external auditing - review - mycga web services · pdf file · 2015-05-27biggest...
TRANSCRIPT
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Instructor Michael Brownlee B.Comm(Hons),CGACourse AU1
Exam 3 hours Wednesday eve 6:30-9:30pmJune 11 – check your schedule
� Key areas for Modules 1 through 10� Focus on Control objectives� Focus on Assertions/procedures� Focus on Cycles/Assertions/procedures� Sampling review-key elements� Focus Audit risk model
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� I will be going through a brief summary of the key elements of each module. I will add further explanations where/when required.
� I will do a quick audit ‘walkthrough’ to hopefully reinforce your understanding of how all the elements come together to form a complete audit. No more than 20 minutes.
� Exam weighting based on blueprint 8-12%� Expect at least one multiple choice and
one or part of one long answer.� Review your module summaries as they
give you the key concepts; then any area that you are unsure of requires more attention.
� Objective, purpose and key components
� Express an opinion as to whether or not the info in the F/S is presented fairly (compared to what framework)
� Fulfill statutory requirements; reduce info risk; address asymmetry of info
� Determine nature, extent and timing of evidence to obtain
� Communicate findings through Auditor’s report
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� Information risk – sources� Asymmetry of info; weak accounting systems;
deceptive management practices� Asymmetry of info –
� Remoteness of info; bias or motivation of info provider (mgmt); high volumes of transx & data; complexity of transx
� Audit reduction of info risk –� Auditor independence counters mgmt bias� Auditor accounting expertise to deal with volume &
complexity� Judgment within clearly defined prof.ðical
standards
� Activities of public practice accounting firm� Know the differences between NTR, Review
& Audit; what they provide and when they might be required.� Audit provides high level of assurance (attest
engagement), written opinion on subject matter� Mgmt responsibility vs auditor responsibility� Review moderate assurance; ensure info is
credible� NTR – no assurance however professional
responsibility to not be associated with false or misleading info
� Standard unmodified auditor’s report
� Components
▪ Intro paragraph
▪ Mgmt responsibility paragraph
▪ Auditor responsibility paragraph
▪ Auditor’s opinion
� Must contain a title, name of the addressee, city and date of issue and auditor’s signature
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� Should be familiar with date on audit report –should be when draft is accepted by mgmt
� VERY IMPORTANT� What causes reservation of opinion:
� GAAP departure – unmodified; modified or adverse
� Scope limitation – unmodified; modified or disclaimer of opinion
� Determined by immaterial, material or pervasively material
� Exam weighting 8-12%� Expect it to be all or part of a long answer
question and/or several multiple choice� Review module 2 summary to determine
where you need more attention
� There are several important concepts in Module 2.� GAAS and CAS� CEPROC and ethics� Independence� Quality control� Liability vs. Ethical responsibility� etc
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� General Standard(1) – should be performed by person(s) having adequate technical training and proficiency in auditing. Comply with regulatory and ethical requirements
� Examination standards (4) – conduct audit according to CAS; determine procedures by following CAS scope of an audit; obtain reasonable assurance f/s free from material misstatement due to fraud or error; plan and perform audit to reduce risk to acceptably low level consistent with the audit objective; obtain understanding of entity and its environment including internal controls, sufficient to assess RMM due to fraud or error; collect SUFFICIENT, APPROPRIATE AUDIT EVIDENCE in order to draw reasonable conclusions that support the audit opinion
� Reporting standards(3) – identify f/s, management responsibility and auditor responsibility; describe scope of auditor’s examination; report expresses opinion of F/S or states that an opinion cannot be expressed and if so, why; should indicate whether F/S present fairly, in all material respects, the financial position, in accordance with disclosed appropriate basis or framework of accounting(ie – IFRS, ASNPO, ASPE)
� Review CEPROC!!!� You should know the difference between
legal liability and ethical responsibility. What constitutes legal liability and how do auditors disprove liability….know the 4 elements of negligence (duty of care; breach of that duty; proof of damage result; causal relationship between breach and damage)
