Chap001

Auditing and Assurance Services

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4. Consider and audit internal control . The auditor understands and evaluates the client’s internal controls in order to assess the risk that they will not prevent or detect a material misstatement. In the case of a public company, the auditor will conduct an audit of internal control over financial reporting. 5. Audit business processes and related accounts . The auditor conducts substantive tests, including analytical procedures and the details of the account balances, searching for material misstatements. 6. Complete the audit . The auditor searches for contingent liabilities and subsequent events, and performs a final review of the evidence gathered. 7. Evaluate results and issue the audit report . Based on the collection and evaluation of evidence, the auditor issues a report on whether the financial statements are fairly presented. b. While audit procedures may be designed to test a specific assertion, they often simultaneously provide evidence on another account or assertion. An example would be when an auditor obtains evidence about a client’s transactions affecting the inventory account and whether shipments of inventory to customers were included in the proper period. Such evidence may also be relevant to the client’s assertions regarding whether accounts receivable balances were correct at the end of the period. c. Auditors develop an understanding of an entity's internal control in order to establish the scope of the audit. However, during the course of this work, the auditor may become aware of weaknesses in the entity's accounting systems. The auditor is required to communicate this information to management. The auditor may also make suggestions on how to correct the weaknesses. The auditor's work on internal control may also have a preventive effect on the behavior of the entity's employees. If the employees know that their work will be audited, they are less likely to commit errors or fraud. Because of the Sarbanes-Oxley Act, internal control is a topic that is front-and-center in the accounting profession. 1.28 A search of the homepage of most public companies will include links to their latest financial information or 10-K filings. The SEC’s homepage will also include this information along with any other recent filings. Examining the independent auditor’s report and financial statements will allow the student have a better idea as to how the chapter’s information is applied in real companies. 1.29Scope paragraph: “These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.” The use of the term reasonable assurance indicates that there is no guarantee that the financial statements are correct, only “reasonable assurance.” Also the statement that the financials are “free of material misstatement” indicates that the financials may have some error that is not material.
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