1. MODERN AUDITING 7th Edition
William C. Boynton
California Polytechnic State University at San Luis Obispo
Raymond N. Johnson
Portland State University
Walter G. Kell
University of Michigan
Developed by:
Dr. Raymond N. Johnson, CPA
Gregory K. Lowry, MBA, CPA
John Wiley & Sons, Inc.

2. CHAPTER 5 OVERVIEW OF THE AUDIT PROCESS
Knowledge of the Business and Industry
Management’s Assertions
Materiality
Audit Risk
Evidence
Consideration of Value-Added Services
Communication of Findings

3. Overview of the Audit Process Figure 5-1

4. Overview of the Audit Process Figure 5-1

5. Knowledge of the Business and Industry
Understand the Entity’s Business Risks
Developing Expectations of Financial Statements
Industry Impact on Information Systems
Evaluation of Reasonableness of Accounting Estimates
GAAP for Specific Industries
Foundation for Other Value-Added Services

6. Consider 2 Industries Airline Household appliance manufacturer
Understand Business Risk
Developing Expectations of Financial Statements
Industry Impact on Information Systems
Evaluation of Reasonableness of Accounting Estimates
GAAP for Specific Industries
Foundation for Other Value-Added Services
Airline
Household appliance manufacturer

7. Overview of the Audit Process Figure 5-1

8. Proposed SAS Audit Evidence - Assertions
Assertions about classes of transactions
Occurrence
Completeness
Accuracy
Cutoff
Classification
Assertions about account balances
Existence
Rights and obligations
Valuation and allocation
Assertions about presentation and disclosure
Occurrence and rights and obligations
Understandability
Accuracy and Valuation

9. Why are assertions important?
Divide and Conquer
Assertions (and related audit objectives) guide the auditor in the collection of evidence.
The auditor needs to obtain sufficient, competent evidential matter for each assertion in the financial statements.

10. Overview of the Audit Process Figure 5-1

11. Materiality FASB Concept Statement No. 2
Influence on the judgment of a reasonable person relying on the financial statements

12. Materiality
How does the concept of materiality influence the audit process?
1. The auditor makes a judgment about materiality while planning the engagement in order to make important decisions about the scope of the audit.
2. The concept of materiality guides the auditor when evaluating audit findings.

13. Chapter 5 Part I Review
Explain how the auditor uses his or her understanding of the client’s business and industry.
Why are financial statement assertions important?
Relate the following specific audit objectives to the five financial statement assertions.
All inventory that is present in the warehouse is counted on inventory tags.
Inventories are properly stated at the lower of cost or market.
The client has legal title to inventory
Inventories are properly classified in the financial statements.
All inventory counted on inventory tags is present in the warehouse.

14. Chapter 5 Part I Review
Identify two ways in which knowledge of materiality is used in the financial statement audit.
Explain the relationship between materiality and the scope of audit work.

15. Overview of the Audit Process Figure 5-1

16. Summary of Audit Risk Components Figure 5-3

17. Audit Risk Model
AR = IR x CR x DR

18. Audit Risk Model
AR = IR x CR x DR
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1.0
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19. Audit Risk Model
AR = IR x CR x DR
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1.0
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20. Audit Risk Model
AR = IR x CR x DR
.02
1.0
.07
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21. Audit Risk Model
AR = IR x CR x DR
.02
1.0
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.05

22. Overview of the Audit Process Figure 5-1

23. Evidence Sufficiency of Evidential Matter 1. Materiality and Risk
2. Economic Factors
3. Size and Characteristics of the Population

24. Competency of Evidential Matter Figure 5-4

25. Classification of Audit Procedures
1. Procedures to Obtain an Understanding (Of the entity and its environment, including its system of internal control)
2. Tests of Controls
3. Substantive Tests

26. Evaluation of Evidence Obtained
1. The auditor is not expected, or required, by the third standard of field work to have an absolute, certain, or guaranteed basis for an opinion.
2. The requirement of a reasonable basis pertains to the overall level of assurance the auditor needs at the conclusion of the audit to express an opinion on the financial statements.

27. Chapter 5 Part I Review
Explain the relationship between control risk and the type of audit procedures performed.
Explain the relationship between detection risk and the scope of audit work.
Provide examples of evidence related to the existence and occurrence assertion that is more competent vs. evidence that is less competent.
What is the purpose of a test of control?
What is the purpose of a substantive test?

28. Overview of the Audit Process Figure 5-1

29. Professional Requirements
Evaluate fair presentation in the financial statements.
Required communications
Internal controls
Other required communications

30. Consideration of Value-Added Services
1. Benchmarking Company Performance and Performance Measurement
2. Business Planning
3. Risk Assessment
4. Business Valuation
5. Information System Design and Reliability

31. Communication of Findings
1. The Auditor’s Report on Financial Statements
2. Other Required Communications
3. Communication of Other Findings

32. CHAPTER 5 OVERVIEW OF THE AUDIT PROCESS

33. Copyright
Copyright 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.