Cpa Audit Notes

AUD - Notes Chapter 1
http://www.cpa-cfa.org
Audited F/S – The Basics
Basics
Company’s mgmt responsible to prepare the F/S
Auditors responsible to express an opinion on the F/S and on mgmt’s assertion on internal controls (if public)
The primary assertion is whether the statements are presented fairly! in accordance with "AA#
Professional Standards
Standards
"enerally Accepted Accounting Standards $ "AAS
"enerally Accepted "o%ernment Auditing Standards $ "A"AS
The #ublic Company Accounting &%ersight 'oard $ #CA&'
 #ublic accounting firms must register with #CA&' in order to audit public companies
 egistered firms are sub*ect to board inspection+ disciplinary proceedings+ and sanctions
"AAS $ T,# #,- AC.&

"eneral standards $ T,#
T $ Training
, $ ,ndependence (in fact and appearance)
# $ #rofessional Care
Standards of Field or0 $ #,-
# $ #lanning and super%ision
, $ ,nternal control+ entity and en%ironment
Strong controls imply the auditor will re1uire less e%idence
ea0 controls imply the auditor will re1uire more e%idence (more wor0)
An exam tric02 wea0 internal controls does not e1ual an ad%erse opinion
- $ -%idence
Standards of eporting $ AC.&
A $ Accounting
Accounting 3 "AA#
-xplicit2 &pinion must state that the acctg used was "AA#
C $ Consistency between periods
,mplicit2 Silence is o0ay cause its implied
. $ .isclosure
,mplicit2 Silence is o0ay
& $ -xpress &pinion
• -xplicit2 &pinion must state ,n our opinion4!
• 5eant to pre%ent misinterpretation of the degree of responsibility the auditor is assuming
when his/her name is associated with the F/S
• The auditor may express different opinions of different sections ('/S+ ,/S)
• The auditor may express an opinion on 6 section and not the others as long as information has
not been limited
Reports on Audited
Audited F/S
The Auditors Standard eport (7n1ualified &pinion)
Title
Addressee
,ntroductory #aragraph $ 2
• Statement that the F/S as identified in the report were audited
• Statement that the F/S are the responsibility of mgmt and the auditors responsibility is to express an opinion
Scope #aragraph
#aragrap h $ A#5-A52 A#5-A5
• Statement that the audit was
was conducted in accordance with 78S8 "AAS
1
•Statement that the audit was planned and
and performed to
to obtain reasonable assurance that the F/S are free
from material misstatement
•Statement that the audit included examining evidence on a test basis2 assessing the accounting principles
used and significant estimates made by mgmt 2 and e%aluating the o%erall presentation
•Statement that the audit pro%ides a reasonable basis for an opinion
&pinion #aragraph
•Statement referring to the F/S specifically identified in the introductory paragraph
•An opinion as to the fair presentation of the F/S (AC.&)
•Statement regarding conformity with 78S8 "AA# (AC.&)
Firm 9ame
eport .ate
•The eport should be dated on or after the date on which appropriate audit e%idence sufficient to support
the opinion has been obtained
Sample unqualified opinion – A1-14
"AAS in referenced to in the Scope paragraph

"AA# is referenced to in the &pinion paragraph
#CA&' Standards $ for publicly traded companies

Audits of Issuers (public companies) $ #CA&' auditing standard 9o8 6 re1uires the auditor’s report to include
3a reference to the standards of the #CA&'
Audits of nonissuers (private companies) $ An auditor may+ but is not re1uired to+ conduct the audit of a
nonissuer in accordance with both "AAS and #CA&. auditing standards
nqualified opinion $ clean2 F/S presented fairly in all material respects+ doesn’t mean good in%estment
!odified nqualified opinion $ additional explanatory language
"ualified opinion $ states except for!2 material "AA# or "ASS problem
Adverse opinions $ %ery material "AA# problems
#isclaimer of opinion $ significant "AAS problem
$%art on A1-1& memori'e
7ncertainties $ impairments+ intangibles+ lawsuits+ warranties

5anagement’s responsibility
•-stimate the effect of future e%ents on the F/S and record and present this estimate+ or
•.etermine that a reasonable estimate cannot be made and ma0e the re1uired disclosures to that effect
emember under "AA#

