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Session #1
2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Learning Objective 1
Describe auditing.
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Auditor
Client
Users use reports, for decision making, e.g. investment, face risk Client reports to users
External Users
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Nature of Auditing
Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence
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The competence of the individual performing audit is of little value if he/she is biased in the accumulation and evaluation of evidence.
Reporting
The final stage in the auditing process is preparing the Audit Report, which is the communication of the auditors findings to users.
2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Determines correspondence
Established criteria Internal Revenue Code and all interpretations
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Attestation Services
1. Audit of historical financial statements 2. Effectiveness of internal control over financial reporting
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Internal Control over Financial Reporting Other Attestation Services (e.g., WebTrust, SysTrust)
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Learning Objective 2
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Types of Audits
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Operational Audit
Example Evaluate computerized payroll system for efficiency and effectiveness Number of records processed, costs of the department, and number of errors Company standards for efficiency and effectiveness, or best practice Error reports, payroll records, and payroll processing costs
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Information
Established Criteria Available Evidence
Compliance Audit
Example Determine whether bank requirements for loan continuation have been met
Information
Established Criteria Available Evidence
Company records
Loan agreement provisions, or law/regulation Financial statements and calculations by the auditor
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Information
Established Criteria Available Evidence
Learning Objective 3
Explain: - Objective of conducting an audit of FS - Management assertion and its correlation to FS Audit.
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5
Auditors Responsibilities
Material versus immaterial misstatements Reasonable assurance Errors versus fraud Professional skepticism Fraud resulting from fraudulent financial reporting versus misappropriation of assets
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Management Assertions
1. Existence or occurrence 2. Completeness 3. Valuation or allocation 4. Rights and obligations 5. Presentation and disclosure
2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Valuation or allocation
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Valuation or allocation
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Cutoff
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Explain the relationship between audit objectives and the accumulation of audit evidence.
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Phase II
Learning Objective 4
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3. Sufficient evidence has been accumulated to conclude that the three standards of field work have been met. 4. The FS are presented in accordance w/ GAAP.
5. No circumstances requiring the addition of an explanatory paragraph or modification of the wording of the report.
2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Standard unqualified
Qualified
Adverse or disclaimer
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1. Changes in an estimate 2. Error corrections not involving principles 3. Variations in format and presentation of financial inf. 4. Changes because of substantially diff. trans. or events
2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Emphasis of a Matter
Under certain circumstances, the CPA may want to emphasize specific matters regarding the FS, even though the CPA intends to express an unqualified opinion.
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Identify the types of audit reports that can be issued when an unqualified opinion is not justified.
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2. GAAP departure
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Qualified Opinion
A qualified opinion report can result from a limitation on the scope of the audit or failure to follow GAAP.
Adverse Opinion
It is used only when the auditor believes that the overall FS are so materially misstated or misleading that they do not present fairly the financial position or results of operations and cash flows in conformity with GAAP.
Disclaimer of Opinion
It is issued when the auditor is unable to be satisfied that the overall FS are fairly presented.
2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
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Immaterial
Material
Disclaimer of opinion (regardless of materiality)
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End of Session 1
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