PowerPoint Presentation Topic 3: Overview of assurance concepts and the auditing process Learning outcome ACC331 Topic 3 / 31 Outline the main steps involved in the audit process Outline the audit...

PowerPoint Presentation
Topic 3:
Overview of assurance concepts and the auditing process
Learning outcome
ACC331 Topic 3

31
Outline the main steps involved in the audit process
Outline the audit risk model
Explain the relationship between financial report assertions, audit objectives, procedures and evidence
Explain the concept of materiality
3.1
3.2
3.3
3.4
Topic learning outcomes
1
3.5
Describe the general requirements and contents of audit working papers
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ACC331 Topic 3

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Overview of assurance concepts and the auditing process
Learning Outcomes: 3.1 & 3.2
Learning outcome
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Audit process overview
3.1
3
Step 1
Step 2
Step 3
Assess risks and client potential
Perform thorough analysis of company, strategy, environment
Assess company risks
Step 4
Step 5
Assess controls and other processes in place to address risk
Perform analytical procedures
Step 6
Step 7
Step 8
Step 9
Test operation of controls where controls reduce the risk of misstatement
Assess remaining risk of misstatement
Design direct tests of account balances
Formulate opinion, review quality of work
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3
Audit process overview
3.1
4
Step 1
Assess risks and
client potential
Step 2
Perform thorough analysis of company, strategy, environment
Accept client?
Step 3
Assess company risks
Review
oad risks affecting client, assess management integrity, assess long prospects of client
Terminate search and engagement
Thorough understanding of company, strategies, competitors, financial feasibility, etc, as a base to understand future prospects and expected financial results
Assessment of
oad risks facing the company and the potential effect of these risks on the company’s financial results
No
Yes
Topics 3 & 4
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4
Audit process overview
3.1
5
Step 4
Assess controls and other processes in place to address risk
Step 5
Perform analytical procedures
Account balances with little or no risk of material misstatement
Assess whether the control and other processes are adequate to reduce the risk of a material misstatement occu
ing in the financial statements
Co
oborate previous assessment and then determine if risk of financial misstatement is reduced to an acceptable level
Account balances with residual risk of material misstatement
Topics 4 & 5
Learning outcome
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5
Audit process overview
3.1
6
Step 6
Test operation of controls where controls reduce the risk of misstatement
Step 7
Assess remaining risk of misstatement
Step 8
Design direct tests of account balances
To reduce the risk of material misstatements occu
ing in audited financial statements
Communicate opinion to client and users
Step 9
Formulate opinion, review quality of work
To assess/confirm the effectiveness of the controls
Topic 6
Topic 7
Topics 8 & 9
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6
Financial report assertions
3.2
7
By signing their statement, Directors are making claims about recognition and measurement of the various elements of the financial report
Per ASA 315.A128 there are 2 categories of assertions:
Classes of transactions
Account balances
Auditors restate the assertions as specific audit objectives for each material class of transaction, balance or disclosure involvement in the financial report
They then design audit procedures that gather evidence to support those objectives
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.
7
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Transaction assertions
3.2
8
Occu
ence: transactions and events that have been recorded have occu
ed and pertain to the entity.
Completeness: all transactions and events that should have been recorded have been recorded.
Accuracy: amounts and other data relating to recorded transactions and events have been recorded appropriately.
Cut-off : transactions and events have been recorded in the co
ect accounting period.
Classification: transactions and events have been recorded in the proper accounts.
Presentation: transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.
    