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� Ethical principles (six)� 1. Responsibility to society� 2. Trust and duties – obligation to clients,
employers and third parties (ie client confidentiality and conflict of interest – in fact and in appearance)
� 3. Due care and professional judgment� 4. Deceptive information – can’t be
associated with false or misleading info
� 5. Professional practice – how CGA’s carry on as a business
� 6. Responsibilities of the profession –reputation
� Refer to CEPROC for the Rules
� In mind and appearance� Affected by self interest, self review,
advocacy, familiarity and intimidation� Safeguards to eliminate threat to
independence:� Those created by profession, legislation,
regulation
� Those within assurance client
� Those within public accounting firms systems and procedures
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� Exam weighting is 10-12%� Expect a combination of multiple choice
and long answer � Review module summary
� Biggest area here is likely to be Assertions and Audit objectives� Assertions (income statement) about classes
of transactions and events in period under audit:▪ Occurrence; completeness; accuracy; cut-off;
classification
� Assertions (Balance sheet) about account balances in the period:▪ Existence; rights and obligations; completeness;
valuation and allocation
� Assertions about presentation and disclosure
▪ Occurrence; rights and obligations; completeness, classification, understandability; accuracy and valuation
� Specific audit objectives are to gather and evaluate sufficient(quantity) appropriate (quality)evidence about each account balance or classes of transactions and the associated assertions; evidence must be persuasive
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� Persuasiveness of evidence is hierarchy, starting from highest to lowest:
� •Auditor’s direct knowledge - obtained through physical observation, own mathematical computations.) Most reliable
� •Documentary evidence – obtained directly from third parties. Extremely reliable.
� •Documentary evidence – obtained from third parties, received & processed by client. Reliable
� Internal evidence – documents produced, processed, and stored in clients information system. Strong IC’s can increase reliability. Easier to obtain and less costly than other evidence. Low reliability.
� •Spoken or written assertions by client officers, directors, managers, or staff. Least reliable, however can be improved with corroborative evidence.
� What, how much and when (nature, extent and timing)
� Determined by judgment using following factors:
▪ Materiality; inherent risk and control risk; experience from prior audits; persuasiveness of evidence and error or fraud found during audit
� Appropriate – Nature and timing� Sufficient - Extent
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� The other important area from Module 3 (later discussed in 8 thru 10) are the procedures:� Computation (Recalculation or re-
performance)
� Observation
� Confirmation
� Enquiry
� Inspection includes vouching and tracing (know the difference) and scanning
� Vouching – start at an account – follow backwards through accounting and control system to find source documentation (ieyou are looking for the original vouchers)
� Tracing – Start at source documents and follow forwards through control and accounting system to get to the account.
� The direction is important for the assertion.
� For Vouching, you are trying to prove existence or occurrence – it is recorded in the GL but did it really happen? You are looking for the source documents to prove it really happened.
� Tracing goes to prove the assertion of completeness. You have the source documentation that shows a transaction occurred, now follow it forward to make sure it was recorded in the proper account.
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� Procedures – cont’d� Analysis – GAAS requires it at planning and final
stage – optional during audit procedure stages� Online review lecturer uses acronym AEIOC2� Meaning:� Analysis� Enquiry� Inspection� Observation� Computation� Confirmation
� Other areas to be aware of:� Working paper requirements� Pre-engagement activities – client
acceptance or retention check lists
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� Exam weighting 11-21%� Likely both multiple choice and long
answer� Review module summary – a lot of difficult
material in this module
� Audit planning:� Develop overall strategy; then detailed
strategy for obtaining the sufficient appropriate evidence within framework.