'oth probable and reasonably estimatable  record
-ither probable or reasonably estimatable  disclose
,f mgmt’s analysis is supported and properly reported or disclosed+ the auditor issues and un1ualified opinion
with no reference to the uncertainty in the report
7n1ualified opinion: "AA# 3 o02 "AAS 3 o0
,f the auditor is unable to obtain sufficient e%idential matter in%ol%ing an uncertainty and its presentation or
disclosure+ the auditor should consider expressing a 1ualified ("AAS) opinion or to disclaim an opinion to
scope limitation8
;ualified or .isclaimer: "AA# 3 <2 "AAS 3 #roblem
2
•Statement that the audit was planned and
and performed to
to obtain reasonable assurance that the F/S are free
from material misstatement
•Statement that the audit included examining evidence on a test basis2 assessing the accounting principles
used and significant estimates made by mgmt 2 and e%aluating the o%erall presentation
•Statement that the audit pro%ides a reasonable basis for an opinion
&pinion #aragraph
•Statement referring to the F/S specifically identified in the introductory paragraph
•An opinion as to the fair presentation of the F/S (AC.&)
•Statement regarding conformity with 78S8 "AA# (AC.&)
Firm 9ame
eport .ate
•The eport should be dated on or after the date on which appropriate audit e%idence sufficient to support
the opinion has been obtained
Sample unqualified opinion – A1-14
"AAS in referenced to in the Scope paragraph

"AA# is referenced to in the &pinion paragraph
#CA&' Standards $ for publicly traded companies

Audits of Issuers (public companies) $ #CA&' auditing standard 9o8 6 re1uires the auditor’s report to include
3a reference to the standards of the #CA&'
Audits of nonissuers (private companies) $ An auditor may+ but is not re1uired to+ conduct the audit of a
nonissuer in accordance with both "AAS and #CA&. auditing standards
nqualified opinion $ clean2 F/S presented fairly in all material respects+ doesn’t mean good in%estment
!odified nqualified opinion $ additional explanatory language
"ualified opinion $ states except for!2 material "AA# or "ASS problem
Adverse opinions $ %ery material "AA# problems
#isclaimer of opinion $ significant "AAS problem
$%art on A1-1& memori'e
7ncertainties $ impairments+ intangibles+ lawsuits+ warranties

5anagement’s responsibility
•-stimate the effect of future e%ents on the F/S and record and present this estimate+ or
•.etermine that a reasonable estimate cannot be made and ma0e the re1uired disclosures to that effect
emember under "AA#

'oth probable and reasonably estimatable  record
-ither probable or reasonably estimatable  disclose
,f mgmt’s analysis is supported and properly reported or disclosed+ the auditor issues and un1ualified opinion
with no reference to the uncertainty in the report
7n1ualified opinion: "AA# 3 o02 "AAS 3 o0
,f the auditor is unable to obtain sufficient e%idential matter in%ol%ing an uncertainty and its presentation or
disclosure+ the auditor should consider expressing a 1ualified ("AAS) opinion or to disclaim an opinion to
scope limitation8
;ualified or .isclaimer: "AA# 3 <2 "AAS 3 #roblem
2
,f the auditor concludes that the F/S are materially misstated due to a departure from "AA# related to
uncertainty+ the auditor should express a 1ualified ("AA#) or ad%erse opinion8 "AA# departures include
inade1uate disclosures+ use of inappropriate accounting principles+ and use of unreasonable acctg estimates
;ualified of Ad%erse: "AA# 3 problem2 "AAS 3 o0
ass ey c%art on A1-1* memori'e

memori'e
5odified 7n1ualified opinion $ still represents an un1ualified opinion8 The additional language (modified
wording or explanatory paragraph) used to highlight the certain circumstances
5odified wording
•.i%ision of responsibility2 auditors opinion is based in part on the report of another
-xplanatory paragraph
•=ustified departure from "AA#
•"oing concern
•To emphasi>e
emphasi>e a matter
•?ac0 of consistency
•&ther2
 e1uired S-C regulation S@ 1uarterly financial data has been omitted or has not been re%iewed
 Supplementary information re1uired by "AA# has been omitted
 &ther information (stuff in 6@) is inconsistent with F/S
(reference in report) $ The principal auditor decides

