...1 Session 4 Audit Planning; Materiality and the audit risk model Auditing: Principles and Methods 2 After studying this session you should be able to: 1. Discuss why adequate audit planning is essential 2. Make client acceptance decisions and perform initial audit planning 3. Gain an understanding of the client’s business and industry 4. Assess client business risk 5. Perform preliminary analytical procedures 6. Apply the concept of materiality to the audit 7. Define risk in auditing and the audit risk model Auditing: Principles and Methods 3 8. Consider the impact of engagement risk on acceptable audit risk 9. Discuss the relationship of risks to audit evidence 10. Answer the Review Questions Auditing: Principles and Methods 1. Audit Planning 4 Why is adequate audit planning essential? “The auditor must adequately plan the work and must properly supervise any assistants”. There are three main reasons why the auditor should properly plan engagements: to enable himself to obtain sufficient appropriate evidence, to keep audit cost reasonable and to avoid misunderstanding with the client. Auditing: Principles and Methods 1. Audit Planning 5 An important part of audit planning is assessing acceptable audit risk and inherent risk because it helps determine the amount of evidence that will need to be accumulated and staff assigned to the engagement. Acceptable audit risk is a measure of how willing the auditor is to accept that the FSs...
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... | | |b. insignificant. | | |c. significant. | | |d. relevant. | | | | |2. |The preliminary judgment about materiality is the amount by which the auditor believes the statements could be misstated and | | |still not affect the decisions of reasonable users. | | |a. minimum | | |b. maximum | | |c. mean average...
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...8 STATEMENT OF FACTS Tiger Pride Enterprise comprises of a corporate office with 4 Business divisions, each running multiple Business Units. The Divisions are labelled A, B, C and D with D being the one not matured and has an unstable income flows. Division A is most concentrated with 40 business units whereas Division D is least concentrated with only 5 business units. All expect units 6 and 7 of Division B vows to have management with the required abilities and skills to organize the business operations effectively. Each business unit maintains all its recording and proceeds of transactions, general ledger and other accounting information at the business unit level. Of the many business units, few are to meet the Statutory Audit requirement by the competent state authority. The management teams meet up periodically to discuss the development and performance of business units and divisions in particular along with regular meetings with management at the consolidated level. All activities and performance indicators are adjusted for changes in the business environment and outlook. Alongside the regular meet-ups, Corporate Management team examines the business operations and financial results primarily through 2 key performance indicators. 1. Revenue of each business unit 2. Earnings before taxes Certain business units encounter several problems which lead to disturbing performance indicators. Division D tends to have the highest per Unit revenue mainly because no...
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...Planning the Audit Process I wanted to let you know that Apollo Shoes is satisfied with our services and wants to continue with a full audit. Therefore I wanted to explain to you how I plan to conduct the audit. I will begin with an explanation of the objectives, responsibilities and strategies for completing the audit. This will be followed by explanations on how analytical procedures will be used to plan, conduct and complete the audit, how materiality and risk will be consider in designing the audit and how technology will be incorporated into the audit. The objective in conducting an audit are to obtain reasonable assurance about whether Apollo Shoe’s financial statements as a whole are free from material misstatement, whether due to fraud or error; allowing us to express an opinion that the financial statements are presented fairly, and in accordance with an applicable financial reporting framework. (Arens, J., & & Beasley, 2014) We have a responsibility to conduct this audit in accordance with established standards. These standards indicate that we should have a high, but not absolute, level of assurance that Apollo Shoe’s financial statements are free of material misstatements. However, it is possible that even when we conduct their audit in accordance with standards, we may fail to detect a material misstatement. Therefore, we have a responsibility to work to overcome judgment biases and to continually remind ourselves of the importance of maintaining appropriate...
