What economic or business situations would potentially influence a company to fudge its numbers (and thus become the focus of the auditor).
Competition is stiff, making it difficult to achieve revenues
Bonuses are based on achieving certain income
Market analysts expect a certain ROI
The banks require certain covenants that are difficult to maintain
Meeting a regulatory requirement is expensive and eats away at profits
Your product could become obsolete if your competitor beats to you market
What is the purpose of performing risk assessment procedures?
In order to plan
** the actual detailed testing
** on which accounts
** at what material level
to reduce the risk of material misstatement
What tasks should be performed when assessing for risk?
Obtain an understanding of the entity and its environment
Obtain an understanding of internal control
Make inquiries regarding risk of material misstatement with
** the audit committee
** management
** others in the company
** engagement team
Perform analytical procedures to identify anomalies in the FS
True / False: GAAS provides guidance as to the level of understanding that should be acquired regarding the entity and its industry.
False
The level of understanding is the auditor's professional judgment, but should be at a level to appreciate the risk of material misstatement.
What types of information should be obtained regarding the entity's industry?
Competitive Environment
** demand
** capacity
** price competition
** technical developments
** regulatory influences and changes
** general economy and inflation
** currency revaluation
Entity Specific
** supplier relationships
** customer relationships
** availability and cost of financing
** whether cyclical or seasonal activity
What types of regulatory factors should be obtained regarding the entity?
The regulatory framework
Special accounting principles
Special taxation of the industry
Specific laws, regulations, or policies that affect the industry
Environmental requirements
What types of factors should be obtained regarding the nature of the entity?
Objectives, strategies, and overall plans
Operations
Ownership
Corporate governance
Corporate compensation, incentives, bonuses
Investments
Financing methods
Financial reporting practices
Where can an auditor find information regarding the nature of the entity?
Public information = SEC filings, press releases, annual reports, earnings calls
Investment information = SEC filings and holdings of significant shareholders
Inquiries of the entity's compensation committee (salary + officer expense reimbursement)
Inquiries of external legal counsel, valuation experts, etc.
Performance of analytical procedures to identify unusual transactions, ratios, or trends
Review trade journals or analysts reports
What types of factors should be considered regarding the accounting policies of the entity?
Is the accounting framework used appropriate for the entity and the industry
How effective is internal control in this area
Have there been any changes
Are the accounts used, or disclosures made, appropriate for the accounting framework
Are management's estimates and assumptions appropriate
Do the staff involved in accounting competent especially when selecting and applying significant new or complex accting stds
During planning, the auditor is specifically required by GAAS to perform analytical procedures on which account type and at what time during the audit?
Revenue accounts
During the planning stage and the final review stage
Analytical procedures should include which types of document comparisons?
The accounts within a particular FS
The FS to budgeted or anticipated results
True / False: A discussion with the engagement team regarding susceptibility of the FS to material misstatement can be held concurrently with the fraud risk discussion?
True
True / False: The auditor is only required to obtain an understanding of the entity and its environment at the beginning of the audit, prior to the start of detailed testing.
False
The auditor should continually update their understanding, and then make appropriate adjustments to the assessment of risk and the procedures needed to reduce risk to an acceptable level.
Fun Fact: According to a COSO study, what percentage of fraud that occurred was perpetrated by either the CEO, CFO or both?
89%
Tests of operational effectiveness of controls [are / are not] required
