planning and Risk
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ACCTG 5510 1st Edition Lecture 6 Outline of Last Lecture I Audit preparation II Cycles III Setting Audit Objectives IV Financial Statement Assertions V Audit Decisions VI Documentation Outline of Current Lecture I Audit Planning II Client Acceptance III Materiality IV Audit Risk Model V Evidence Testing VI Design an Audit program Current Lecture I Audit Planning a Why Plan i Required by GAAS ii Reduces cost iii Avoid misunderstandings with client iv Avoid litigation v Assess risk b Audit Risk i The amount of risk is closely related to materiality ii Materiality increases with risk c Inherent risk i The amount of risk excluding internal controls These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute II III ii The nature of the industry going concerns problems and other items increase inherent risk Client Acceptance a Once an audit is completed a client is performed before re accepting the client b Where there any issues with management that might increase the risk of performing the audit c Is the substantial risk in the industry that reduces the value of performing the audit d Is the engagement profitable e Engagement letter Purpose is to establish a contract between the client and the firm including audit fee s procedure to be performed objectives of the audit a time frame and how to handle sensitive situations f Pre proposal Investigation a Investigation into the potential client is needed to assess management integrity expertise needed to service the client and what profitability would be i The reputation of the officers and directors should be determined ii SAS 84 requires the firm speaks with the former auditor before accepting the new client b At the same time the CPA firm must make a positive impression on the potential client c The proposal will include a fee range quality of firm resources and the experience of the professionals at the firm Materiality a Materiality gain reasonable assurance that the financial statement are fairly stated in accordance with U S GAAP b There must be a preliminary judgment about the level of materiality used during the audit there are no set guidelines auditor judgment is key as each client is very different c A benchmark is normally set to base materiality off of i Example 5 of net income before taxes ii Non profit companies generally use 1 3 of total assets as they are not focused on making a profit iii Percentage of revenue is also used frequently d SAS 107 Allocate planning materiality to segments of the audit accounts to be tested and adjust for risk e If misstatements are over the materiality threshold in total the client needs to make an adjustment f If below materiality keep a record of the misstatement but no adjustment on the clients books in needed IV V VI Audit Risk Model a SAS 107 110 cover audit risk b Planned Detection Risk PDR Acceptable Audit Risk AAR Inherent Risk IR x Control Risk CR c The lower the AAR the more evidence or testing will be need as the firm is willing to accept very little uncertainty d PDR is the risk that there will be a failure to detect material misstatements with planned audit procedures the higher the PDR the less amount of evidence or testing would be required e There is an inverse relationship between PDR and planned evidence f Inherent and control risk have an inverse relationship with PDR if inherent and control risk are low then PDR is going to be high the higher the PDR the less evidence is needed during the audit i In other words if inherent risk is high then the firm will require more evidence or testing in the audit because of the inverse relationship between PDR and IR CR ii IR CR the risk of material misstatement g Inherent risk factors the auditor uses their knowledge of the client business and industry to assess risk i Initial audit ii Non routine transactions iii Going concern problems iv Large likely misstatements v Industry vi Complex calculations or accounting issues vii Susceptibility to misappropriation h Control Risk the risk that material misstatement is not prevented or detected by the clients internal control i Prior to the start of the audit the auditor would perform a walk through of internal controls to assess the type and scope of further testing needed on the internal controls ii Procedure when testing controls would include i Inquiries ii Document examination iii Observation iv Re performance Evidence Testing a Substantive testing includes looking for monetary misstatement through testing transactions analytical procedures and testing of detailed balances b Evidence includes physical examination confirmation inspection observation inquiries of the client recalculation re performance and analytical review Design an Audit program a The audit program would include a combination of types of test and evidence b There would be a detailed audit program for different cycles or areas of the financial statements


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U of U ACCTG 5510 - Audit Planning and Risk

Type: Lecture Note
Pages: 4
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