1. audit planning and materiality
chapter 8
audit planning and materiality
a bit of jumping around
Ch 6 p. 167 (175) analytical procedures
Ch 7 p analytical procedures & common ratios
Ch 9 p. 268 (236) nonroutine transactions & judgment
Ch 9 p ( ) audit risk model and definitions

2. 5*33 = = 162
#2 3 for POP A + 2 for explanation #11 -2 if you did not use covered member; immediate family / close relative #33 I am not sure that I emphasized the names of the audit approached adequately reduced level of control risk approach primarily substantive approach

3. Financial Interest George is a staff auditor in the San Luis Obispo office. George’s daughter inherited stock in a client from George’s aunt. The dollar value of the stock was not material to George’s aunt. The client is audited by the SLO office. Use the following bullet points to discuss (1) scenarios which would not impair the audit firm's independence and (2) scenarios which would impair independence.
(no group of professional employees owns 5% of the client's equity)
Is a staff auditor who is not assigned to the engagement in a position to influence the engagement or in the chain of command
Are George and his immediate family part of a group of professional employees who own more than 5% of the client’s commons stock

4. Financial Interest Joan is an audit manager in the San Luis Obispo office. Joan only performs audit services. Joan’s sister owns stock in the office's largest client. Use the following bullet points to discuss (1) scenarios which would not impair the audit firm's independence and (2) scenarios which would impair independence.
(no group of professional employees owns 5% of the client's equity)
Does Joan perform non-audit services for the client

5. Independence
Problems Right now --- I intend to have similar problems on test #3 (and final??)

6. Enron Related Party Transactions
No one could explain how Enron actually made money
Incredibly complicated business structure
“What we are looking at here is an example of superbly complex financial reports. They didn’t have to lie. All they had to do was to obfuscate it with sheer complexity,”
John Dingell, U.S. Congressman Michigan

7. Obtain engagement
Analytical procedures
Assess RoMM
Understand the client
Internal controls AU 315
Tests of controls if CR < 1.00
Substantive tests of transactions AU 500
Substantive Analytical procedures
Substantive tests of details of balances
Reporting AU 700

8. environmental
client
auditor

9. Sami
What is the definition of control risk?

10. The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

11. Stages of the Audit Accepting the engagement
client acceptance
1) integrity of management

12. Client Acceptance p. 222 (190) Communicate with predecessor auditor
Why the client needs an audit
New client investigation
Competency, industry knowledge
Communicate with predecessor auditor
Risks
Intended users of the financial statements
Independence
Engagement Letter

13. 84 AICPA Statement on Auditing Standards
February 1997
Statement
on Auditing
Standards 84
AICPA
Communications between Predecessor and Successor Auditors

14. Julia B
what issues need to be discussed with the predecessor auditor ?

15. Communications with Predecessor Auditor
Integrity of senior management
Disputes with the client over accounting principles
Disputes with the client over audit procedures
Disputes with the client over fees
p. 223 (191)

16. Malcolm
who is responsible for initiating the communication between the successor auditor and the predecessor auditor ?

17. AICPA Code of Professional Conduct
– Confidential Client Information

18. Mikey Do we care about the nature of the client’s business?
Do we care about the reasons they are having their financial statements audited?
Do we care who is going to rely on the audited financial statements?

19. RISK RISK RISK
identify the users of the financial statements

20. Brittney
How does the AICPA’s Code of Professional Conduct define the Ethical Principle “Objectivity and Independence?”

21. Objectivity and Independence
A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attest services.

22. Genna
Discuss how this affects our decision whether to accept the engagement ?

23. memo to partners and staff
independence
memo to partners and staff
Partners in the engagement office?
Everyone in the engagement office?
Everyone in the firm?
Consulting and tax employees or just auditors
must consider spouses & dependents

24. Hannah
How might the financial investments of non-dependent, close relatives affect the firm’s decision whether to accept a new client ?

25. Nik
If a non-dependent, close relative is employed by a potential client, what issues does the audit firm need to consider in their decision whether to accept the client?

