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ACCT_3444_Chapters_9_and_10 - ACCT 3444 LECTURE 5 Chapters...

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ACCT 3444 LECTURE 5 Chapters 7 and 8 Recap: Management bias – a lack of neutrality by management in the preparation of financial statements Obtaining an understanding of the entity and its environment is a dynamic process of gathering, updating and analyzing information throughout the audit. Risk of Material Misstatement : The risk that the financial statements are materially misstated prior to the audit. This consists of two components at the assertion level: 1. Inherent Risk - The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements before consideration of any related controls. 2. Control Risk – The risk that a material misstatement that could occur and that could be material, will not be prevented, or detected and corrected on a timely basis by the entity’s internal controls. CAS 315 Identifies Following Risk Assessment Procedures: Inquiries of management and of others within the entity that may have information that is likely to assist in identifying risks of material misstatement due to fraud or error. Examples: those charged with governance, internal audit personnel, employees involved in initiating processing or recording complex transactions, inquiries toward in-house legal counsel and marketing or sales personnel. Analytical procedures Observation and inspection - may provide information that supports or disputes management inquiries Examples: review of entity’s operations, business plans and internal control manuals, quarterly management reports, board of director’s meeting minutes. In Class Chapter 7 and 8 Wrap up Questions: Chapter 7: 7-20 – concluding on audit risk 1
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Chapter 8: 8-22- working paper review Chapter 9 - Internal Controls and Control Risk in a Financial Statement Audit Internal Control: the policies and procedures designed, implemented and maintained by management to provide reasonable assurance with regard to the reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. Control – refers to any aspect of one or more components of internal control. Internal Control Concepts Management’s responsibility – management (not auditor) has responsibility to establish and maintain internal controls Reasonable assurance – internal controls provide reasonable, not absolute, assurance (cost benefit analysis) Inherent limitations – internal controls have limitations: human error theft collusion management override NOTE: Auditors are required to document the controls surrounding all financial statement classes of transactions and account balances .
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