� Obtain understanding of entity and its environment and assess risks of material misstatement
� Audit planning:� Characteristics of audit� Reporting requirements� Consider important factors (ie materiality;
areas that may pose higher RMM, etc)
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� Audit planning: Five steps
� Conducting preliminary analysis
� Assessing materiality
� Assessing risk
� Determining extent, timing and nature of audit work
� Preparing the audit program
� Understand the use of analysis� Know the aspects of materiality
� Quantitative – potential $$ misstatement
� Qualitative:
▪ Potential breaches of laws or regulations
▪ Inadequate disclosure of accounting policies
▪ Inadequate disclosure of non-financial ongoing concerns that may impact fair presentation of company position
� Know your basis for materiality level
� ie 5-10% of net income from continuing ops
� How are misstatements dealt with in regards to materiality
� Know:� Likely misstatements – LM� Likely aggregate misstatements – LAM� Further possible misstatements – FPM� Maximum possible misstatements-MPM
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� Audit risk components� Audit risk – AR� Risk of Material Misstatement –RMM� Inherent risk – IR� Control risk - CR� Detection risk – DR� A strong possibility is that you will be
given a narrative about a company and you will be required to pick out those things that would affect inherent risk
� Inherent risk examples:
� First year of business
� Down turn in economy
� Increase competition in market
� New loan with performance targets
� Management incentives/ethics (have they lied, cheated stolen?)
� You should understand the Audit risk model and the expanded audit risk model
� Audit risk model:� AR = IR x CR x DR� Expanded:� AR = IR x CR x APR x RIA� You could be given values for some of the
above and be expected to calculate for the missing factor.
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� Audit risk model� RMM = IR x CR� AR = IR x CR x DR� AR = RMM x DR� DR = AR� IR x CR
� DR = RIA x APR (Risk of Incorrect Acceptance x Analytical Procedures Risk)
� RIA = AR� IR x CR x APR
� Exam weighting 9-12 %� Likely all going to be in long answer
except of course the March 2015 exam put this module in the multiple choice
� Review module summary
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� Internal control components
� Control environment
� Risk assessment process
� Information system
� Control activities
� Monitoring of controls
� Three phases of internal control evaluation
� Gain understanding of controls
� Assess preliminary control risk; determine audit approach (test of controls or substantive)
� Test controls
� Internal control objectives
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� Good control system components
� See module summary
� When to assess control risk at maximum
� Internal controls do not address assertion
� IC not effective
� Not efficient for auditor to evaluate
� Almost whole module is level 2� Exam weighting 4-7%� Seem to be either all MC or all long
answer
� Sampling risk – probability that auditor’s conclusion based on sample is different from conclusion based on full audit of entire population
� Type I risk – auditor concludes population has more errors than it actually does
� Type II risk – auditor concludes population has fewer errors than it actually does
� Non-sampling risk are all other risks not related to sampling(ie failure to evaluate sample properly due to inexperience, not exercising due care and attention when testing; tests not appopriate
� Mitigate non-sampling risk with proper planning and supervision
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� Sampling errors – part of Sampling risk� Type I errors – incorrect rejection of
population� Type II – Incorrect acceptance� Auditor more concerned with Type II
where incorrect acceptance of population with Material Misstatement
� Differences between statistical and non-statistical sampling
� Statistical sampling you can quantitatively calculate the sampling risk
� Statistical can calculate effect of results of sample on population
� Non-statistical uses more auditor judgement
� etc
�
� Sample size factors(test controls):
� Acceptable risk of overreliance (ARO)
� Tolerable deviation rate (TDR)
� Expected population deviation rate (EPDR)
� Population size
� Sample size is selected by using table based on given ARO, EPDR and TDR
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� Sample size factors (substantive):
� Acceptable Risk of incorrect acceptance (ARIA)= Risk of incorrect acceptance (RIA)
� Risk of incorrect rejection (RIR)
