Essay on Exam Preparation Notes

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Session 1
These must be present to conduct an audit:

Information and Established Criteria- there must be info in verifiable form
-audited information must be compared against a standard ex. GAAP for FS or Tax Act for Taxes

Accumulating and Evaluating Evidence- evidence used to establish whether information audited is in accordance with criteria...need to obtain sufficient evidence for audit objectives

Competent, Independent Person- auditor must be qualified to understand material used and be independent with an objective state of mind

Reporting- final stage in process is the auditor’s report, communication of findings to users

GAAS
General Qualifications and Conduct
-auditor must be technically qualified in industry of client, need to have prerequisite knowledge and skills
-due care is needed, must not be negligible or bad faith (ex. Completeness of working papers)
-free of bias, objective state of mind an independence

Examination: Performance of Engagement
-auditor needs to conduct a risk based approach, taking into account potential material misstatements (includes error or fraud) in FS
-engagement needs to be well planned and executed with proper supervision
-collect proper amount of audit evidence according to strategic and risk based approach

Reporting: Results
-specific wording required in auditor report, describes auditor responsibilities, management responsibilities, financial statements audited, scope of engagement and auditors opinion

Session 2
Responsibilities
Mgmt Responsibilities Auditor Responsibilities
Adopt sound accounting policies Use professional skepticism
Maintain adequate internal control Conduct the audit using a risk based approach
Make fair representation in the f/s Conduct the audit to provide reasonable assurance about material misstatements
Acknowledge its responsibilities to the auditors Consider fraud and error
Provide documentation and information for the audit process Issue mgmt a letter if weaknesses are encountered that could result in a material error Issue an appropriate report
Audit Planning- Risk Assessment
1.Preplanning- Client acceptance of continuance
-conduct independence threat analysis- (self interest, self review, advocacy, familiarity and intimidation)
-obtain engagement letter-agreement between firm and client on specifics of audit

2. Client Risk Profile-obtain knowledge of industry and business environment
-obtain knowledge of clients business
-assess entity-level controls (management honest? Does management monitor internal and external risk? All transaction cycles affected?)
-evaluate effectiveness of internal controls, significant risks or transactions requiring more than substantive tests

3. Plan the Audit- Phase 2 and 3 are done in parallel- audit will be planned based on the audit risk of the client
-using assessed inherent risk and control risks, determine risk of material misstatement at financial statement or assertion levels, identifies depth of audit work required for individual accounts and transactions

Audit Planning-Risk Response
-designed to respond to identified risks with audit programs and tests addressing these risks

4. Design Further Audit Procedures- prepared to respond to risk of material misstatement in risk assessment phase
-determine what actual testing and sampling to use to conduct test based on materiality levels and risk for management bias override, fraud risk, etc

5. Test of Control-test the actual internal controls and the effectiveness of them to justify reduced control risk

6. Substantive Tests- Analytical procedures determine reasonableness of transactions ex. Balances of sales and a/r
-Test of details of balances- procedures intended to catch monetary misstatement ex. Written communication with customer to prove validity of A/R
-Test of key items –focus on trisections at risk of material error or complex transactions (if reasonable assurance based on test of
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