Audit Procedures and Considerations
Case 1: Client Acceptance and Risk Assessment
Client Acceptance Factors
Integrity of Client Management: Evaluate the honesty, ethical values, and reputation of the client’s management and ownership.
Nature of the Client’s Business: Understand the industry, operations, and business practices of the client.
Financial Health: Review the client’s financial stability.
Independence: Assess any relationships that could threaten the auditor’s independence.
Auditor’s Expertise: Determine if the audit firm has the necessary knowledge and experience.
Compliance with Legal and Ethical Requirements: Ensure compliance with laws and regulations.
Auditor’s Ability to Apply Professional Skepticism: Consider factors that could compromise skepticism.
Engagement Risk: Assess the likelihood of uncovering material misstatements or reputational harm.
Previous Audits and Disagreements: Review past audit results and disagreements.
Communication with Predecessor Auditor: Communicate with the previous auditor, if applicable.
Materiality
Users of the Financial Statements: Identify who relies on the financial statements.
Base for Materiality: Select a relevant base, such as revenue or profit.
Appropriate Rate: Apply a rate based on industry norms and company size.
Quantitative Factors: Use recent financial data.
Qualitative Factors: Consider factors affecting users’ perception of materiality.
Performance Materiality: Set a lower amount to reduce the likelihood of exceeding planning materiality.
Risk Assessment
Inherent Risk
Industry and Environment: Consider the economic and regulatory environment.
Nature of the Client’s Business: Review the complexity of the business.
Financial Performance: Look for unusual trends or ratios.
Control Risk
Internal Control Environment: Assess the design and implementation of controls.
Management’s Attitude: Evaluate management’s approach to controls.
Previous Issues: Identify any known weaknesses.
Fraud Risk
Management Pressure: Be aware of pressures to achieve targets.
Opportunity for Fraud: Assess the control environment.
Attitude and Rationalization: Consider the culture regarding fraudulent behavior.
Financial Statement Analysis for Risk Assessment
Ratio Analysis: Calculate and interpret financial ratios.
Trend Analysis: Compare financial data over time.
Horizontal and Vertical Analysis: Analyze relationships and changes within financial statements.
Audit Risk Model/Approach
Components of the Audit Risk Model
Inherent Risk (IR): Susceptibility of an assertion to a misstatement.
Control Risk (CR): Risk that a misstatement will not be prevented or detected by internal controls.
Detection Risk (DR): Risk that the auditor’s procedures will not detect a misstatement.
Audit Risk (AR): Risk of expressing an inappropriate audit opinion.
Audit Approach Based on the Risk Model
Substantive Approach: Used when inherent and control risks are high.
Controls-Based Approach: Used when control risk is assessed as low.
Combined Approach: Involves testing both controls and balances.
Case 2: Internal Controls and Audit Procedures
Internal Control/Objectives
Authorization: Ensuring transactions are approved.
Completeness: Ensuring no transactions are omitted.
Accuracy: Ensuring financial information is recorded correctly.
Validity: Ensuring transactions represent actual events.
Physical Safeguards and Security: Protecting assets and information systems.
Error Handling and Correction: Processes to identify and correct errors.
Weaknesses (WIR Analysis)
Weakness: Identify deficiencies in internal controls.
Implication: Consider the potential consequences.
Recommendation: Suggest ways to improve controls.
Audit, Review, and Compilation
Compares the levels of assurance, procedures, and requirements for audits, reviews, and compilations.
Levels of Assurance and Audit Opinions
Defines reasonable assurance, moderate assurance, and no assurance, and explains the different types of audit opinions.
Assertions
Lists the assertions for transactions and balances.
Audit Opinion Decision Matrix
Provides guidance on choosing the appropriate audit opinion based on the presence and pervasiveness of material misstatements or insufficient evidence.
Safeguards
Lists factors to consider when assessing audit risk and safeguards to mitigate those risks.
Overall Financial Statement Level Risks
Identifies general/inherent risks, control risks, and fraud risks based on case facts.
Case Fact Implications
Analyzes the implications of specific case facts on general/inherent risks, control risks, and fraud risks.
Financial Ratios and Trends
Explains the meaning and calculation of key financial ratios and trends.
Transaction-Level and Entity-Level Controls
Defines transaction-level controls and entity-level controls.
Types of ITGCs
Describes types of IT general controls (ITGCs).
Control Testing Methods
Lists methods for testing internal controls.
Threats to Independence
Explains self-interest, self-review, advocacy, familiarity, and intimidation threats and suggests safeguards.
Types of Evidence and Collection Methods
Describes types of audit evidence and methods for collecting evidence.
Sufficient Appropriate Audit Evidence (SAAE)
Explains the concept of SAAE and how to assess it.
Sampling and Risk Response
Discusses sampling methods and the extrapolation of audit errors.
Assertions
Defines and explains the assertions related to existence, rights and obligations, completeness, valuation and allocation, occurrence, accuracy, cut-off, and classification.