Week 5 Flashcards Preview

External Auditing > Week 5 > Flashcards

Flashcards in Week 5 Deck (15):
1

Materiality & RMM

Assess RMM
Audit Work
Evaluate

Used together throughout the audit. However, not used to determine each other. Materiality is based on information needs of the users which is the same regardless of the risk assessment.

2

Audit Strategy

Part of Audit Strategy
Scope, Timing, Direction

Part of Direction
Risk Assessment, Materiality, Analytical Procedures

3

Accounting Cycles

Focusing on how business is conducted
How a business makes money
How a business spends money
How a business pays its employees
How a business manages its products

Focusing on how business is financed
How a business manages its capital assets
How a business manages its cash & investments
How a business manages its liabilities & equity

4

Sales Business Process

Order:
Price Goods & Services
Place Order
Credit Check

Ship:
Pick Inventory
Deliver
Install
Return

Collect:
Create Invoice (Bill)
Receive Cash
Write off

5

Sales Business Process
Need to understand:

What steps in the process trigger the transactions to be recorded
What data fields trigger recording, process
Where the risks and controls are and how are they designed
What source documents and reports are available

6

Key decision in Audit Strategy is:

Rely on Controls
Control Risk = low
Called: Combined Audit Strategy

Don’t Rely on Controls
Control Risk = high
Called: Substantive Audit Strategy

7

Combined Audit Strategy

Understand IC
Assess CR as Low
Test Controls
Substantive Testing

8

Substantive Audit Strategy

Understand IC
Assess CR as High
Substantive Testing

9

Understand your client: KPI

Understanding how client measures its own performance gives insight into accounts under pressure

Profitability – a common KPI

Liquidity – common concern of stakeholders

10

Analytical Procedures

Definition:
Evaluation of financial information by studying plausible relationships among both financial and non-financial data

Dependant on clear expectations:
based on: your understanding of the client, industry, economy
Expectations of fluctuations
Ex.: AFDA increasing as the economy is struggling (2008 & 2009)
Existence or absence or contradiction of expectation

11

Analytical Procedures
Forms of analytical procedures

Comparisons
Trend (horizontal)
Common-size (vertical)
Ratio (profitability, liquidity, solvency)

12

Analytical Procedures
Reliable & Comparable must be considered

Effective IC
Independent reputable external source
Audited
Generated using consistent accounting methods
Internally generated with a track record (ex. Budget)

13

Financial Statement Assertions

Transactions (R,E):
Occurrence (Real?)
Completeness (all?)
Accuracy (right $$?)
Cut-off (right period?)
Classification (right account?)

Balances (A,L, OE):
Exist (Real?)
Completeness (all?)
Valuation & Allocation (right value?)
Rights & Obligations (are these the clients?)

14

CAVE

Completeness
Accuracy and Cut-off
Valuation
Existence

15

CAVE is a part of ...

Audit Assertions