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Understand client's business and industry (5)
- industry and external environment
- business operations and processes
- management and governance
- objectives and strategies
- measurement and performance
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Business Operations and Processes (4)
- operational and reporting structure
- technology infrastructure
- touring the plant and offices
- identifying related parties
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Management and Governance (4)
- articles of incorporation and bylaws
- code of ethics
- minutes of meetings and contracts
- corporate governance
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Client Risk Profile Evidence Gathering (4)
- inquiries of management and others
- observation (i.e. plant tour)
- inspection (i.e. examining contracts, reports, minutes)
- analytical procedures
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analytical procedure to understand the client's industry and business
calculate key ratios for the client's business and compare them with industry averages
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analytical procedure to assess going concern
calculate he debt-to-equity ratio and compare it with those of previous years and successful companies in the industry
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analytical procedure to indicate possible misstatements
compare the gross margin with those of prior years, looking for large fluctuations
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analytical procedure to reduce detailed tests
compare prepaid expenses and related expense accounts with those of prior years
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Purposes of working papers (5)
- basis for planning the audit
- record of the evidence accumulated and the results of the tests
- data for determining the proper auditor's opinion
- basis for review
- file freeze
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the written or electronic audit documentation kept by the auditor to support audit conclusions
working papers
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Included in working papers (4)
- risk assessments
- procedures or tests performed
- information obtained
- conclusions reached
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auditors' working papers that contain data of a historical or continuing nature pertinent to the current audit
permanent files
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Included in the permanent files (4)
- company documents of continuing importance, such as articles of incorporation, bylaws, contracts
- analyses, from previous years, of accounts that have continuing importance to the auditor (long-term debt, shareholders' debt, goodwill, capital assets)
- info related to the understanding of internal control and assessment of control risk (org charts, flowcharts, questionnaires)
- results of analytical procedures from previous years' audits
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all working papers applicable to the year under audit
current files
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a working paper that contains the detailed accounts from the general ledger making up a line item total in the worrking trial balance
lead schedule
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Current files (6)
- risk assessment and materiality
- audit problem
- overall planning information
- working trial balance
- adjusting and reclasssification entries
- supporting schedules
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a listing of the general ledger accounts and their year-end balances
working trial balance
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a detailed schedule prepared by the client or the auditor in support of a specific amount on the financial statements
supporting schedule working papers
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a supporting schedule that shows the activity in a general ledger account during the entire period under audit
analysis working paper
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a supporting schedule of the details that make up the year-end balance of a general ledger account
trial balance or list working papers
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a schedule that supports a specific amount; it normally ties the amount recorded in the client's records to another source of information, such as a bank statement or a confirmation
reconciliation of amounts working paper
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Major types of supporting schedules (8)
- analysis
- trial balance or list
- reconciliation of amounts
- tests of reasonableness
- summary procedures
- examination of supporting documents
- informational schedule
- outside documentation
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Characteristics of working papers (5)
- properly identified (client's name, description of contents)
- indexed and cross-referenced
- clearly indicate the audit work performed
- include sufficient information
- conclusions
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3 primary benefits from planning audits
- helps auditor obtain sufficient, appropriate audit evidence
- helps keep audit costs reasonable
- helps avoid misunderstandings with the client
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Three broad objectives in designing an effective internal control system
- reliability of financial reporting
- efficiency and effectiveness of operations
- compliance with laws and regulations
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Management objectives in designing effective internal controls (in addition to the 3 broad objectives) (4)
- maintaining reliable control systems
- safeguarding assets
- optimizing the use of resources (human and financial)
- preventing and detecting error and fraud
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the policies and procedures instituted and maintained by the management of an entity in order to provide reasonable assurance that management's objectives are met
internal control
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a cooperative effort among employees to defraud a business of cash, inventory, or other assets
collusion
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COSO internal control components (5)
- control environment
- risk assessment
- control activities
- information and communication
- monitoring
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individuals responsible for overseeing the straegic direction of the entity and the accountability of the entity, including financial reporting and disclosure
those charged with governance
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those controls that are implemented for multiple transaction cycles or for the entire organization
entity-level controls
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policies and procedures that management has established to meet its objectives for financial reporting
control activities
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5 types of control activities
- adequate segregation of duties
- proper authorization of transactions and activities
- adequate documents and records
- physical control over assets and records
- independent checks on performance
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Steps in audit of internal controls (7)
- obtain an understanding of relevant (key) controls
- evaluate design effectiveness of controls
- assess control risk
- identify and assess risk of material misstatement
