Auditing Principles 2, audit risk, control risk, detection risk, inherent risk, risk of material misstatement, audit plan, risk assessment, information risk, substantive procedures, audit evidence, client acceptance, engagement letter, audit plan, internal auditors, time budget, audit procedures, Auditing Principles 2, audit risk, control risk, detection risk, inherent risk, risk of material misstatement, audit plan, risk assessment, information risk, substantive procedures, audit evidence, client acceptance, engagement letter, audit plan, internal auditors, time budget, audit procedures, substantive, audit plan, vouching, tracing, scanning, tangible assets, observation, inquire, confirmation, recalculation, JoseCintron, Advance Business Consulting, mba4help.comsubstantive, audit plan, vouching, tracing, scanning, tangible assets, observation, inquire, confirmation, recalculation, JoseCintron.com, Advance Business Consulting, mba4help.com

1. Auditing Principles
Jose Cintron, MBA-CPC
jose@mba4help.com
Http://josecintron.com
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2. Audit Risk
Audit risk is the probability that an
audit team will express an inappropriate
audit opinion when the financial
statements are materially misstated (i.e.,
give an unqualified opinion on financial
statements that are misleading because
of material misstatements that the
auditors failed to discover). Such a risk
always exists, even when audits are
well planned and carefully performed.
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3. Audit Risk
Audit risk can be broken down into the risks that (1) a material
misstatement occurs (inherent risk), (2) is not prevented or detected by
client internal controls (control risk), and (3) is not detected by the
auditor's procedures (detection risk). Inherent risk and control risk are
combined into risk of material misstatement (RMM)
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4. Inherent Risk
Inherent risk is the probability that, in the absence of internal
controls, material errors or frauds could enter the accounting system used
to develop financial statements. You can think of inherent risk as the
susceptibility of the account to misstatement. In other words “what could
go wrong?”—inherent risk is a function of the nature of the client's
business, the major types of transactions, and the effectiveness and
integrity of its managers and accountants.
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5. Control Risk
Control risk is the probability that the client's internal control activities
will fail to prevent or detect material misstatements provided that they
enter or would have entered the accounting system in the first place.
Auditors do not create or manage control risk. They can only evaluate an
entity's control system and assess the probability of its failure to prevent
or detect material misstatements.
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6. Detection Risk
Detection risk is the probability that audit procedures will fail to detect
material misstatements provided that any have entered the accounting
system in the first place and have not been prevented or detected and
corrected by the client's internal controls. In contrast to inherent risk and
control risk, auditors are responsible for performing the evidencegathering procedures that manage and establish detection risk. These
audit procedures represent the auditors' opportunity to detect material
misstatements in financial statements. In other words, unlike inherent
risk and control risk, auditors can and do influence the level of detection
risk.
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7. Audit Plan
GAAS require the preparation of a written audit plan. An audit
plan(formerly referred to as an audit program) is a list of the audit
procedures auditors need to perform to gather sufficient appropriate
evidence on which to base their opinion on the financial statements. The
procedures in an audit plan should be stated in enough detail to instruct
the assistants about the work to be done.
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8. Audit Plan
The audit plan is a comprehensive list of the specific audit procedures
that the audit team needs to perform in order to gather sufficient
appropriate evidence on which to base their opinion on the financial
statements.
Although risk assessment provides the basis to determine the
nature, timing, and extent of procedures to be performed at an audit
client.
Other planning issues include properly staffing the audit, considering the
work of internal auditors, the use of specialists, the use of IT auditors and
the time budget.
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9. Risk Assessment
An important part of the
performance principle is for
auditors to identify important
concerns (or risks) they face in the
audit. This process is referred to as
risk assessment and follows
engagement planning, as follows:
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10. Information Risk
Information risk is the probability
that the information distributed by
an entity will be materially false
and misleading. Auditors' evidencegathering and reporting reduce this
risk to financial statement
users, but the team itself faces the
risk of issuing an incorrect opinion
on the financial statements
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11. Risk Assessment
The risk assessment process requires an understanding of the client, its
operating environment, and its industry. This includes internal controls
operating within the client's accounting information systems that
ultimately produce the client's financial statements. Internal control
may be defined as the policies and procedures implemented by an entity
to prevent or detect material accounting frauds or errors and provide for
their correction on a timely basis. Satisfactory internal control reduces
the probability of frauds or errors in the accounts.
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12. You are who your friends are
It's important to acknowledge the power of a positive attitude. This
goes not only for yourself, but also for the people you surround
yourself with.
Attitudes are catchy. Whether they're positive or negative, they're
rubbing off on you. If you're around people who complain, judge, spread
negative gossip, blame others and play victim roles, chances are you do,
too.
Successful people surround themselves with successful people, plain and
simple. They want to be around others who are achieving goals and
making things happen. They want to know their secrets and strategies for
winning
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13. Substantive Procedures
Effective internal control reduces the control risk, and auditors thus have
a reasonable basis for reducing the necessary effectiveness of further
audit procedures.
Ineffective internal control increases control risk, and auditors must
increase the necessary effectiveness of further audit procedures.
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14. Audit Evidence
The final element of the performance principle requires that the audit
team collect and evaluate sufficient appropriate evidence to afford a
reasonable basis for their opinion. Evidence is the information used by
auditors in arriving at the conclusions on which the audit opinion. To be
considered appropriate, evidence must be relevant and reliable
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15. Detection Risk
Detection risk represents the risk that the audit team's substantive
procedures will fail to detect a material misstatement. As auditors require
higher quality evidence (lower detection risk), they must gather more
relevant and reliable evidence (appropriateness) and evaluate a larger
number of transactions or components (sufficiency).
