Audit Notes Essay

Submitted By alexusgucci
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Pages: 6

Nature, Timing & Extent
Chapter 1:
Why Audit:
Legal and Contractual Requirements
Restrictive Covenants in Debt Agreements
Modern Corporation Setup –
Absentee Stockholders and professional Managers
Principal –Agent Relationships Lack on information symmetry
Conflicts of Interest
Cost Effective Monitoring Device
Information asymmetry: when on party has more or better information that the other party.

Independence: Independence is a backbone of auditing. If an auditor is not independent of the client, users may lose confidence in the auditor’s ability to report objectively and truthfully on the financial statements, and the auditor’s work loses its value. If the auditor is not independent, then there is not skepticism to auditing the financial statements.
Audit: they are subcategory of attestation and includes the examination of historical financial statements
Attestation: they are subcategory of assurance and require independence and result in an issuance of a report.
Assurances: they are broad category of services designed to improve the quality of decision making by improving confidence in the information in which decisions are made.
Fundamental concepts in conducting a financial statement:Materiality: Materiality is the magnitude of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
Audit risk: the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated.
The auditor’s standard report states that the audit provides only reasonable assurance that the financial statements do not contain material misstatements
Reasonable assurance implies that there is some risk that material misstatement could be present in the financial statements and the auditor failed to detect it.
Evidence: assists the auditor in evaluating management’s financial statement assertions consists of the underlying accounting data and any additional information available to the auditor, whether originating from the client or externally
Sufficient – refers to the quantity of evidence the auditor obtains – is it enough?
Appropriate – whether the evidence is relevant and reliable
Relevance – is the information related to the specific asserting being tested
Reliability – can the information be relied upon to signal the true state of the specific assertion being tested?
It would be too costly for the auditor to examine every transaction. Auditors use (1) their knowledge about the transactions and/or (2) a sampling approach to examine the transactions.
The auditor’s job ultimately is to express an opinion on whether the financial statements are fairly stated
Major Phases of the Audit:
1. Client acceptance/continuance
2. Preliminary engagement activities
3. Plan the audit
4. Consider and audit internal control
5. Audit business processes and related account (e.g. revenue generation)
6. Complete the audit
7. Evaluate results and issue audit report unqualified/unmodified opinion - the financial statements are free of material misstatements, the auditor does not find it necessary to qualify his or her opinion about the fairness of the financial statements qualified/modified opinion - the financial statements are fairly stated except for the misstatement identified by the auditor
Adverse opinion - the financial statements are not fairly stated and should not be relied upon

Chapter 2:
Types of Auditors
External Auditors - a third-party professional who performs an independent review of an organization's financial records
Internal Auditors- An employee of a company charged with providing independent and objective evaluations of the company's financial and operational business activities, including its corporate governance.
Government Auditors – evaluates whether