#ivision of +esponsibility (reference dec ides to mention the wor0 done
don e by
other auditors+ the report will express a di%ision of responsibility8 The principal auditor will mention this
di%ision in all three paragraphs8 The name of the other auditor is not mentioned unless the auditor gi%es express
permission and the report
repo rt of the other auditor is presented8 5a0e other C#A responsible by mentioning them in
the ,ntro+ Scope+ and &pinion paragraph8
Assumption of +esponsibility (no reference $A) $ The principal auditor must assure on the other
reference to ot%er $A
auditors+ reputation+ independence+ professional competency+ program steps (,##)8 Bisit the other auditor to
discuss audit procedures and re%iew audit program+ documentation+ and e%aluation of internal controls
performed by the other auditor
au ditor
from AA $
,ustified departure from $ The explanatory paragraph should contain a description of the departure+ its
approximate effects (if possible) and the reasons why adherence to "AA# would ma0e the F/S misleading
oing $oncern – The auditor should perform the following procedures:

A $ Analytical
Analytical procedures
proc edures
. $ .ebt compliance
5 $ e%iew board minutes
, $ ,n1uiry of client’s legal counsel
T $ Confirm third party arrangements/agreements
S $ Subse1uent e%ents re%iew
Conditions or e%ents that may indicate substantial doubt:
F $ Financial difficulties
, $ ,nternal matters
9 $ 9egati%e trends
- $ -xternal matters+ legal proceedings+ new legislation+ loss or expiration of intellectual property
The auditor is not precluded from choosing to disclaim an opinion in cases in%ol%ing uncertainties
The explanatory paragraph occurs after opinion paragraph

,t includes the terms substantial doubt! and going concern!
3
.on’t limit it for a time period
,f+ in the auditor’s *udgement+ the entity’s disclosures are inade1uate+ a departure from "AA# exists8 This may
result in either a 1ualified or ad%erse opinion
.mp%asis of a matter $ auditor may wish to emphasis a particular matter but still express an un1ualified
opinion8 -mphasis when a company is a -CC
• A related party transaction
• Significant subse1uent e%ents
• -ntity is a component of a larger business
• ,tems that affect the comparability (except changes in accounting principles)
An explanatory paragraph is not re1uired
/ac of consistency (*ustified changes) AC.& $ if a change is "AA# has occurred between accounting periods
and the effect is material+ the auditor should add an explanatory paragraph to the un1ualified report8 The
explanatory paragraph comes after the opinion paragraph
hen selecting the type of opinion because of a lac0 of consistency+ determine is the change is *ustified
"AA#: Acceptable/=ustified 3 5odified 7n1ualified
9ot "AA#: 7nacceptable/7n*ustified 3 ;ualified or Ad%erse
;ualified except for! &pinion and Ad%erse &pinion for %ery material "AA# problems
68 9on "AA# un*ustified/unacceptable change $ ,ssue is consistency (AC.&)2 an explanatory paragraph
should appear before the opinion paragraph to describe the non"AA# acctg change and the financial impact
8 ,nade1uate disclosure $ when the auditor belie%es that the omitted items cause the F/S to be decepti%e
D8 .eparture from "AA#
"AA#: Acceptable/=ustified 3 5odified 7n1ualified
9ot "AA#: 7nacceptable/7n*ustified 3 except for! or Ad%erse
E8 7nreasonable accounting estimates
;ualified except for! &pinion for material "AAS problems

68 7ncertainty
8 Scope limitation $ time constraints+ in ability to obtain sufficient competent e%idential matter+ refusal of
mgmt to pro%ide mgmt letter which ac0nowledge their responsibility for the fair presentation of the F/S in
conformity with "AA#+ refusal of clients attorney to respond to in1uiry
The scope limitation should be referred to in the scope and opinion paragraph (as an explanatory
paragraph preceding before the opinion paragraph: .ouble except for! whammy
.isclaimer &pinion for significant "AAS problems

68 7ncertainty
8 Scope limitation
D8 ?ac0 of independence
E8 7naudited $ only an opinion paragraph8 States reason of unaudited F/S and we do not express an opinion!
Changes to the report include

