auditing chapter 7
DESCRIPTION
AUDITING CHAPTER 7. Audit Process & Detecting Fraud By David N. Ricchiute. TOPICS. Audit process Client acceptance, client strategies, planning, interim & year end work Auditor’s responsibility to detect, report fraud. PRELIMINARY STEPS IN AUDIT PROCESS. Communication with audit committee - PowerPoint PPT PresentationTRANSCRIPT
AUDITINGCHAPTER 7
Audit Process & Detecting FraudByDavid N. Ricchiute
GBW 8th ed., Ch. 72
TOPICS
Audit process Client acceptance, client strategies,
planning, interim & year end work Auditor’s responsibility to detect, report
fraud
GBW 8th ed., Ch. 73
PRELIMINARY STEPS IN AUDIT PROCESS
Communication with audit committeeAccepting, continuing engagementsUnderstand client’s business strategiesPlanningInterim, year-end audit work
GBW 8th ed., Ch. 74
AUDIT COMMITTEES:History
1940 SEC ASR #19 encouraged 1978 required by NYSE1999 recommendations from Blue Ribbon on audit committee effectiveness Consistency of accounting
principles Clarity, completeness of financial
statements
GBW 8th ed., Ch. 75
SEC & SARBANES-OXLEY RULES: Post 2000
Mandates Reviews of public company financial
statement interim reports Disclosure in proxy statements
whether audit committee discussed Financial statements with management Estimates, uncertainties, unusual
transactions, new accounting principles, independence with auditor
GBW 8th ed., Ch. 76
QUALITY OF EARNINGS
Auditor must discuss quality not just acceptability of accounting principles & earnings with Audit committee (SAS 89) Consistency in use of accounting
principles Clarity, completeness of financial
statements
GBW 8th ed., Ch. 77
ACCEPTING, CONTINUING ENGAGEMENTS
Establish policies, procedures to accept, continue clients (Stmt. Quality Control Stds. No. 1 )For new client Evaluate ability to service client Review financial statements Inquire about reputation, bankruptcy Investigate key managers
GBW 8th ed., Ch. 78
COMMUNICATIONS WITH PREDECESSOR
Successor auditor initiates communicationPredecessor auditor obtains permission to disclose confidential information (Rule 301)Is prior auditor’s resignation, replacement linked to (SAS 84)Disagreement with management? Management integrity? Other reasons?
GBW 8th ed., Ch. 79
UNDERSTANDING WITH CLIENT
Objectives & limitations of engagementManagement’s responsibilitiesExample: financial statement audit Objective: express opinion whether
statements Present fairly In all material respects In conformity with GAAP
SAS 83 & SSAE 7
GBW 8th ed., Ch. 710
MANAGEMENT’S RESPONSIBILITIES
Financial statementsEstablishing, maintaining effective internal over financial reportingAssuring compliance with laws & regulationsMaking records, information availableConfirming representations made during engagement
GBW 8th ed., Ch. 711
ENGAGEMENT LETTERSDrafted by auditor for CEO’s signatureWritten agreement to state purpose of engagement & role of auditorOptional but recommended by SAS 84 which requires some form of written understanding in work papers
GBW 8th ed., Ch. 712
PROPOSED ADJUSTING JOURNAL ENTRIES (AJE)
SAS 88 “Audit Adjustments” Management’s responsibility to
record material proposed adjustments Management must confirm
responsibility for adjustments at year end in representation letter
Auditor informs audit committee of management’s responsibilities for adjustments
GBW 8th ed., Ch. 713
UNDERSTANDING CLIENT’S BUSINESS
Auditor considers effects of client business & strategies on Risks Strategies to overcome risk Transactions, events as products of
management’s strategies
GBW 8th ed., Ch. 714
CLIENT STRATEGY TEMPLATE-Strategies
Growth strategyFinancial goals & operating priorities
GBW 8th ed., Ch. 715
CLIENT STRATEGY TEMPLATE-Characteristics
Characteristics of business Major business units Markets Products Customers Competitors Strategic alliances & joint ventures Potential adverse influences
GBW 8th ed., Ch. 716
BUSINESS: Units, Markets, Products, Customers
Demonstrate value of productR&D to develop new products
GBW 8th ed., Ch. 717
FINANCIAL GOALS, OPERATING PRIORITIES: Merck
Remain in top quartileMaximize revenue growthPreserve profitability of core businessAchieve full potential
GBW 8th ed., Ch. 718
ERRORS VS. FRAUD
Errors Unintentional misstatements or
omissions in financial statements
Fraud Fraudulent financial reporting:
intentional misstatement or omission Misappropriation of assets: theft
GBW 8th ed., Ch. 719
PLANNING
Risk of misstatement from fraudFirst quarter planningSecond quarter planning
GBW 8th ed., Ch. 720
RISK OF FRAUD: Auditor’s Responsibility
Discuss risk with staffObtain pertinent informationIdentify & assess risksPlan according to assessmentEvaluate evidence
GBW 8th ed., Ch. 721
RISK OF FRAUD: Other Aspects
Professional skepticism No presumption of dishonesty
balanced with possibility of misstatement due to fraud
Fraud screens Some financial ratios help
Asset quality Total accruals to total assets Days sales in receivables
GBW 8th ed., Ch. 722
IDENTIFYING, ASSESSING RISK OF FRAUD
Fraud triangle Incentives, pressures to commit fraud Opportunities to commit fraud Management’s rationalizations for
committing fraud
GBW 8th ed., Ch. 723
FIRST-QUARTER PLANNING
Review prior-year audit workReview 1st quarter resultsPrepare preliminary audit time budgetConsider adverse influences
GBW 8th ed., Ch. 724
SECOND-QUARTER PLANNING
Review 2nd quarter resultsFinalize budgetPerform analytical proceduresPrepare preliminary planning memoCoordinate staff with clientPrepare interim audit programs
GBW 8th ed., Ch. 725
INTERIM AUDIT WORK: Controls & Programs
Understand internal controlPerform tests of controlsAssess control riskPrepare preliminary audit programs
GBW 8th ed., Ch. 726
YEAR-END AUDIT WORK
Coordinate with clientFinalize audit programPerform substantive tests, analytical proceduresEvaluate audit test results Material errors, fraud
Subsequent events
GBW 8th ed., Ch. 727
YEAR-END AUDIT DOCUMENTATION
Management, legal representationsAudit documentation review Staff work reviewed
Audit reports