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Chapter 6
1. Chapter 6
Important points about an integrated audit:
1. Implement a top-down, risk based approach to identify significant accounts, relevant
assertions and the risk of misstatement.
2. Reasonable possibility that a material misstatement could occur
3. Recognizes that the external auditor can rely on some of the companu;s evaluation
and/or testing of controls, particulary work performed by a competent and independent
internal audit function.
4. Emphasizes the need to document the auditor’s reasonin process
5. Increases audit efficiency by getting auditors to think through areas where they can
place greater reliance on effective internal controls in reducing the amout of substantive
tests of account balance
The work is integrated to promote audit efficieny00 integrated because both the tests of control
and the substantive tests of account balances provide evidence related to each other.
Unqualified report contains the following elements
o The internal control report is contained in the same report that contains the opinion on
the financial statements
o The auditor provides an opiion on the effectiveness of internal control in the context of
agreed-upon criteria
o Recognizes and conveys to users that there are limitations of internal control.
Adverse report is issued when the auditor finds one or more material weaknesses in the client’s
internal control over financial reporting.
The challenge in an integrated audit is to find the most cost-effective manner in which to
develop sufficient evidence to render an opinion in the financial statements and the
effectiveness of a company’s internal control.
Top-down risk based approach to an integrated audit requires auditors to focus on accounts,
disclosures and assertions that have a reasonable possiblit of material misstatement to the
financial statement and relate disclosure.
Phase ! and II
o Update information about various risks
The auditor should continually gather and update information on business risk
including the identification of any fraud risk factors noted during preliminary
audit planning.
Ultimately, the starting point of the integrated audit shoud be to understand:
The risks that the business faes in meeting its objectives
Incentive that may motivate management or other employees to
misstate the financial statements
The isksinherenet in important business processes.
o Consider the possibility of account misstatements
2. The auditor should analyze the potenaial management motivations to misstate
account balanes, as well as the existence of other fraud indicatos and determine
the most lilely method for misstating account balances.
The area of accounting judments and estimates is almost always considered
high risk.
o Complete preliminary analytical procedures
The auditor is required to perform preliminary analytical procedures.
These procedures help the auditor to determine whether unexpected
relationships exist in the accounts
o Understand the client’s internal controls
The auditor will develop an understanding of the client’s internal ocntrosl that
are deisgned to address the risk identified in the three previous steps, including
relevant entity-level controls and fraud0related controls.
The amount of wok performed by the independent auditor is dependent on the
design, thoroughness and independence of management’s assessment process.
Phase III and IV
o Identify controls to test
The auditor determines the important ontrols that need to be tested for the
purposes of
Formulating an opinion on the entity’s internal controls
Forming a bsis for desgning substantive tests of account balances
Overall, risks associated with significant accounts, disclosures and their relevant
assertions should lead to the identification of important controls that need to
be tested.
The auditor needs to explicitly link controls and assertions when determining
which controls to select for testin.
o Make a plan to test the controls and execute that plan
For non-integrated audits, the auditor can choose to not test controls, but the
auditor must determine where material misstatement could occur if controls
are not present or may not be working.
In an integrated audit, the auditor has to understand and test controls that are
important to preventing or detecting significant misstatements.
The auditor will test the design effectiveness of controls by determining
whether the company’s controls, as designed and implemented, can effectively
prevent o detect material misstatements in the financial statements.
Design effectiveness- inquiry, observation, inspection (walkthrough may be the
most efficient way to evaluate design effectiveness)
Operating effectiveness- inquiry, observation, inspection and reporeformance.
o Consider the results of control testing
If deficiencies are identified, assess those deficiencies to determine whether
they are significant deficiencies or material weaknesses
3. If control deficiencies are identified assess whether the preliminary control risk
assessment is still appropriate, determine the extent that cntrols can provide
evidence on the correctness of account balances and determine planned
substantive audit procedures.
o Conduct substantive audit tests
The auditor plans substantive procedures based on the potential for
misstatement and the information gathered about the effectiveness of internal
controls
Residual risk- the probability that the account balance might be misstated after processing and
the application of internal controls.