the audit process - pwc.com audit process.pdf · pwc utb/1 audit basics risk assessment substantive...
TRANSCRIPT
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The audit process
www.pwc.com
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UTB/1PwC
Audit basics
Risk assessment
Substantive testing
Planning and understanding the
business
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UTB/2PwC
The PwC audit powered by AuraOverview
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UTB/3PwC
Organizer
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Planning Activities view
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• Industry, regulatory and other external factors
• Nature of the entity
• Selection and application of accounting policies, including the reasons for changes thereto
• Objectives and strategies and related business risks
• Measurement and review of the entity’s financial performance
Understanding the entity and its environmentISA 315.11
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UTB/6PwC
Risk assessment proceduresHow do I gain my understanding?
Inquiries of management
Analytical procedures
Observation and inspection
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Researching Your ClientIndividual Exercise
Tasks:
Research Liberate U Shoes by reading the
Learner Material - Understanding the
Entity - Liberate U Shoes.
Time: 15 minutes
T
We will then deliberate on the information
provided
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UTB/8PwC
Per ISA 320.2...
Materiality
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements
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UTB/9PwC
You are auditing a telecommunications client and noted that the an accountant wrongly added a 1% charge to all local phone calls on July 1 in the billing system.
Applying materiality on the job
Is this material?
QuestionQ
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UTB/10PwC
Applying materiality on the job
What if this error occurred more frequently, for instance for every third phone call or on more days during the year?
What impact would this have on materiality?
The magnitude would be bigger and might become more material.
QuestionQ
AnswerA
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UTB/11PwC
Applying materiality on the job
What if you discovered the error was a result of the CFO deliberately over charging the customer so the results for July would meet the budget?
Would this error then become material?
Yes. If the CFO is deliberately manipulating the financial results this is material because it indicates fraud which would dramatically change our perception of the integrity of management and our audit procedures.
QuestionQ
AnswerA
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UTB/12PwC
Overall materiality
Materiality
Per ISA320.10, when establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as a whole
Our assessment of materiality at the overall financial statement level is termed as overall materiality
It is the maximum amount of misstatement that could exist before information in financial statements is considered misleading
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UTB/13PwC
Performance materiality
Materiality
Per ISA320.11, the auditor shall determine performance materiality for purposes of assessing the risks of material misstatement and determining the nature, timing and extent of further audit procedures
It takes into account the aggregation risk of individually immaterial misstatements that may cause the financial statements to be materially misstated
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UTB/14PwC
Scoping view
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UTB/15PwC
The three components of audit risk
Inherent risk
The susceptibility of an account balance or class of transactions or disclosure to misstatement, before consideration of any related controls.
Control risk
The risk that a material misstatement will not be prevented or detected and corrected by the client’s internal controls.
Detection risk
The risk that our audit procedures will not detect a material misstatement that exists in the financial statements.
Inherent risk
Control riskRisk of Material
Misstatement
+=
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Brick analogy
Any material misstatement
at all?Inherent Risk
Control Risk
Detection Risk
Audit Risk
Caught by controls?
Caught by our audit?
Wrong opinion
Yes
No
No
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Nature of the risk
Likelihood of the risk occurring
Likely Magnitude of the potential misstatements
Risk of material misstatement (RoMM)
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UTB/18PwC
Inherent risk continuum
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UTB/19PwC
Internal control frameworkRelationship with audit approach
DesiredEvidence
Filling the Evidence Bucket
Evaluate whether further evidence is necessary from tests of details
and/or substantive analytics
Tests of Details* or Substantive Analytics
Controls testing
* Generally, perform tests of details for significant risk
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UTB/20PwC
Knowledge check #1
Risk of material misstatement is comprised of what two types of risks? Be prepared to explain each type of risk
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UTB/21PwC
Knowledge check #2
What are the three criteria for assessing the level of inherent risk?
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UTB/22PwC
Knowledge check #3
A financial statement level risk will not typically be categorised as a “normal” risk. Why?
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UTB/23PwC
Knowledge check #4
The audit team determined that an assertion level risk has a high likelihood of occurring and the likely magnitude exceeds overall materiality. However, the client has adequate controls around this assertion, so they decide to assess the risk as normal. What has the audit team done incorrectly?
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UTB/24PwC
Group Exercise
For each of the five scenarios determine:
1. What additional questions you will have for your client
2. Does the information represent a potential risk of material misstatement to the financial statements?
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UTB/25PwC
The PwC Audit Powered by AuraOverview
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UTB/26PwC
Obtaining Audit Evidence
Filling the Evidence Bucket
Evaluate whether further evidence is necessary from tests of details
and/or substantive analytics
Tests of Details orSubstantive Analytics
Controls testing
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UTB/27PwC
Obtaining Audit Evidence
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Substantive Testing Overview
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UTB/29PwC
Key characteristics:
Targeted testing
• Preferred method
• Aims at establishing if there is materialmonetary misstatement
• Items to be tested are selected based onmonetary value of higher risk
• Applied to either a specific part or the whole of the account
• Results should not be projected to the untested items in a population
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UTB/30PwC
Key characteristics:
Targeted testing
• Application to a representative group < 100% items
• Homogeneous populations
• Can be combined with targeted testing
Auditsampling
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UTB/31PwC
Key characteristics:
• Particular attribute or characteristic
• NOT testing monetary values
• NO project misstatements Accept-rejecttesting
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Substantive Testing Overview
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UTB/33PwC
The 4-step Process
Step 1
Determine suitability, assess reliability of underlying data and develop an independent expectation
Step 2
Define a
significant
difference or
threshold
Step 3
Compute
differences
Step 4
Investigate
significant differences and corroborate with evidence
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UTB/34PwC
Tests of DetailsDefinition
One type of substantive test
Involves the examination of support for individual items that make up balance sheet and profit and loss accounts
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UTB/35PwC
Tests of DetailsExamples of Procedures
Inspection
Inquiry
Recalculation
External Confirmation
Reperformance
Observation
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UTB/36PwC
Reliability of Audit Evidence
More Reliable
• Original documents • Auditor obtained
evidence • Written evidence • External generated
evidence
Less Reliable
• Photocopies or facsimiles• Audit evidence obtained
indirectly• Oral evidence• Client generated evidence
Audit evidence is most reliable when the client’s internal controls are effective.
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Identified misstatements
Identified misstatements can arise from fraud or error Identified
misstatements should be posted to the summary of uncorrected misstatements (SUM)
The de minimis SUM posting level is used to determine which identified misstatements will be posted to the SUM We should also
include misstatements identified by us, which were corrected by the client, on the SUM.
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Questions