Outline Day 5 - Student - Outline Day 5 Chapter 8 and 9...

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Outline Day 5 Chapter 8 and 9 Recap Difference between current files and permanent files Audit risk (risk that an auditor may issue unqualified report for failure to detect material misstatement either due to error or fraud) and what is acceptable Engagement letter – Terms of the audit Board meeting minutes – through balance sheet date Related party transactions – Parent company and its subsidiaries. Analytical procedures Objective of a financial statement audit – Obtain reasonable assurance Materiality – Influence decision makers (probably/likely) Determining Materiality – B/S and I/S approach. B/S most commonly used Performance Materiality – Adjusting materiality at a lower value - Professional judgment Materiality – Both overstatement and understatements Known misstatements – Material (adjust F/S and/or finding) Inherent risk – Risk when no controls are in place. Note that certain accounts are inherently riskier than others due to their nature and risk of material misstatement Chapter 10 – Section 404 Audits of Internal Control and Control Risk Internal control – Consists of policies and procedures designed to provide reasonable assurance that the company achieves its objectives and goals Internal controls help: 1. Reliability of financial reporting 2. Efficiency and effectiveness of operations 3. Compliance with laws and regulations Mgmt must establish and maintain the entity’s internal controls Reasonable assurance – there is that word again Inherent limitations – Internal controls can never be completely effective, regardless of the care followed in their design and implementation Management’s section 404 reporting responsibilities: Management of all public companies to issue an internal control report that includes the following – 1. A statement that management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting 2. An assessment of the effectiveness of the internal control structure and procedures for financial reporting as of the end of the company’s fiscal year 3. Mgmt Must identify the framework used to evaluate the effectiveness of internal control – most used is Committee of Sponsoring Organizations (COSO) Mgmts assessment of IC over financial reporting consists of: 1. Design of internal control – how transactions are initiated, authorized, recorded, processed, and reported to identify points in the flow of transactions where misstatement due to error or fraud could occur 2. Operating effectiveness of controls (mgmt. must test the operating effectiveness of controls Auditors responsibilities: Auditor’s mostly focus on the design of the internal controls
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  • Fall '15

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