Describe the Phase I from the audit process.
Phase I - Plan and design an audit approach 1.1 Accept client and perform initial planning (engagement lettter) 1.2 Understand theclient's business and industry (Industry and External Environment, Business Operations and Processes, Management and Governance, Objectives and Strategies, Measurement and Performance) 1.3 Assess client business risk 1.4 Perform preliminary analytical procedures 1.5 Set materiality and assess acceptable audit and inherentrisk 1.6 Understand internal control and assess control risk 1.7 Gather information to assess fraud risks 1.8 Develop overall audit plan and audit program
Describe the Phase II from the audit process.
Phase II - Perform tests of controls and substantive tests of transaction 2.0 Plan to reduce assessed levelof control risk? 2.1 Perform tests of controls (The extent of testing of controls is determined by planned reliance on controls. For companies that are subject to astatutory audit, testing must be sufficient to confirm the existence of an internal control system.) 2.2 Perform substantive tests of transactions 2.3 Assess likelihood of misstatements in financial statements
Describe the Phase III from the audit process.
Phase III - Perform analytical procedures and tests of details of balances 3.1 Perform analytical procedures 3.2 Perform tests of key items 3.3 Perform additional tests of details of balances
Describe the Phase IV from the audit process.
Phase IV - Complete the audit and issue an audit report 4.1 Review for contingent liabilities 4.2 Review for subsequent events 4.3 Accumulate final evidence 4.4 Evaluate results 4.5 Issue audit report 4.6 Communicate with auditcommittee and management
Why is essential planning?
(1) enable the auditor to obtain sufficient appropriate evidencefor the circumstances to minimize legal liability and maintain a good reputation (2) help to keep audit costs reasonable (3) avoid misunderstandings with the client, e.g., scope of the service
Define "acceptable audit risk" and "inherent risk".
Acceptable risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. Inherent risk is a measure of the auditor's assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control.
Which kind of tests are in the Audit Procedures
(1) Tests of controls (1.1)Gain an understanding of internal controls (1.2) Assess effectiveness of internal controls (2) Substantive tests (2.1) Substantive tests of transactions - determine whether transaction-related audit objectives are satisfied (2.2) Analytical procedures - comparisons of recorded amounts to expectations developed by the auditor (2.3) Tests of details of balances - (2.3.1) Focus on the monetary correctness of the ending general ledger balances for balances sheet and income statement accounts (2.3.2) Evidence usually obtained from a source independent of the client.
Define of Materiality.
The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
Is the Audit Risk calculated in an isolated manner?
No, the audit risk (AR) as such cannot be calculated in an isolated manner, but is a combination of risks (i.e., inherent risk, control risk, and detection risk)
Understanding the relationship between the risks.