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...1. Each of the following elements make up an integral part of what is meant by "ethics" except for: A. Accepted standards of behavior B. Knowing the difference between right and wrong C. Always following the law D. The moral point of view 2. "Treating others fairly" encompasses treating them: A. Equally, impartially, and responsibly B. Equally, responsibly, and openly C. Impartially, openly, and diligently D. Equally, impartially, and openly 3. The Independence Principle in the AICPA Code applies to: A. All accountants and auditors B. All CPAs regardless of professional services C. All CPAs who render attestation services D. All members of the audit committee 4. In stage 1 of Kohlberg's model, ethical reasoning is motivated by: A. Fear of punishment B. Satisfaction of one's needs C. Following the law D. Acting based on universal ethical principles 5. Professional judgment in accounting includes each of the following attributes except for: A. Exercising due care in carrying out one's professional responsibilities B. Maintaining one's objectivity in decision making C. Maintaining one's integrity in decision making D. Acting in accordance with the moral point of view 6 Each of the following considerations should help to evaluate alternative courses of action in the decision making model except for: A. Whether the alternatives are consistent with professional standards B. Whether the alternatives are consistent with firm policies and its own code of...
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...materially misstated after the audit is completed and an unqualified opinion has been issued is the: A) inherent risk. B) acceptable audit risk. C) statistical risk. D) financial risk. Answer: B 1) بمقياس لمدى رغبة مراجع الحسابات أن تقبل أن البيانات المالية قد يمكنه ماديا بعد اكتمال عملية المراجعة وقد تم إصدار رأي غير متحفظ: A) المخاطر الكامنة. ب) مخاطر المراجعة مقبولة. ج) خطر الإحصائية. د) خطر المالية. جواب: ب 2) A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called: A) control risk. B) acceptable audit risk. C) statistical risk. D) inherent risk. Answer: D بمقياس 2) لتقييم مراجع الحسابات لاحتمال أن هناك الأخطاء المادية في حساب قبل النظر في فعالية الرقابة الداخلية للعميل ويسمى: A) التحكم في المخاطر. ب) مخاطر المراجعة مقبولة. ج) خطر الإحصائية. مد) المخاطر الملازمة. جواب: D 3) When inherent risk is high, there will need to be: عند عالية المخاطر الكامنة، هناك حاجة إلى أن تكون: A) |A lower assessment of audit risk |More evidence accumulated by the auditor | |إجراء تقييم أقل من مخاطر المراجعة |المزيد من الأدلة المتراكمة لدى المراجع | |Yes |Yes | B) |A lower assessment of audit risk ...
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...Chapter 9 - Materiality and Risk ← Multiple Choice Questions From CPA Examinations 9-22 a. (4) b. (4) 9-23 a. (1) b. (1) c. (1) 9-24 a. (2) b. (3) c. (1) 9-25 a. The justification for a lower preliminary judgment about materiality for overstatements is directly related to legal liability and audit risk. Most auditors believe they have a greater legal and professional responsibility to discover overstatements of owners' equity than understatements because users are likely to be more critical of overstatements. That does not imply there is no responsibility for understatements. b. There are two reasons for permitting the sum of tolerable misstatements to exceed overall materiality. First, it is unlikely that all accounts will be misstated by the full amount of tolerable misstatement. Second, some accounts are likely to be overstated while others are likely to be understated, resulting in net misstatement that is likely to be less than overall materiality. c. This results because of the estimate of sampling error for each account. For example, the likely estimate of accounts receivable is an understatement of $7,500 + or - a sampling error of $11,500. You would be most concerned about understatement for accounts receivable because the estimated understatement of $19,000 exceeds the tolerable misstatement of $18,000 for that account. d. You would be most concerned about understatement amounts since the total estimated understatement...
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...of these are as cut-and-dry as people would like to think. Auditors, as many people assume, are not always looking for fraud. Their main purpose in auditing is to ensure the financial statements comply with Generally Accepted Accounting Principles (GAAP). Auditing is as much for external users as it is for internal users. It is important for internal users because they can ensure they are complying with many of the GAAP laws. For external users auditing allows them to make educated decisions on which companies to invest in and they can see both business risk and audit risk. For any given auditing firm they will evaluate a potential client before actually committing to doing an audit. Auditors are looking at business risk and are always aware of audit risk. These two terms are glaringly different and yet go hand-in-hand for auditors. Many people think that business and audit risk are all about fraud, however, audit risk is more about legally protecting the auditing firm and the CPA’s while business risk is about protecting people that may invest or lend money to a business. Fraud is not actually a large part of auditing because auditing is looking at internal controls, and if a company has strong internal controls they are less likely to have fraud. Business risk is that a company will have lower than anticipated profits. This is an obvious risk for investors; there is a chance that the company will not be able to pay dividends or will go under all together (Business Risk...
