1 PART 2 Basic Concepts and techniques. 2 CHAPTER 4 Audit Objectives, Procedures, and Working Papers

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Text of 1 PART 2 Basic Concepts and techniques. 2 CHAPTER 4 Audit Objectives, Procedures, and Working Papers

  • PART 2Basic Concepts and techniques

  • CHAPTER 4Audit Objectives, Procedures, and Working Papers

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  • Pre-engagement arrangementsActivities

    Understand the clients business

    Obtain the financial statements

    Sufficient appropriate evidence

    General audit procedures

    Audit working papers

    Management assertions and audit objectivesBasic Concepts

    Materiality decisions

    General risk assessment

    Audit program

    Preliminary analytical proceduresAudit Planning ToolsOverview

  • 1.PRE-ENGAGEMENT ARRANGEMENTS(1) Client selection and retention(2)Communication between predecessor and successor auditors(3)Engagement letters(4)Staff Assignment(5)TIME BUGET

  • (1) Client selection and retentionClient selectionA. financial information: annual reports, interim statements, registration statements, annual information forms, reports to regulatory;B. client`s banker, legal counsel, underwriter, or other business person;

  • Client selection

    C. predecessor auditor D. special attention or unusual risksE. independenceF. special skills

  • RETENTIONMajor Changes management, directors, ownership, legal counsel, financial condition, litigation status, nature of the business, scope of the audit engagement.

  • (2)Communication between predecessor and successor auditorsRules of Professional ConductA. successor obtain inf. From predecessor; B. predecessor respond to successor;C. client consent.

    If the consent is refused, the successor should be wary.

  • (3)Engagement lettersScopeGAASPlanFee P109 exhibit 4-1

  • (4)Staff AssignmentEngagement partner: final responsibilityAudit manager1 or more senior staffStaff assistants or PA studentsStatistics, computer, industry specialistsTax and consulting partnerA second audit partner: review the work

  • (5)time budgetInterim audit work: before the balance sheet date

    Year-end audit work: before and after the balance sheet date

  • 2.Understanding the client`s business(1)methods and sources of information

    A.enquiry, including prior working papersB. observationC. study

  • (2) other aspects of understanding the businessA. First-time audit: balance sheet reliable account balancesB. internal auditors: internal controlC. analysisD.specialists

  • 3.Management`s financial statementA.CYCLE revenue and collection acquisition and expenditure production and conversion finance and investmentB.FINANCIAL STATEMENTSC.NOTES P116, 117 E4-2A/B

  • Pre-engagement arrangementsActivities

    Understand the clients business

    Obtain the financial statements

    Sufficient appropriate evidence

    General audit procedures

    Audit working papers

    Management assertions and audit objectivesBasic Concepts

    Materiality decisions

    General risk assessment

    Audit program

    Preliminary analytical proceduresAudit Planning ToolsOverview

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  • Management`s financial statementA.CYCLE revenue and collection acquisition and expenditure production and conversion finance and investmentB.FINANCIAL STATEMENTSC.NOTES P116, 117 E4-2A/B

  • 4.Management assertions and audit objective5 very general assertionsexistence or occurrence/cutoffcompleteness /cutoffrights and obligationsvaluation or allocationspresentation and disclosureP119, exhibit 4-3 Compliance assertion

  • 5.sufficient appropriate evidence in auditingThe purpose of gathering and analysing evidence is to support the decision on whether the FS conform to GAAP.(1)APPROPRIATENESS (2)SUFFICIENCY

    P123, Reliability

  • APPROPRIATENESSrelevant, reliableA. auditor`s direct evidence, the most reliableB. external evidence, very reliableC. external-internal reliableD. internal evidence low in reliableE. spoken and written by client least reliable

  • 6.general audit techniques(1)computation(2)observation(3)confirmation (4)enquiry (5)inspection(6)analysisP125, E4-4

  • (1)computation

    Auditor`s calculations

  • (2)observationPhysical observation, inspection

  • (3)confirmationIt consists of an enquiry, usually written, to verify accounting records.A.confirmation application banks, customers, borrowers p126(11)B.important general points returned directly to the audit firm p126(5)Positive confirmation negative confirmationStatements by independent parties

  • (4)enquiry Statements by client personnel

  • (5)inspectionA.documents prepared by independent outside parties p128 Formal authoritative documents 8 Ordinary documents 7B. Documents prepared and processed within the entity under audit p128 Internal documents 13

  • (5)inspectionC.a particular inspection procedure a. vouching--- account source documents existence/occurrenceb. Tracing---source documents account completeness

  • (5)inspectionc.scanningLooking for anything unusualDoes not produce direct evidenceRaise questions for which other evidence must be obtained

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  • (6)analysisA. 5 general forms p1301.Comparison of current-year account balances to balances of one or more comparable periods.2. Comparison of current-year account balances to anticipated results found in the company`s budgets and forecasts.

  • 5 general forms3.Evaluation of the relationships of current-year account balances to other current-year balances for conformity with predictable patterns based on the company`s experience.4. Comparison of current-year account balances and financial relationships(e.g, ratios) with similar information for the industry in which the company operates.

  • 5.Study of the relationships of current-year account balances with relevant nonfinancial information e.g, physical production statistics).B.the sources of information is very important p1315 general formsData interrelationships

  • 7.Effectiveness of audit procedureP134, E4-6, Summary of misstatementsP134, E4-7, Initial events that identified adjustments

  • 8. Audit working papers(1)permanent file papers(2)audit administrative papers(3)audit evidence papers

  • (1)permanent file papersA.Copies or Excerpts of the corporate charter and bylaws, or partnership agreementsB.continuing contracts, such as leases, bond indentures, and agreementC.a history of the company, its products, and its marketsD.shareholders` and directors` meeting on mattersE.share capital, retained earnings, partnership capital,

  • (2)audit administrative papersA.engagement letterB.staff assignmentsC.client organization chart-. Internal control questionnaire and control analyses-. Audit program-. Working trial balance(18), p136

  • (3)audit evidence papersP137, E4-8P138, E4-9

    4working paper arrangement and indexing

  • Auditing Assignments(CH4)(1)chapter4: 4.5, 4.8, 4.9, 4.13, 4.15(2)chapter4: 4.24--4.35(3)chapter4: 4.38, 4.39, 4.40 4.44