Presentation on theme: "MODERN AUDITING 7th Edition"— Presentation transcript:
1 MODERN AUDITING 7th Edition William C. BoyntonCalifornia Polytechnic State University at San Luis ObispoRaymond N. JohnsonPortland State UniversityWalter G. KellUniversity of MichiganDeveloped by:Dr. Raymond N. Johnson, CPAGregory K. Lowry, MBA, CPAJohn Wiley & Sons, Inc.
2 CHAPTER 5 OVERVIEW OF THE AUDIT PROCESS Knowledge of the Business and IndustryManagement’s AssertionsMaterialityAudit RiskEvidenceConsideration of Value-Added ServicesCommunication of Findings
5 Knowledge of the Business and Industry Understand the Entity’s Business RisksDeveloping Expectations of Financial StatementsIndustry Impact on Information SystemsEvaluation of Reasonableness of Accounting EstimatesGAAP for Specific IndustriesFoundation for Other Value-Added Services
6 Consider 2 Industries Airline Household appliance manufacturer Understand Business RiskDeveloping Expectations of Financial StatementsIndustry Impact on Information SystemsEvaluation of Reasonableness of Accounting EstimatesGAAP for Specific IndustriesFoundation for Other Value-Added ServicesAirlineHousehold appliance manufacturer
8 Proposed SAS Audit Evidence - Assertions Assertions about classes of transactionsOccurrenceCompletenessAccuracyCutoffClassificationAssertions about account balancesExistenceRights and obligationsValuation and allocationAssertions about presentation and disclosureOccurrence and rights and obligationsUnderstandabilityAccuracy and Valuation
9 Why are assertions important? Divide and ConquerAssertions (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.
11 Materiality FASB Concept Statement No. 2 Influence on the judgment of a reasonable person relying on the financial statements
12 MaterialityHow 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 ReviewExplain 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 inventoryInventories are properly classified in the financial statements.All inventory counted on inventory tags is present in the warehouse.
14 Chapter 5 Part I ReviewIdentify 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.
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 Controls3. 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 ReviewExplain 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?
29 Professional Requirements Evaluate fair presentation in the financial statements.Required communicationsInternal controlsOther required communications
30 Consideration of Value-Added Services 1. Benchmarking Company Performance and Performance Measurement2. Business Planning3. Risk Assessment4. Business Valuation5. Information System Design and Reliability
31 Communication of Findings 1. The Auditor’s Report on Financial Statements2. Other Required Communications3. Communication of Other Findings
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