Notes 2 auditing Corporate Governance
What is corporate governance?
A process by which the owners and creditors of an organization exert control and require accountability
for the resources entrusted to the organization. The stockholder/owners elect a boa
In many accounting systems, liabilities are not recorded until receiving reports have been
matched to purchase orders and invoices. Often when there is a problem in matching the
documents, the liability is not recorded, thus understa
Auditors often do a significant amount of tests of controls and substantive procedures prior to
year-end to spread the audit work over a more extended period. This interim testing occurs
between the beginning of the year and the yea
Public accounting firms try to reduce their own business risks by carefully managing their audit
engagements. To do so, public accounting firms undertake several activities before beginning any audit
engagement. In general, these act
Information risk is the probability that the information circulated by a company will be false or
misleading. Decision makers usually obtain their information from companies or organizations with
which they want to conduct business,
Risks that could adversely affect companies ability to achieve objectives and execute strategies are called
business risks. Business risks might result from setting inappropriate objectives and strategies, or from
complexity in the c
Auditors must develop an understanding of business and risk. Here are a few sources to develop
this understanding: online searches, review SEC filings, company web sites, economic statistics,
stock analyst reports.
Business risk is best un
The standard audit report has the following features: (see the attached report)
Notice of audit
Description of the audit
Opinions issued by CPAs performing certified a
Note D- auditing the production cycle
The production cycle links the acquisition of cycle in which goods and services are purchased to
the revenue in which the inventory is sold. The production cycle is mostly concerned with
inventory as it moves from raw
Auditing note 6
As part of the opinion formulation process, the auditor must pay careful and extensive attention
to the clients internal controls. Internal controls are an important part of the governance
process and help the company to address its risks.
Note C Finance and Investment Cycle
In most firms transactions in the financing and investment cycle do not occur on a daily or weekly basis
but the transactions are often in large amounts. It is imperative that these transactions are properly
There are many inherent risks when it comes to the revenue cycle and the collection cycle. Most
companies will recognize revenue even when they are not earned in order to make the business seem
more profitable. However, revenue must
Internal control is a process, affected by an entitys board of directors, management and other personnel, designed to
provide reasonable assurance regarding the achievement of objectives in the following three categories: In the
Addendum B to Note 1
Fundamental Audit Principles have replaced 10 basic audit standards.
Auditors must have basic competencies and capabilities to perform the audit.
Auditors must comply with ethical principles.
Auditors must be professi
Note 11 Auditing
CPAs have a responsibility to safeguard the publics interest. As we have seen, this responsibility is both
an ethical and a legal one. This note stresses the legal responsibility of CPAs.
The legal environment for CPAs is one of increased
Note B Auditing the Acquisition and Expenditure Cycle
The most common reason for restatement of financial statements is misstated costs and expenses.
Capitalizing expenditures and improperly accounting for income taxes are leading examples o
Note 8 auditing
Auditing is the process of gathering and assessing evidence.
In planning an audit three questions need to be answered:
What audit procedures need to be performed?
How much evidence is needed?
When should the audit procedures be performed?
Note 10-Auditing- Concluding the Audit
The auditors professional objective is to produce a high quality audit. This will satisfy the needs of
companys stakeholders and participants in the capital market.
What does a high quality audit depend on?
Note A - Auditing the Revenue and Accounts Receivables Cycle
Many companies find it difficult earning net income in the early stages of their growth and
development. Investors look at revenue growth as the more important metric in assessing the
Note 9 auditing for fraud
The regulators message is clearauditors must assume a greater responsibility for detecting fraud and
assuring investors that the financial statements are free of material fraud.
Fraud deterrence can occur if:
There is a highly et
Note 4 Auditing
Risk is at the heart of every business transaction. It is pervasive. Risk for auditors can be
Business riskaffects operations and outcomes of organizational activities.
Financial reporting riskconnected with recording and repo
The relevant pronouncements of the AICPA and PCAOB are collectively referred to as generally accepted
auditing standards (GAAS). GAAS are auditing standards that identify necessary qualifications and
characteristics of auditors and g
The finance and investment cycle contains a large number of accounts and records ranging
across tangible (e.g., property, plant, and equipmentPP&E) and intangible assets (e.g.,
goodwill, patents), long-term liabilities, deferred cre
Note 12 Auditing
Complex Audit Judgments
Auditors are always making complex judgments whether it is deciding whether or not the misstatement
is material enough to merit a qualified report or whether the clients accounting position can be justified.