ACCT450:Ch.5

• The risk of material misstatement is assessed by the auditors and may be separated using two components: inherent risk and control risk.
• Inherent risk: is the possibility of material misstatements of a financial statement assertion before considering any related controls. Relates to either the nature of the client and its environment or the nature of the financial statements.
• Control risk: The risk that the project will not achieve its objectives because of the inability of the project manager to control the project. it is the function of effectiveness of both the design and operation of internal control.
• Detection Risk: the risk that the auditors' procedures will lead them to conclude that a financial statement assertion is not materially misstated when, in fact, such misstatement does exist. It is a function of the effectiveness of the audit procedures and their application by the auditors
• Audit evidence includes all the information used by auditors in arriving at the conclusions on which the audit opinion is based. It includes the information contained in the accounting records underlying the financial statements, other internal information, and evidence obtained and developed from external sources, such as the entity to which audit procedures have been applied.
• Audit documentation, also known as working papers, is the record of the audit procedures performed, relevant audit evidence obtained, and the conclusions the auditors reach.
• The audit file includes the working papers for a particular engagement and is the principal record of the work performed during the audit. If the auditors are subsequently charged with negligence, the working papers included in the audit file will be the major factor in refuting or substaintiating the charge.
• Administrative Working papers are specifically designed to help the auditors plan and administer the engagement, such as audit plans, internal control questionnaires and flowcharts, time budgets, and engagement memoranda.
• Working trial balance are working paper that lists the balances of accounts in the general ledger for the current and the previous year and also provides columns for the auditors’ adjustments and reclassifications and for the final amounts that will appear in the financial statements
• Lead schedules (also called grouping sheets or summary schedules) are set up to combine similar general ledger accounts, the total of which appears on the working trial balance as a single amount
• Cutoff is the process of determining that transactions occurring near the balance sheet date are assigned to the proper accounting period.
• The permanent file serves three purposes: 1. to refresh the auditors' memories on items applicable over many years; 2. to provide new staff members with a quick summary of the policies and organization of the client; and 3. to preserve working papers on items that show relatively few or no change, thus eliminating the necessity for their preparation year after year.
• A relevant assertion is a financial statement assertion with a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated. The determination is made without regard to the effect of controls
• Existence and Occurance: Assets, Liabilities, and equity interest exist, and recorded transactions and events have occurred.
• Rights and Obligation: The company holds rights to the assets, and liabilities are the obligation of the company.
• Completeness: All asset, liabilites, equity interests, and transactions that should have been recorded are recorded.
• Cutoff: Transactions and events have been recorded in the correct accounting period.
• Accuracy, valuation, and allocation: All transactions, assets, liabilities, and equity interest are included in the financial statements in proper amounts. This includes the (a) accuracy of the initial recording of the transactions and (b) account balances. The initial recording is often at a transaction price. Is dictated by GAAP.
• Presentation and disclosure: The components of the financial statements are properly classified, described, and disclosed.
• Inspection of records or documents: examining a record or document. Examples include inspecting certain records as evidence of ownership and a test of controls to inspect records for evidence of proper authorization.
• Inquiry: Seeking information of knowledgeable persons within or outside the organization: may be oral or written. Examples include the investigation of the plant manager as to a sequence of operations and attorney related to litigation.
• External confirmation: obtaining a written response about a particular item from a third party. Examples include confirmation of accounts receivables.
• Inspection of tangible assets: physically examining an asset. An example includes inspecting the condition of inventory items.
• Observation: watching a process or procedure being performed by the entity's personnel or the performance of control activities. Examples include The client counting its inventory and client personnel performing manufacturing functions.
• Recalculation: texting the mathematical accuracy of documents or records. For example, using audit data analytics to determine whether data in a file has been summarized properly by the client.
• Reperformance: An independent execution of procedures or controls originally performed by the client (often as part of the client's internal control). Examples include reperforming the aging of accounts receivables manually or using audit data analytics.
• Analytical procedures: evaluating financial information through analysis of plausible relationships among financials and non-financial data. Examples are calculating days credit sales in ending inventory accounts receivables and comparing to prior years
• Scanning: use of professional judgment to review accounting data to identify significant unusual items that will be tested. Examples include scanning general journals for unusual entries and applying audit data analytics to identify unusual payments in the payroll register.