- design tests of control
- test controls
- evaluate results of tests of control
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Procedures relating to understanding key controls (5)
- update and evaluate auditor's previous experience with the entity
- make inquiries of client personnel
- read client's policy and systems manuals
- examine documents and records
- observe the entity's activities and operations
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Segregation of duties (6)
- separation of custody of assets from accounting
- separation of operational responsibility from recording or data entry of transactions
- separation of systems development or acquisition and maintenance from accounting
- separation of computer operations from programming and accounting
- separation of reconciliation from data entry
- proper authorization of transactions and activities
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actions, policies, and procedures that reflect the overall attitude of top management, directors, and owners of an entity about internal control and its importance
control environment
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examples of control environment (5)
- commitment to competence
- board of director and audit committee participation
- management's philosophy and operating style
- organizational structure
- human resource policies and practices
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management's identification and analysis of risks relevant to the preparation of financial statements in accordance with GAAP
risk assessment
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Risk assessment processes (3)
- identify factors affecting risks
- assess significance of risks and liklihood of occurance
- determine actions necessary to manage risks
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Categories of management assertions that must be satisfied (3)
- assertions about classes of transactions and other events
- assertions about account balances
- assertions about presentation and disclosure
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methods used to initiate, record, process, and report an entity's transactions and to maintain accountability for related assets
information and communication
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Transaction-related audit objectives (6)
- occurence
- completeness
- accuracy
- posting and summarization
- classification
- timing
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management's ongoing and periodic aassessment of the quality of internal control performance to determine whether controls are operating as intended and are modified when needed
monitoring
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Examples of monitoring (2)
- review department exception reports
- conduct annual employee evaluations
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Documents (key controls) (3)
- narrative
- flowchart
- internal control questionnaire
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written description of a client's internal controls, including the origin, processing and disposition of documents and records, and the relevant control activities
narrative
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a diagrammatic representation of the client's documents and records, and the sequence in which they are processed
flowchart
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a series of questions about the controls in each audit area used as a means of gaining an understanding of internal control
internal control questionnaire
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those controls that are expected to have the greatest impact on meeting the transaction-related audit objectives
key controls
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the absence of adequate controls; increases the risk missttatemnts in the financial statements
internal control weaknesses
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a control elsewhere in the system that offsets a weakness
compensating control
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a measure of the auditor's expectation that internal controls will neither prevent material misstatements from occuring nor detect and correct them if they have occured
assessment of control risk
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Procedures for tests of controls (5)
- make inquiries of appropriate entity personnel
- inspection of documents, records, and reports
- observe control-related activities
- reperform client procedures
- recalculation
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fictitious transactions entered in controlled circumstances and processed through the client systems
test data
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Extent of procedures (3)
- reliance on evidence from prior year's audit
- testing of controls related to significant risks
- testing less than the entire audit period
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Major steps in developing the client risk profile (3)
- understand client's business and industry (5 steps)
- assess client business risk
- perform preliminary analytical review
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a party that has the ability to exercise, directly or indirectly, control or significant influence over the over the operating and financial decisions of another party
related party
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Information in the client's minutes that is likely to be relevant to the auditor (9)
- declaration of dividends
- authorized compensation of officers
- acceptance of contracts and agreements
- authorization for the acquisition of property
- approval of mergers
- authorization of long-term loans
- approval to pledge securities
- authorization of individuals to sign cheques
- reports on the progress of operations
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Advantages of flowcharting (2)
- provides concise overview of the workings of the client's internal control
- superior to written descrition - easier to follow
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Disadvantage of flowcharting
tendency for confusion if every processing detail is shown
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Advantages of internal control questionnaire (2)
- a good questionnaire can give relatively complete coverage of the audit area
- can usually be prepared easily at the beginning of an audit engagement
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Disadvantages of internal control questionnaire (3)
- individual parts of the internal control are examined without providing an overall view of the client's internal control
- a standard questionnaire is often inapplicable to some audit clients
- in danger of being prepared in a mechanized fashion without carefully interviewing personnel and evaluating the implication of "no" responses
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exists if a necessary control is missing or not properly designed
design deficiency
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exists if a well designed control does not operate as designed or when the person performing the control is insufficiently qualified or authorized
operation deficiency
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significant weaknesses in the design or operation of internal control; they represent an absence of adequate controls and likely increase the risk of misstatements in the financial statements
significant deficiencies
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