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SCM 3301: Chapter 6
Timeline |
1. Plan the Audit
2. Understand the Client
3. Assessing the Risks and designing further procedures
4. Perform further procedures
5. Complete the audit
6. Form the opinion |
Risk Assessment Procedures |
performed to understand client's internal control. The procedures include; 1) inquiries of management and others within the entity 2) Analytical Procedures 3) observation and other procedures like external inquiries |
Substantive Procedures |
Test of account balances and transactions designed to detect any material misstatements of F.S. assertions |
Test of Controls |
tests directed toward the design of control to assess its effectiveness in detecting material misstatement of financial statement assertions |
Audit Committees |
public companies must establish a committee within the board of directors to take an active role in overseeing the company's accounting and financial reporting practices. |
Engagement Risks |
Risks associated with auditing a client |
predecessor |
client's previous auditor |
Shopping for Accounting Principles |
Management changes to a CPA firm that is more likely to sanction a disputed accounting principle. |
Successor Auditor |
client's new auditor |
Engagement Letter |
a contract between the executor and the client. |
Overall Audit Strategy |
Determine the scope, such as industry reporting requirements, client locations and basis of reporting by the client. |
Audit Plan |
More detailed than the audit strategy. Includes the nature, timing and the extent of audit procedures to be performed by the auditor. |
Audit Program |
A detailed list of the audit procedures to be performed in the course of the audit. |
Time Budget |
Estimating the time required for each step in the audit program for each of the various levels of auditors and totaling those estimates. |
Opening Balances |
account balances that exist in the beginning of the period |
materiality |
if not told otherwise assume it to be 10% of Net Income |
Analytical Procedures |
comparisons of F.S. balances, ratios with auditor expectations developed from prior year F.S., prior year published statistics, and budgets. |
As materiality increases |
auditor will need less evidence because the audit is based on a less precise amount |
Performance Materiality |
Tolerable misstatement |
Significant Risks |
require more audit consideration. Are usually related to non-routine and estimation risks. |
Fraudulent Financial Reporting |
material misstatement on F.S. by management in order to mislead F.S. users |
Misappropriation Assets |
putting assets to wrong use |
Fraud Risk Factors |
1. Incentive
2. Opportunity
3. Rationalization Attitude |
Transaction Cycle |
the sequence of procedures applied by the client in processing a particular type of recurring transaction. |
Dual Purpose Procedures |
Serves as both a test of controls and a substantive test of the details, or the transactions |
Test of Controls |
test that controls are in use and operating effectively |
Substantive Procedures |
detect material misstatements if they exist in the F.S. |
Interim Period |
Period before the balance sheet date |