BAC_401_Audit_Practice_and_Investigations (1).doc

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KENYATTA UNIVERSITY INSTITUTE OF OPEN DISTANCE & e-LEARNING IN COLLABORATION WITH SCHOOL OF BUSINESS DEPARTMENT ACCOUNTING AND FINANCE MODULE: BAC 401 AUDITING PRACTICE AND INVESTIGATION WRITTEN BY MR. A. K. THUO MR. J. M. THEURI MR. E.M. SIMIYU Table of Contents 1
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Table of Contents ......................................................................................................................................... 1 LESSON ONE ............................................................................................................................................. 7 AUDITING BEYOND FINANCIAL STATEMENTS ................................................................................ 7 1.0 Introduction ....................................................................................................................................... 7 1.1 Lecture objectives .............................................................................................................................. 8 1.2 Management Responsibility .............................................................................................................. 8 1.2.1 Financial indicators ..................................................................................................................... 9 1.2.2 Operating Factors ...................................................................................................................... 10 1.2.3 Others ....................................................................................................................................... 10 1.3 Mitigating Factors ............................................................................................................................ 10 1.4 Auditor’s Responsibility .................................................................................................................. 11 1.4.1 Planning Considerations ........................................................................................................... 11 1.4.2 Evaluating Management’s Assessment ..................................................................................... 12 1.4.3 Period beyond Management’s Assessment ................................................................................ 13 1.4.4 Additional Audit Procedures when Events or Conditions are identified. ................................... 14 1.5 Audit Conclusions and Reporting .................................................................................................... 15 1.6 Going Concern Assumption Appropriate but a Material Uncertainty exists ..................................... 15 1.7 POST BALANCE SHEET EVENTS AND SUBSEQUENT EVENTS ........................................... 18 1.7.1 Events Occurring Up to the Date of the Auditor’s Report ......................................................... 19 1.7.2 Factors discovered after the Date of the Auditor’s Report but Before Financial ....................... 21 1.7.3 Facts Discovered After the Financial Statements Have Been Issued ......................................... 21 1.8 Dating Audit Report ......................................................................................................................... 23 1.9.1 Features or Qualities which Auditor Look for during Final Review of Financial Statements ...23 1.9.2 Audit Procedures ....................................................................................................................... 24 1.10 Activity .......................................................................................................................................... 25 1.11 Summary ........................................................................................................................................ 25 1.12 Self Testing Question ..................................................................................................................... 26 1.13 Further Readings ............................................................................................................................ 26 LESSON TWO .......................................................................................................................................... 27 AUDITORS LIABILITY .......................................................................................................................... 27 2.0 Introduction ..................................................................................................................................... 27 2.1 Objectives ........................................................................................................................................ 27 2
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2.2 Minimizing Auditors Liability ......................................................................................................... 28 2.3 Agreement for Extension ................................................................................................................. 29 2.4 Arguments against Extension ........................................................................................................... 30 2.5 Decisions of the Court ..................................................................................................................... 30 2.5.1 Foreseeability ............................................................................................................................ 30 2.5.2 Proximity .................................................................................................................................. 31 2.6 The Whole Circumstances of the Case ............................................................................................ 31 2.7 Auditors Independence, Publicity and Advertising in Audit Practice ............................................... 31 2.7.1 Situations Which May Comprise Auditors Independence ......................................................... 31 2.7.2 Ways of Expanding Clients Base .............................................................................................. 32 2.8 The Following are not specifically allowed by Professional Standards ........................................... 33 2.9 Advertising of Services is allowed under the Following Circumstances .......................................... 33 2.10 Constitution of Audit Practice ........................................................................................................ 33 2.11 Activity .......................................................................................................................................... 34 2.12 Self Testing Questions ................................................................................................................... 34 2.13 Summary ....................................................................................................................................... 34 2.14 Further Readings ............................................................................................................................ 35 LESSON THREE ...................................................................................................................................... 36 AUDIT RISK (INTERNATIONAL STANDARD ON AUDITING 400) .................................................. 36 3.0 Introduction ..................................................................................................................................... 36 3.1 TYPES OF AUDIT RISK ................................................................................................................ 36 3.1.1Normal Audit Risk ..................................................................................................................... 36 3.1.2 Higher than Normal Risk .......................................................................................................... 37 3.1.2.1The audit approach in high risk situations must be ................................................................. 38 3.2 Audit Work Risk .............................................................................................................................. 38 3.3 Audit Firm Organization and Audit Risk ......................................................................................... 38 3.4 Particular Audits and Audit Risk ...................................................................................................... 39 3.5 The Risk Based - Audit Methodology .............................................................................................. 40 3.6 Components of Risk ........................................................................................................................ 41 3.7 Inherent Risk ................................................................................................................................... 43 3.8 Understanding the Accounting and Internal Control Systems .......................................................... 45 3.9 Quality and Timeliness of Audit Evidence ....................................................................................... 49 3
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3.10 Final Assessment of Control Risk .................................................................................................. 50 3.11 Relationship between the Assessment of Inherent and Control Risks ............................................ 50 3.12 Detection Risk ............................................................................................................................... 50 3.13 Audit Risk in Small Business ......................................................................................................... 52 3.13.1 Communication of Weaknesses .............................................................................................. 52 3.13.2 Public Sector Perspective ........................................................................................................ 52 3.14 Activities ........................................................................................................................................ 53 3.15 Summary ....................................................................................................................................... 53 3.16 Self Testing Question ..................................................................................................................... 53 3.17 Further Readings ............................................................................................................................ 53 LESSON FOUR ........................................................................................................................................ 54 AUDIT SAMPLING AND OTHER SELECTIVE TESTING PROCEDURES ........................................ 54 4.0 Introduction ..................................................................................................................................... 54 4.1 STATISTICAL SAMPLING ............................................................................................................ 55 4.2 STAGES OF AUDIT OF SAMPLING ............................................................................................ 55 4.2.1 Sample selection ....................................................................................................................... 56 4.2.2 Sample size ............................................................................................................................... 56 4.2.3 Methods of Sample Selection
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