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8
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Existence: assets, liabilities and equity interests exist.
Rights and obligations: the entity holds or controls the rights to assets, and liabilities are the obligation of the entity.
Completeness: all assets, liabilities and equity interests that should have been recorded have been recorded and all related disclosures that should have been included in the financial reports have been included.
Accuracy, valuation and allocation: assets, liability and equity interests are included in the financial report at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded and related disclosures have been appropriately measured and described
Presentation: assets, liabilities and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework
Account balance assertions
3.2
9
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9
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Assertions to objectives—an example
3.2
10
    Assertion    Illustrative audit objectives
    Existence    Inventories included in the balance sheet physically exist.
        Inventories represent items held for sale in normal course of business.
    Completeness    Inventory quantities as per the accounting records include all products, materials and supplies owned by the company that are on hand.
        Inventory quantities include all products, materials and supplies owned by the company that are in transit or stored at outside locations.
    Rights and obligations    The company has legal title or similar rights or ownership to the inventories
        Inventories exclude items billed to customers or owned by others.
    Accuracy, valuation and allocation    Inventories are properly stated at cost (except when net realisable value is lower).
        Slow-moving, excess, defective and obsolete items included in inventories are properly identified and valued.
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10
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Audit procedures
3.2
11
Therefore, once audit objectives have been established….
audit procedures are used to obtain audit evidence so that….
audit objectives can be met
as per ASA 500.A14-25 common audit procedures are:
Inspection
Observation
Inquiry
Confirmation
Recalculation
Re-performance
Analytical procedures
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11
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Transactions can be traced from:
initial entry in the system to…
intermediate records (where the transactions become components of subtotals) to…
the final records (where subtotals are summarised) for…
presentation in the financial report.
The audit trail
3.2
12
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12
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Direction of tracing
Direction of the tracing can be modified. An auditor can trace from:
point of initiation of transaction to final recording (assertion of completeness), OR
trace from final record back to point of initiation (assertion of existence or occu
ence).
Accounting
ecords
Source
documents
Existence (of account balance components)
Occu
ence (of transactions in accting records)
Completeness (of account balance components) o
Completeness (of transactions in accounting records)
3.2
13
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Assertions to objectives to procedures
3.2
14
Accuracy, valuation and allocation
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14
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Audit evidence
3.2
15
Audit evidence is needed to support audit objectives to support our final opinion
It needs to be sufficient and appropriate
Sufficiency: quantity of audit evidence necessary to provide the auditor with a reasonable basis for an opinion on the financial report
Appropriateness: quality of audit evidence. There two dimensions:
Relevance — evidence relates to the financial report assertion of interest
Reliability — influenced by the source and nature
of the evidence.
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Reliability of audit evidence
3.2
16
Evidence from sources outside an entity is more reliable than evidence obtained solely from within the entity.
Evidence obtained directly by the auditor is more reliable than evidence obtained from the client.
Evidence in the form of documents or written representations is more reliable than oral representations.
Evidence provided by original documents is more reliable than evidence provided by photocopies
or facsimiles.
We can generalise the following (ASA 500.A31):…
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Overview of assurance concepts and the auditing process
Learning Outcome: 3.3
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Audit risk is the risk that the auditor will give an inappropriate audit opinion when the financial report is materially misstated.
Before issuing an opinion on the financial report, the auditor needs to reduce audit risk to an acceptable level to ensure the opinion is reliable.
Overview of the audit risk model
3.3
18
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An auditor reduces audit risk by performing audit procedures until...
there is sufficient and appropriate evidence for each assertion of...
each significant transaction class or account balance to...
provide reasonable assurance that...
the financial reports are not materially misstated.
Reducing audit risk
3.3
19
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The audit risk model focuses audit effort on those classes of transactions or balances (and the particular assertions) that are likely to contain material misstatements.
As outlined in ASA 200.A39-46 there are three components:
Inherent risk (IR): Susceptibility of an assertion to material misstatement given inherent and environmental characteristics, but without regard to prescribed control procedures.
Control risk (CR): Risk that material misstatement might not be prevented or detected by internal control procedures.
Detection risk (DR): Risk that auditors’ substantive procedures will lead auditor to conclude no material misstatement exists when, in fact, they do.
Components of audit risk
3.3
20
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Audit risk (in a funky diagram)
3.3
21
Auditors can’t change this
Auditors can’t change this either!
But can obtain evidence to support an assessed level
This is where the auditor can reduce audit risk
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Auditors cannot change inherent risk.
Auditors cannot directly change control risk.
An auditor can obtain evidence to support an assessed level of control risk less than high (expect to rely on internal control) by examining control environment, risk assessment process, information system, control activities and monitoring of controls, and testing their effectiveness.
The level of detection risk is the lever an auditor can pull to reduce audit risk by:
Appropriate planning, direction, supervision and review
Decisions on the nature, timing and extent of audit procedures
Effective performance of procedures and evaluation of results
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21
The link between audit risk components
3.3
22
Need to make an assessment
If High, NO need to test controls
Will rely on substantive tests …of transactions and balances instead
Make sure this is practical
TEST!
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To assess control risk as high, auditor must expect that substantive procedures alone will provide sufficient appropriate evidence.
Areas where substantive procedures alone may not provide sufficient appropriate evidence include routine recording of significant classes of transactions