ACCT_3444_Chapter_7_and_8 - ACCT 3444 Lecture 3 Recap...

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ACCT 3444 Week 4 Lecture 3 Recap – Chapters 5,6 Assertions/Objectives - CEACVOP Completeness o Cutoff Existence or Occurrence o Cutoff/Allocation Accuracy Classification Valuation Ownership (rights and obligations) Presentation and Disclosure Appropriate Procedures for the Assertions Existence= Observation i.e. observe inventory count Cut Off= Examine shipping documents a few days before/after year end Completeness= Issue is usually understatement of Liabilities-Search for unrecorded liabilities Rights and Obligations= Title Search Valuation= Reasonableness of AFDA Hierarchy of Audit Evidence (High to Low): 1. Auditor’s direct personal knowledge obtained through observation and his or her own mathematical computations. 2. Documentary evidence obtained directly from independent external sources. 3. Documentary evidence that originated outside the company’s data processing system but that has been received by the company. 4. Internal evidence of documents that are produced, circulated and stored within the company’s information system. 5. Spoken and written representations given by the client’s officers, directors, owners and employees. Hand in Chapter 7 and 8 Questions Chapter 5 and 6 In Class Wrap Up Questions: 1
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5-27 (professional judgment mini case) 6-24 (analytical procedures and audit trail) Chapter 7: Materiality and Risk Auditors need to conduct a thorough, high quality audit that provides value to users of the statements and their clients they need to achieve a balance between the costs of conducting the audit, against the risk of being sued. Audit Risk Risk – auditors accept that there is some level of uncertainty in performing the audit function Need to consider risks inherent in the company which impacts the likelihood of misstatements: Audit Risk- the risk the auditor expresses an inappropriate opinion i.e. issue an unqualified report when the financial statements are materially misstated. - Auditor has to plan the audit to reduce this risk to an acceptably low level - Effective risk response strategies are essential in order to achieve a quality audit AUDIT RISK MODEL Audit Risk = Inherent Risk*Control Risk*Detection Risk Inherent Risk(IR) – A measurement of the probability that material misstatements have occurred, regardless of existence of internal control in transactions entered into the f/s. A high level of inherent risk will increase overall audit risk 2
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Factors Influencing Inherent Risk (IR): 1. Nature of the clients business (including products and services, complex transactions, complex products/business model) 2. Nature of data processing systems and extent of data communications 3. Sophistication of client personnel (training/qualifications/turnover) 4. Changes in key client personnel 5. History of misstatements/errors from previous audits 6. Management bias/client motivation - management bonuses/ performance evaluation system/circumstances (e.g. management’s plan to
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This note was uploaded on 07/13/2011 for the course ACCT 1110 taught by Professor Bleecker,d during the Spring '11 term at Kwantlen Polytechnic University.

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ACCT_3444_Chapter_7_and_8 - ACCT 3444 Lecture 3 Recap...

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