Chapter 1 Notes
Chapter 1 Notes ACCT 4150
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This 4 page Class Notes was uploaded by Victoria Andreski on Wednesday January 13, 2016. The Class Notes belongs to ACCT 4150 at Clemson University taught by Nancy Harp in Spring 2016. Since its upload, it has received 116 views. For similar materials see Auditing in Accounting at Clemson University.
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Date Created: 01/13/16
Chapter 1 An Introduction to Assurance & Financial Statement Auditing What is Auditing? o “A systematic process of objectively obtaining & evaluating evidence regarding assertions about economic actions & events to ascertain the degree of correspondence between those assertions & established criteria & communicating the results to interested users.” (AAA,1973) Stepbystep process Needs to be done objectivelyindependent from company Evaluate evidencesome evidence better than other Gather evidence over managers’ assertions—claims Compared w/ GAAP Communicate results Tells you whether or not the financial statements can be relied upon o Requires analytical & logical skills o More conceptual in nature compared to accounting Why have an audit? o Required by law o Desirable for reliable economic information for investing, credit, and management decisions o Lowers info risk o Demand for assurance provided by auditors has increased significantly over the years Principals & Agents o Public company—company that sells its stock/bonds to the public o Principals—owners (stockholders) of the company o Agents—professional managers hired by the owner Creates a conflict of interestsome may have own self interests Agent wants principal to know that what he is doing is reliable Example: house inspection seller mist disclose to the own different claims (roof is good, floors, etc.) Seller knows a lot and therefore has an incentive to lie o Information asymmetry—manager has more information about the actual financial position & results of the entity’s operations Auditing, Attest, & Assurance Services o Terms heard interchangeably o Audit—most specific; over economic events/transaction Systematic process wellplanned Obtained & evaluated evidence objectively Relates to claims about economic actions/events Auditor compares evidence to management’s financial statements Communicates results to intended users o Attestation More general than auditing Doesn’t have to be over economic events could be over a company’s systems Open up to more types of things o Prospective information o Analyses o Systems & processes o Assurance Anything that will help improve the quality of information Most generic very broad Make good decisions, improve quality of information, be independent, apply professional judgment & due care Fundamental Concepts in Conducting a Financial Statement Audit o Audit Risk The risk that auditor may have issued a clean opinion when he/she shouldn’t have Must accept that risk as auditors Auditors will provide reasonable assurance Absolute assurance is too expensive auditors would have to be there with managers all year long looking over their shoulder o Materiality How big of an error can we let slip by before it messes w/ someone’s decision? Audit must decide what is material for each company Usually 35% of a company’s taxable income Reasonable person—in general, would a reasonable person make a different decision? Example: if you move into a household and one of the light bulbs is broken, that isn’t material. However, it is material if the roof is messed up. o Evidence Helps auditor evaluate management’s financial statement claims Relevance—is the information related to the specific claim being tested? Reliability—can the information be relied upon to represent the true state of the claim being tested? Not all evidence collected is created equal Sampling—inferences based on limited observations Auditors use: o Their knowledge about the transactions o A sampling approach to examine the transactions It would be too expensive for auditors to examine every single transaction Phases of an Audit 1. Client acceptance/continuance a. Client acceptance—tons of paperwork to fill out when you take on a new client i. Reasons to say no to a new client maybe they actually won’t be in business long enough to pay, shady company, may be a huge risk, may be lying, may hurt reputation 1. Don’t want to take super risky clients 2. Want safe companies that have good management b. Client continuance—less paperwork; reevaluate them c. Engagement letter—when you decide to take clients i. Contract w/ rules of engagement ii. Talks about fees & services 2. Preliminary engagement activities a. Before you do anything, a lot of planning must take place— must read about clients & understand them i. Determine audit engagement team requirements ii. Assess compliance w/ ethical requirements (independence) iii. Understanding the entity & environment 3. Plan the audit a. Guided by results of the risk assessment procedures performed to gain an understanding of entity i. Business risk—usually in revenue ii. Specialists—complicated pension accounts, derivatives, etc. iii. Related parties iv. Materiality v. Analytical procedures 4. Consider & audit internal control a. Internal Control System should: i. Ensure that assets/records are safeguarded ii. Create environment that encourages and monitors efficiency & effectiveness iii. Generate reliable information b. Auditor is responsible for: i. Obtaining an understanding of internal control ii. Assessing control risk 1. Control risk—risk that we can’t rely on their controls iii. Identify specific controls to be relied upon iv. Perform tests of controls v. Concludes on achieved level of control risk 5. Audit business processes & related accounts a. Substantive analytical procedures i. Look at relationships b. Substantive tests of transactions c. Tests of details of account balances & disclosures i. If controls are good, it’ll be less money for the company 6. Complete the audit a. Contingent liabilities b. Sufficiency of evidence c. Subsequent events i. Things that you think about at the end of an audit 7. Evaluate results & issue audit report a. Unqualified—clean b. Qualified—only 1 mistake c. Adverse—several accounts are messed up i. Tells people not to rely on statements
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