ba 120.1 - auditing process b
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AUDITING PROCESS (B)
BA 120.1Mr. Virgilio Lapuz III, CPA, CIA
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Outline
General Approach to Auditing FS
The Audit Process
Accepting an Engagement
Audit Planning
Materiality
Risk
Consideration of Internal Controls
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General Approach
FinancialStatementAssertions
AuditProcedures
AuditEvidence
AuditOpinion
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AssertionsAssertions
Procedures
Evidence
Opinion
Assertions about classes of
transactions and events for the
period under audit Assertions about account balances at
the end of the period
Assertions about presentation and
disclosure
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Assertions on EventsAssertions
Procedures
Evidence
Opinion
Occurrence
Completeness
Accuracy Cutoff
Classification
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Assertions on BalancesAssertions
Procedures
Evidence
Opinion
Existence
Rights and Obligations
Completeness Valuation and Allocation
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Assertions on DisclosureAssertions
Procedures
Evidence
Opinion
Occurrence and rights and
obligations
Completeness Classification and Understandability
Accuracy and Valuation
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Audit ProceduresAssertions
Procedures
Evidence
Opinion
Inspection
Observation
Inquiry Confirmation
Computation
Analytical Procedures
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Audit EvidenceAssertions
Procedures
Evidence
Opinion
To be discussed after Exam
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Audit OpinionAssertions
Procedures
Evidence
Opinion
Unqualified
Qualified
Adverse Disclaimer of an Opinion
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Audit Process
AcceptinganEngagement
Audit Planning
ConsideringInternal Controls
PerformingSubstantive Tests
Completing an
Audit
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Accepting an Engagement
Accepting anEngagement
Audit Planning
ConsideringInternal Controls
PerformingSubstantive Tests
Completing anAudit
Making a decision whether to accept or reject an
engagement
Requires evaluation of auditors qualification,auditability of the clients FS, independence issues,
etc.
Usually involves preliminary understanding of the
business, background investigation, etc
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Audit Planning
Accepting anEngagement
Audit Planning
ConsideringInternal Controls
PerformingSubstantive Tests
Completing anAudit
More detailed knowledge about the clients business
and industry in order to
understand the transactions and events affectingthe financial statements, and
Identify potential problems that might be
encountered during the audit
Preliminary assessment of risk and materiality
Develop overall audit strategy and detailed
approach/scope
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Considering Internal Control
Accepting anEngagement
Audit Planning
ConsideringInternal Controls
PerformingSubstantive Tests
Completing anAudit
Stronger internal controls, more assurance it
provides about the reliability of accounting data
and financial statements Involves
Obtaining understanding of Control Systems
Assessing the level of Control Risk Performing Test of Controls (less than high level)
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Substantive Tests
Accepting anEngagement
Audit Planning
ConsideringInternal Controls
PerformingSubstantive Tests
Completing anAudit
Gathering evidence to test the assertions
Dependent on the results of the consideration of
internal controls (inverse)
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Completing an Audit
Accepting anEngagement
Audit Planning
ConsideringInternal Controls
PerformingSubstantive Tests
Completing anAudit
Auditor must have sufficient, appropriate evidence
in order to reach a conclusion on the fairness of the
financial evidence Review of subsequent events
Assessing going concern assumption
Overall analytical review Written representations
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Outline
General Approach to Auditing FS
The Audit Process
Accepting an Engagement
Audit Planning
Materiality
Risk
Consideration of Internal Controls
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Accepting an Engagement
Competence
Independence
Ability to serve the client properly
Integrity of Management
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Integrity of Management
PSA 220 states that auditors should conduct a
background investigation of the prospective client to
minimize the likelihood of association with clients
whose management lack integrity Making inquiries of appropriate parties in the
business community
Communicating with the predecessor auditor
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Communicating with the predecessor
auditor
Matter of courtesy to the predecessor auditor
Allows incoming auditor to obtain informationabout the client that will be useful in determining
whether the engagement will be accepted Is there a need to ask potential clients permission?