� Tolerable misstatement
� Expected dollar misstatement
� Variability within the population
� Population size
� Dollar Unit Sampling:� Know the characteristics vs other sampling
methods� DR = APR x RIA
� We now learn that DR is a factor of two risks – analytical procedures risk (APR) and Risk of incorrect acceptance (RIA)
� APR – probability that analytical procedures will fail to detect material errors
� RIA – probability that test-of-detail procedures will fail to detect material errors
� Don’t sweat this area too much. Weighting is only 4-7%
� Some typical MC questions ask you to identify which is a form of sampling error or they give you values for all but one of AR=IR x CR x APR x RIA and you have to calculate the missing
� You should know the key components of sampling – sampling risk, sampling error, DR= APR x RIA,TDR,EPDR
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� Exam weighting 5-8%� Again not too heavy� Could be either MC or long answer
� Nothing about an audit changes with computer based audits
� GAAS, mgmt assertions, control objectives, sufficient appropriate audit evidence requirement, auditor’s report all still the same
� Recognize controls and/or control deficiencies
� Recognize computer test limitations� Identify functionality of components of
information technology (ie firewalls, EDI, etc)
� Recognize the impact to the auditor of a change from manual to computer accounting or changing from one computer accounting method to another
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� Exam weighting 8-12%� Can be either MC or long answer
� This is the same for 8,9 & 10:� Know the procedures� Know the control objectives� Know the assertions� Be able to come up with 2-4 procedures
for any possible cycle� Recognize the characteristics of each
cycle and the most significant assertion� Be able to identify strengths and
weaknesses in given procedures
� Procedures
� Recalculation or reperformance
� Observation
� Confirmation
� Enquiry
� Inspection - includes vouching and tracing (know the difference) and scanning
� Analysis
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� Control Objectives:
� Will be different for each cycle – Module summary lists them
� Main assertions:� Receivables – existence� Liabilities - Completeness
� Should also be able to identify some sources of evidence – module summary has a good list for each cycle
� Know how testing balance sheet supports income statement (ie – testing of A/R supports revenue and collections cycle)
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� Exam weighting 8-12%� Again MC or long answer
� This is the same for 8,9 & 10:� Know the procedures� Know the control objectives� Know the assertions� Be able to come up with 2-4 procedures
for any possible cycle� Recognize the characteristics of each
cycle and the most significant assertion� Be able to identify strengths and
weaknesses in given procedures
� Main assertions:� Inventory – Existence,valuation,
ownership� Capital assets – same as inventory
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� Exam weighting 9-12%� MC or long answer
� This is the same for 8,9 & 10:� Know the procedures� Know the control objectives� Know the assertions� Be able to come up with 2-4 procedures
for any possible cycle� Recognize the characteristics of each
cycle and the most significant assertion� Be able to identify strengths and
weaknesses in given procedures
� Contingencies – legal enquiry letter� Client representation letter – dates� Related party issues� Subsequent events and Type I/II events� Evaluation of results� Management communication
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� Perform procedures� Evaluate results� Determine misstatements and if
adjustments necessary or expand procedures
� Form opinion� Consider subsequent events,
contingencies or other items that may need adjusting or disclosure
� Communicate opinion and draft statements to management along with Client rep letter
� Audit closing – file review, etc.
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� We can go through some Multiple Choice and short answer/short case questions from past exams if you want. Some find this helpful others do not.
� You can do this. � Use your exam blueprint, module
summaries and practice multiple choice and practice exams.
� And in the words of Douglas Adams…� “Don’t Panic”
� GOOD LUCK ON YOUR EXAM.� UTILIZE ALL OF YOUR RESOURCES IF
YOU ARE UNCLEAR ON ANY CONCEPTS
� REVIEW PAST AND PRACTICE EXAMS, ONLINE FORUMS, ETC
� I AM AVAILABLE� EMAIL ME IF YOU NEED ADDITIONAL
CLARIFICATION, ETC. MY GOAL IS FOR ALL OF YOU TO PASS!!!