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16. Client Acceptance or Continuance
An important element of a public accounting firm's quality control
policies and procedures is a system for deciding whether to accept a new
client and, on a continuing basis, deciding whether to continue providing
services to existing clients. Public accounting firms are not obligated to
accept undesirable clients, nor are they obligated to continue to serve
clients when relationships deteriorate.
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17. Engagement Letters
Professional standards require auditors to reach a mutual understanding
with clients concerning engagement requirements and expectations and
to document this understanding, usually in the form of a written letter.
When a new client is accepted or when an audit engagement continues
from year to year, an engagement letter should be prepared.
This letter sets forth the understanding with the client, including in
particular: (1) the objectives of the engagement, (2) management's
responsibilities, (3) the auditors' responsibilities, and (4) any limitations
of the engagement.
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18. Engagement Letter
In effect, the engagement letter acts as a contract. Thus, it serves as a
means for reducing the risk of misunderstandings with the client and as a
means of avoiding legal liability for claims that the auditors did not
perform the work promised.
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19. Audit Plan
An audit plan is a comprehensive list of the specific audit procedures
that the audit team needs to perform to gather sufficient appropriate
evidence on which to base their opinion on the financial statements. The
professional standards require that the auditor plan each audit
engagement, including the establishment of an overall strategy for each
audit engagement.
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20. Internal Auditors
External auditors must obtain an understanding of a client's internal audit
department and its work as part of the understanding of the client's
internal control.
Objectivity. Internal auditors can never be considered independent in the
same sense as external auditors because internal auditors are employed
and compensated by the client.
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21. Time Budget
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22. Audit Procedures
Auditors use audit procedures for three purposes;
1. They use audit procedures to gain an understanding of the client and
the risks associated with the client (risk assessment procedures).
2. Auditors use audit procedures to test the operating effectiveness of
client internal control activities (tests of controls).
3. Auditors use audit procedures to produce evidence about
management's assertions (i.e., relating
to existence, occurrence, completeness, cutoff, rights and
obligations, valuation and allocation, accuracy, classification, and
understandability) related to the amounts and disclosures in a client's
financial statements (substantive procedures).
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23. Substantive Audit Plan
A substantive audit plan would contain a list of audit procedures for
gathering evidence related to the relevant assertions identified for the
significant financial statement accounts and disclosures at an audit client.
The substantive audit plan (i.e., the nature, timing, and extent of
procedures) depends almost exclusively upon the assessment of risk at an
audit client.
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24. Documents Prepared by
Independent Outside Parties
A great deal of documentary evidence is external-internal
(i.e., documents initially prepared by an external party but received by
the client). The signatures, seals, engraving, or other distinctive artistic
attributes of formal authoritative documents make such sources more
reliable than ordinary documents prepared by outsiders.
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25. Internal evidence
Documentation of this type is internal evidence. Some of these
documents may be quite informal and not very authoritative or reliable.
As a general proposition, the reliability of these documents depends on
the quality of internal control under which they were produced and
processed.
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26. Vouching and Tracing
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27. Scanning—Examination of
Documents
Scanning is the way auditors
exercise their general alertness to
unusual items and events in clients'
documentation. A typical scanning
directive in an audit plan is: “Scan
the expense accounts for credit
entries; vouch any to source
documents.”
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28. Inspection of tangible assets
Examination of Documents
Inspection of tangible assets
includes examining
property, plant, and
equipment, inventory, and
securities certificates. Physical
inspection of tangible assets
provides compelling evidence
of existence and may provide
tentative evidence of valuation.
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29. Observation
Examination of Documents
Although inventory observation often refers to the physical inspection of
inventory (tangible assets), auditors use observation when they view the
client's physical facilities and personnel on an inspection tour, when they
watch personnel carry out accounting and control activities (such as
observing client inventory counts), and when they participate in a
surprise payroll distribution.
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30. Inquiry
Examination of Documents
Inquiry is a procedure that generally involves the
collection of oral (but sometimes written)
evidence from independent parties and
management (commonly referred to
as management representations). Important
inquiries and responses should be documented in
writing. Auditors typically use inquiry
procedures during the early planning stages of
the engagement.
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31. Confirmation
Confirmation by direct correspondence with independent parties is a
procedure widely used in auditing. It can produce evidence of existence
and ownership and sometimes of valuation and cutoff.
Banks—cash and loan balances.
Customers—receivables balances.
Borrowers—note terms and balances.
Agents—inventory on consignment or in warehouses.
Lenders—note terms and balances.
Policyholders—life insurance contracts.
Vendors—accounts payable balances.
Registrar—number of shares of stock outstanding.
Attorneys—litigation in progress.
Lessors—lease terms.
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32. Recalculations/Re-performance
Auditor recalculation of calculations
previously performed by client personnel
produces compelling mathematical evidence.
A client calculation is either right or wrong.
Reperformance is broader in approach.
Reperformance can involve any client
control procedure such as matching vendor
invoices with supporting purchase orders and
receiving reports.
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33. Speaker-Available presentations
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Social media press release
SEO-Website optimization
Local Directories
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Business Plan
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SMM strategies
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