26. Close relatives (including immediate family):
Covered Members
Close relatives (including immediate family):
parent, sibling or nondependent child, spouse, dependents
Holding a key position with the client
Holding a financial interest in the client that is material to the relative (covered member must know)
Holding a financial interest that enables the relative to exercise significant influence over the client

27. Key positions
Individual has primary responsibility for
significant accounting functions that support material components of the financial statements
preparation of the financial statements

28. Key positions --- always
Individual has the ability to influence contents
Board of Directors
Chief Executive Officer
President
Chief “xxxxx” Officer
General Counsel
Controller
Director of Internal Audit
Director of Financial Reporting
Treasurer

29. When we obtain an understanding of the IC
How do we identify other Key Positions
When we obtain an understanding of the IC
positions subject to significant internal accounting controls
positions that are an element of significant internal accounting controls

30. Phases of the Audit Accepting the engagement
Engagement Letter p. 225 (193)

31. Understand the Client’s Business

32. Mark W
what is the objective of AU 315?

33. AU Section 315
The objective of the auditor is to identify and assess the risk of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risk of material misstatement.

34. Many litigation cases result from the auditor’s failure to fully understand the nature of transactions in the client’s industry.
ZZZZ Best
ESM

35. RISK of Material Misstatement
Page 276/277 (244/45)
Related Party transactions
Complex transactions
Nonroutine transactions
Judgment
Chapter 9
Declines in economic conditions
Information technology
Expansion
Accounting complexity of judgments
Accounting complexity of estimates
Complex financial instruments

36. Miki
how does the Auditor’s Responsibility Paragraph in the independent auditor’s report describe the auditor’s responsibility to detect material misstatements?
Does the auditor’s responsibility differ for misstatements that are the result of an error or a fraud?

37. Auditor’s Responsibility Paragraph standard unmodified opinion
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

38. Navid
what is the overall objective of the indepent auditor?

39. Overall Objective AU 200
…obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in accordance with an applicable financial reporting framework.

40. Related Parties --- RISK p. 228 (196)
.. an affiliated company, principal owner of the client company, or any other party with which the client deals, where one of the parties can influence the management or operating policies of the other.
investors are concerned that the terms of the transaction may not reflect “arms length” bargaining. There is risk that the transaction may not be valued at the same amount as a transaction with a non-related party.

41. Related Parties --- RISK p 220 (188)
Enron - Andy Fastow

42. Related Parties --- RISK
Essentially a related party is one that can exert significant influence over another party.
Related parties are frequently involved in fraudulent transactions because they can conceal problems that the auditor would likely detect if the transactions occurred between unrelated parties.

45. Hailee
what is Client Business Risk?

46. Analytical Procedures Pages 231-34 (199-202)
article on web page
If you have the full book
Read pages
Analytical procedures & common financial ratios

53. Analytical Procedures p. 167 (175)
Reasonableness tests
evaluations of financial information by a study of plausible relationships among financial and nonfinancial data …
….involving comparisons of recorded amounts … to expectations developed by the auditor.

54. Julia L
at which stages of the audit are Analytical Procedures required ?

55. Analytical Procedures
planning phase
testing phase (as substantive tests)
completion phase (as an overall review)

56. Sofia
why do we perform analytical procedures during the planning stage ?

57. Analytical Procedures
During the Planning Phase
Understand the client’s business & industry
Assess going concern
Indicate possible misstatements (attention directing)
Reduce detailed tests

58. Steps in performing Analytical Procedures
Develop expectations
Define significant difference (what is reasonable)
Compare our predictions with recorded amount
Investigate Significant differences
DOCUMENT the above steps

59. Mitchell
What is the definition of audit risk?

60. Audit risk. The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

61. What is the definition of Materiality?
Michelle
What is the definition of Materiality?

63. Performance Materiality
tolerable error
tolerable misstatement
The allocation of the preliminary judgment about materiality to segments (account balances or classes of transactions)

64. Max Describe a Significant Class of Transactions ?
Describe a Transaction Cycle?

65. Class of Transactions
Accounts receivable xxx.xx
Sales xxx.xx
Revenue & Collection Cycle
Cash xxx.xx

67. Dorian
In your statistics class, why does a larger sample increase your level of confidence?
How does evidence reduce risk?

68. Sample $ 50,000
Population ,000
Table 2
p. ??? (210)

69. Projection allowance for sampling risk p. 242 (210)
Sample Results Tolerable Misstatement
Known misstatement
Projection of sample results to the population
Allowance for sampling risk
Estimates
Difference between auditor’s estimate
Book Value (management’s estimate
$3,500
$3,500*(450,000/50,000) = $31,500
$15,750
$47,250