Reliab level High

inspection of tangible assets, reperformance, and recalculation

Reliab level Medium

inspection of records and docs, scanning, confirmation, and analytical procedures

Reliab level

Low

observation and inquiry

existence and occurance

Tracing

completeness

Assertions for trans under audit

AACCCO

authorization, accuracy, completeness, cutoff, classification, occurrence

Account balances at period end Assertions

rights and obligations, existence, completeness, valuation and allocation RECV

Assertions for presentation

completeness, classification, accuracy, occurrence, CCAO

Audit prodcedures used to(3 thing)

obtain understanding of entity, test operating effectivenss of controls, detect material misstatements

Audit evidence is considered competent when it provides information

that is relevant and reliable

Factors auditor consider for reliability(3 things)

independence of source, effectiveness of internal control, auditor’s personal knowledge

Sufficiency is the measure of

the quanity of audit evidence

Audit documentation is the auditor’s

principal record of the work performed and the basis for the conclusions in the auditor’s report

PCAOB Auditing Standard 3

must keep records for 7 years with all evidence and opinion, for public companies only, auditor owns work papers

Audit documentation formatted 3 characteristics

1. Proper heading 2. Organized so that audit team can find docs  3. Tick marks used on document

Internal controls falls under

second standard of field work

Internal controls provide reasonable assurance about

-          Reliability of fina reporting

-          Operational effectiveness and efficiency

-          Compliance with laws and regs

-          Safeguard assets and data

Public companies integrated audit

IC and financial reporting

Ceo and cfo have

final say on controls

Deficiency types

-    Material weakness – worst (have to inform audit committee and auditor

-          Significant deficiency

-          Control deficiency

Auditor must report fraud to audit committee when

someone in power commits fraud (management)

Controls testing effects

substance testing

SOX requires an

accepted framework of controls

Most companies use

COSO framework

Types of assertions

Occurrence

Completeness

Accuracy

Authorization

Cutoff

Classification

Occurrence

– seg of duties, prenumbered docs, daily or monthy rec

Completeness

same as occurrence

Accuracy

internal verification of amounts and calculations, month bank rec

Authorization

general and specific authorization of transactions

Cutoff

procedures for prompt recording of trans, internal review and verification

Classification

chart of accouts, internal review

-          Not 100% effective

-          Size of staff effects seg of duties

-          People don’t follow controls

-          Management override a big red flag

-          Collusion

-          Mistakes

-          Inquiries

-          Inspection

-          Observation

-          Reperformance

Substantive strategy does not rely of IC because

CR is assessed at max

Substantive strategy does not rely of IC because CR is assessed at max

1. controls not effective

2. scope limitations

3. not efficenct to test controls

Reliance strategy greater reliance on IC

-          Controls are effective

-          Lower reliability tests used

-          Rely on controls

AS CR increases

use more substantive tests

Low detection risk

use high CR substantive

High detection risk use

low CR reliance

Most controls test happens

happens of year

SSAE16

attestation audit would come from company who does business with company you are auditing, would give info about the companies controls, gives type 1 or 2 assurance, 1 is best

Sox requires opinion

on IC effectiveness

Reporting IC (3)

Control deficiency – there is a prob with the IC such that it doenst prevent or detect material miss in a timely manner – report to mgmt

Significant deficiency – not material but important enough to inform mgmt

Material weakness –deficiency w/ reasonable possibility of material misstatement

Examples of material miss

-          Ineffective board or audit comm.

-          Intentional override of IC

-          Failure to safeguard assets from damage and theft

-          Tone at top

-          Ignore GAAP

Reporting IC Report types

Unqual – no material weaknesses any scope limit minor

Adverse – one or more control material weaknesses

Disclaim – more than minor scope limitation

*no qualified

Contingent Liabilities types

Probable – have to put liability on balance sheet, footnote if cant estimate

Reasonable possible – footnote still have to estimate

Remote – not disclosed

Subsequent events – type 1

existed at time of financial statement, have to readjust financial statement

Subsequent events Type 2

did not exist at time of financial statement – pro forma financial statement needed

Duel dating involves

revising audit report to refer to fina statement date and subsequent event date

Final processes include

final analytical procedures, going concern evaluation, representation letter, audit review, final evalutaiton, evaluate fina state presentation, independent review

Standard unqualified report 8 elements

1. report title

2. addressee

3. intro paragraph

4. scope paragraph

5. opinion paragraph

6. explanatory paragraph audit controls

7. name of auditor

8. audit report date

3

1

Report types

Unqualified

Modified unqualified

Modified unqualified – going concern

If opinions from 2 years are different then have to

say both opinions and show what year is which

Annual report – responsible for

financial statements only

Sampling used not as extensively as before but still used for

human involvement in many controls, examination of docs and assertions, and corroborate evidence from third parties

Third standard of fieldwork

sufficient competent evidence must be obtained to form an opinion

Type 1 sampling risk

– risk of incorrect rejection, sample results lead to conclusion that there is a misstatement when there really isn’t

Type 2 risk of incorrect acceptance

sample results lead to conclusion that no misstatement or control deficiency exists when one really does * worse cause increase audit risk

Sampling and non sampling risk are relevant for

tests of controls and substantive tests

Tolerable error –

acceptable defect rate

Expected error

expected defect rate

Precision

at the planning state of sampling is the difference between tolerable and expected error

Tolerable error has an

inverse relation to sample size

There is no effect between the

population size and sample size once the transactions are over 500

If there is higher risk then use

bigger sample

Nonstat sampling

don’t use statistical techniques to determine sample size, select items, or measure sampling risk

Statistical sampling – use

laws of probability to compute sample size and evaluate results

Attribute sampling – used to

estimate the proportion of population that possess a specified characteristic (commonly used for tests of controls)

Classic variables sampling – use

basic statistics theory to determine whether an account is materially misstated

Monetary unit sampling – uses

attribute sampling theory and techniques, but for monetary amounts, estimate the dollar amount of misstatement for a class of transactions or an account balance

7 step process attribute sampling

1. determine test objectives

2. define the population characteristics

3. determine sample size

4. select sample items

5. perform audit procedures

6. calculate the sample deviation rate and computed upper deviation rate

7. draw final conclusions

Common non stat types –

ratio estimation, difference estimation

Non stat is

more common, easier, less info required, but less precise

material weakness