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...AUDITING PROFESSIONAL 1 EXAMINATION - AUGUST 2011 NOTES: Section A - You are required to answer Questions 1, 2 and 3. Section B - You are required to answer any two out of Questions 4, 5, 6 and 7. (If you provide answers to more than two questions in this section, you must draw a clearly distinguishable line through the answer(s) not to be marked. Otherwise, only the first answers to hand for these four questions will be marked.) TIME ALLOWED: 3 hours, plus 10 minutes to read the paper. INSTRUCTIONS: During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page. You are reminded that candidates are expected to pay particular attention to their communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of your answers and the extent to which answers are supported with relevant legislation, case law or examples, where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted. The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2. THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND AUDITING PROFESSIONAL 1 EXAMINATION - APRIL 2011 Time Allowed: 3 hours, plus 10 minutes to read the paper...
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...Section 70 Texas Woman’s University Dr. John Nugent April 20, 2015 Abstract The purpose of this research paper is to provide an in depth review of the Public Company Accounting Oversight Board (PCAOB) and how it contributes to the interest of the Sarbanes Oxley Act of 2002. The research highlights the importance of the PCAOB’s role in the accounting profession as well as prospective changes that may evolve in the future related to PCAOB. Upon reading this research the reader will be familiar with PCAOB’s roles and functions, as well as auditing standards (AS) released such as AS5 and AS11. The PCAOB’s significance in the protection of investors is revealed as well. Keywords: SEC, PCAOB, SOX, AS 5, AS 11, Internal Control, Materiality Table of Contents Introduction……………………………………………………………………………………………….5 PCAOB…………….……………………………………..……………………………….……….……5-6 a) The PCAOB Mission, Vision, & Core Values………………………………….………........6-7 b) Current Standards…………………………………………………………….…..............…7-8 c) Future Standard Plans…………………………………………………………………….…8-9 Sarbanes Oxley Act of 2002 Section 404……………………………………………………………...….9 a) Auditing Standard 5…………………………………………………………………….….9-10 b) Auditing Standard 11……………………………………………………………………..10-12 c) Communication Requirements.................................................................................................13 Conclusion...............................................................................
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...CASE STUDY PA503 FUNDAMENTALS OF AUDITING Audit Firm Contact Number JABATAN PERDAGANGAN Programme Section CHAPTER 1 CHAPTER 2 Email Materiality and Audit Risk Corporate Governance PROBLEM SOLVING CLO2 | LD2/P3 Instruction: Please answer ALL questions. | Part 1 NEW CLIENT ACCEPTANCE DECISION Learning Objectives After completing and discussing this case, you should be able to: 1. Understand the types of information relevant to evaluating a prospective audit client 2. List some of the steps an auditor should take in deciding whether to accept a prospective client 3. Identify and evaluate factors important in the decision to accept or reject a prospective client 4. Understand the process of making and justifying a recommendation regarding client acceptance INTRODUCTION Your accounting firm is a medium-sized, accounting firm in Malaysia, formed in 2012, mainly provides auditing and tax services. But it has recently had success in building the information-systems-consulting side of the business. Recently, your group has been assigned for the first time to perform audit engagement procedures for a small and medium-sized company in Malaysia. One of team member has been a senior auditor for the past three years. Your first assignment is to assist an audit partner on a client acceptance decision. The partner explains to you that the prospective client, Unggul Holdings Berhad, is a medium-sized textile company. The partner recently met the...