Incoming auditor should inquire into matters thatmay affect the decision to accept the engagement
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What to inquire?
Predecessor auditors understanding as to the
reasons for the change of auditors
Any disagreement between the predecessor
auditor and the client Any facts that may have bearing on the integrity
of the prospective clients management
Can the predecessor auditor withhold info?
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Retention of Existing Clients
Evaluation is not a one-time exercise
At least once a year or upon occurence of major
events
Changes in Management, Directors, Owners
Change in nature of business
Other changes that may affect the scope of
engagements
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Engagement Letter
Written contract between the auditor and the client
Important to avoid misunderstandings with respect
to the engagement, and to document and confirm
the auditors acceptance of the appointment.
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Content of Engagement Letter
Objective of the audit (express an opinion)
Managements responsibility (FS)
Scope
Forms or any reports expected to be issued
Unavoidable risk
Responsibility of client to have unrestricted access
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Optional Content
Billing arrangements
Expectations of receiving management
representation letter
Arrangements concerning the involvement of others
Request to confirm the terms of the engagement
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Recurring audits
Do you need to send it every year?
When do you send a new letter?
Indication that the client misunderstands the objective
and scope of the audit Revised or special terms of the engagement
Recent change of senior management, BOD, ownership
Significant change in nature of the business Legal requirements and other pronouncements
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Audit of Components
Who appoints the auditor of the component?
Is there a separate report?
Legal requirements
Extent of any work performed by other auditors
Degree of ownership by the parent
Degree of independence of the components
management
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10 minute break then quiz
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Outline
General Approach to Auditing FS
The Audit Process
Accepting an Engagement
Audit Planning
Materiality
Risk
Consideration of Internal Controls
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Audit Planning
Developing a
General Audit Strategy
Detailed Approach for the expected conduct of the audit
Main objective
determine the scope of the auditprocedures to be performed
Plan the audit so that it can be performed in aneffective and efficient manner
Extent varies depending on size of entity, complexity ofaudit, auditors experience with the entity, knowledgeof the business, etc.
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Why is adequate planning important?
Helps ensure that appropriate attention is devoted
to important areas of the audit.
Helps identify potential problems
Allows the work to be completed expeditiously
Assists in the proper assignment and coordination of
work
Helps ensure the audit is conducted effectively andefficiently
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Sufficient Understanding (315)
Industry, regulatory, other external factors includingfinancial reporting framework
Nature of the entity, including entitys selection and
application of accounting policies Objectives and strategies and the related business
risks that may result in a material misstatement ofthe financial statements
Measurement and review of the entitysperformance
Internal Controls
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Sources of Information
Review of prior years working papers
Tour of clients facilities
Discussion with people within and outside the entity
Reading books, periodicals, and other publicationsrelated to the clients industry
Reading corporate documents and financial reports
Who in the audit firm? When?
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Use of the information obtained?
Assessing risks and identifying potential problems
Planning and performing the audit effectively and
efficiently
Evaluating audit evidence as well as thereasonableness of clients representations and
estimates
Providing better services to the client
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New Engagements (510)
Obtain sufficient, appropriate audit evidence that:
Opening balance do not contain misstatements thatmaterially affect the current years financial statements
Prior periods ending balance was correctly brought
forward, or when appropriate, have been restated
Appropriate accounting policies are consistentlyapplied, or changes have been properly accounted forand adequately disclosed.
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Overall Audit Strategy
Best strategy is that which will result in the most
efficient auditthat is, an effective audit
performed at the least possible cost.
How much evidence to accumulate?
What procedures should be done?
How and when should these be done?
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Materiality
Largest amount of misstatement that the auditor
could tolerate in the financial statements
Smallest aggregate amount that could misstate the
financial statements
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Using Materiality Levels
Determine overall materialityfinancial statement
level
Determine the tolerable misstatement at the account
level Compare the aggregate amount of uncorrected
misstatements with the overall materiality
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Audit Risk Model
DetectionRisk
ControlRisk
InherentRisk
AuditRisk