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...Prepare common-sized balance sheets and income statements for Just for Feet for the period 1996 – 1998. Also compute key liquidity, solvency, activity, and profitability ratios for 1997 and 1998. Given these data, comment on what you believe were the high-risk financial statement items for the 1998 Should auditors insist that their clients accept all proposed audit adjustment, even those that have an “immaterial” effect on the given financial statements? According to section 312.10 of the PCAOB standards, “the auditor’s consideration of materiality is a matter of professional judgment and is influenced by his or her perception of the needs of a reasonable person who will rely on the financial statements” (Public Company Accounting Oversight Board, 2011). This statement suggests that there are no hard and fast rules with regards to the determination of whether an adjustment is material or immaterial. In my opinion, much of the decisions are left to the auditor’s interpretation of the rule. Given all the rules and standards that both auditors and corporations must abide by, it would be wise to accept the proposed audit adjustments. Whether they are “material” or “immaterial” should not matter, because the fact that the auditor finds it necessary to propose the adjustment must be based on a rule or interpretation of a rule. If the company is secure in the abilities of its chosen auditor, they should allow the auditor to do his job. On the other hand, the auditor is supposed...
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...risk-based audit, adequate planning is of paramount importance as it allows to direct the audit effort towards the areas expected to be most at risk of material misstatement. Additionally, adequate planning helps identify and resolve problems on a timely basis and allows the auditor to organize the engagement, including selecting suitably experienced team members to deal with specific risks, so that it can be performed in an effective and efficient manner. ISA 300 in particular requires setting out an overall audit strategy and a detailed audit plan. The overall audit strategy should indicate the scope of the work, the resources to be allocated to specific high-risk areas in terms of experienced staff or hours and the timing of the work. A more detailed audit plan follows on from the approach identified in the audit strategy and indicates the audit procedures to be performed in respect of specific items in the financial statements and their timing. The audit strategy and the audit plan are not necessarily separate documents or processes as they are strictly interrelated. For example the results of initial risk assessment procedures, like the entity’s business risk assessment or the assessment of internal control, will inform the planning for further audit procedures and, vice versa, the outcome of detailed audit procedures may be so different from what expected at the time of planning to require a modification of the audit strategy and audit plan. As such, the audit strategy and...
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...Accounting 732 Audit II 9/25/2012 Anne Aylor Inc. A. Why are different materiality bases considered when determining planning materiality? Different materiality bases are considered when determining planning materiality because the magnitude and nature of financial statement misstatements or omissions have different influences on different financial statement users. For example, investors are more interested in the accuracy of numbers involving net income because they are mainly concerned with the company’s ability to increase shareholder wealth. For an audit company, the primary concern when planning materiality is to take into account all expected financial statement users. These different expected users all have different concerns in regards to where financial statements contain misstatements. Debtors such as banks who provide loans to help companies like Anne Aylor raise capital are mainly concerned with company’s maintaining debt covenants involving current assets. Anne Aylor has a debt covenant to maintain a current ratio over 2.0, which according to the company’s projected 2012 balance sheet, will not be met. These debtors are more concerned with Anne Aylor overstating assets or understating liabilities in order to meet these debt covenants and avoid potential interest rate changes. B. Why are different materiality thresholds relevant for different audit engagements? Different materiality thresholds are relevant for each audit engagement because...
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...Auditing Standards Ethical Standards Ethical Standards (FRS, 2010) is issued by Auditing Practices Board. Its responsibilities are set up standards and guidance for auditing work. According to this standard, APB tries to enhance confidence on auditing process for public. ESs includes five requirements that auditors must adhere to and its primary objective is to give ‘true and fair’ opinions on financial statement. The credibility of audit opinions depends on the integrity, objectivity and independence of the auditor. Accordingly, it requires the quality of audit more stringent, especially the independence of auditors’ assurance. ES2 illustrates the guidance on some particular circumstances, which may generate threats to the independence and objectivity of auditors. ES3 states that senior positions have collaborated with audit engagement for a continuous period should be rotating. ES4 explains that there is no relationship between audit opinion and audit fees or other remuneration. ES5 shows that audit firm should consider whether non-audit service have significant effect on the threats to the auditor’s objectivity or independence. International Standards on Auditing ISA (FRS, 2009) copes with independent auditor’s overall responsibilities when implementing auditing process. These professional standards establish objectives of independent auditors together with explain the scope and nature of auditing process, which is designed to enable auditors to achieve the objectives...
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