,ntroductory paragraph
 7se the words were engaged to audit! instead of ha%e audited!+ and
 .eletion of the reference to the auditor’s responsibility
Scope paragraph $ omitted
-xplanatory paragraph $ is the middle paragraph and describes the reasons for the disclaimer
&pinion paragraph $ disclaimer of opinion is gi%en on the F/S ta0en as a whole
4
Reports on Comparative Statements

,f the prior year’s financial statements were not audited and that the current year’s financial statements are
being audited+ the auditor is facing a scope limitation (because the beginning balances may not be correct) and
may re1uire a disclaimer opinion8
hen updating (changing prior) periods the explanatory should disclose the:
. $ .ate of the auditor’s pre%ious report
& $ &pinion type pre%iously issued
 $ eason for prior opinion
C $ Changes that ha%e occurred
S $ Statement opinion4is different!
&nly .&CS change their mind
7pdate or change opinion when now in conformity with "AA# (restate prior yr F/S)
eport of a predecessor auditor $ presented

The prior (old) C#A should:
•ead the current period statements
•Compare the statements audited with the current period statements
•&btain a letter of representation from the successor auditor
•&btain a letter of representation from mgmt
•,f the report is unre%ised use the original report date in any reissue
•,f the report is re%ised dual date
eport of a predecessor auditor $ not presented

The current (new) C#A should:
• 9ot name the predecessor auditor
• The date of the predecessors auditors report
• The type of opinion expressed by the predecessor auditor
• The substanti%e reasons for other than an un1ualified report
Subsequent Events
Type , e%ents $ conditions on or before balance sheet date+ accrue+ loo0ing bac0ward
e1uires a F/S ad*ustment
Type ,, e%ents $ conditions existing after the balance sheet date+ disclose in footnotes+ loo0ing forward
5ay re1uire footnote disclosure
Auditors responsibility for subse1uent e%ents $ #,5- is included in yr end fieldwor0

# $ #ost balance sheet transactions
 $ epresentation letter should be obtained from mgmt
, $ ,n1uiry
5 $ 5inutes of stoc0holders+ directors+ and other committee meetings should be read
- $ -xamine latest a%ailable interim F/S2 compare them with the F/S under audit
Auditors responsibility after the original date of the auditors report

The auditor has no acti%e responsibility8 owe%er+ if the auditor becomes aware of a subse1uent e%ent+ auditor
must use professional *udgement to decide whether to ad*ust the F/S or disclosures
,f ad*usts are made after the original date of the auditors report+ the auditor may dual date the report
5
-x8 =an+ 6+ + except for 9ote + as to which the date is Feb D+ !
Facts disco%ered after report is issued (the auditors missed it)

Auditor action
• Ad%ise client to issue re%ised F/S or ma0e additional disclosures
• #ro%ide notification that the F/S can not be relied upon
,f the client refuses to follow procedures
• 9otify the board of the directors
• .issociate with the client
• ,nform any regulatory agencies (if applicable)
• 9otify parties relying on the F/S
&mitted audit procedures disco%ered after submission of the audit program (we forgot to do it)
• Auditor should determine whether other audit procedures tended to compensate for the omitted procedures
• Apply the omitted procedures (or alternati%e procedures)
Reportin on !ther "nformation

Auditor should perform limited procedures on supplementary information and report deficiencies G omissions
68 ,n1uire of mgmt
8 .etermine if the methods uses are consistent with mgmt’s responses+ audited F/S and other 0nowledge
D8 Consider whether the client representation letter should refer to the supplementary information
Segment information is re1uired by "AA#

5aterial misstatement $ "AA# problem  1ualified or ad%erse opinion
Scope limitation $ "AAS problem  1ualified or disclaimer opinion
hen an auditor submits a document containing audited F/S to a client or others+ the auditor has a
responsibility to report on all information in the document
The auditor must indicate in the report whether the accompanying information is fairly stated in all material
respects in relation to the basic F/S ta0en as a whole8 The report should also describe the character of the
auditor examination and the degree of responsibility the auditor is assuming8
Condensed F/S
The Auditor must indicate:
• That the auditor audited and expresses an opinion on the complete F/S
• .ate of the auditors report on the complete F/S
• Type of opinion expressed
• hether the information in the condensed statements is fairly stated+ in all material respects
Selected financial data

The auditor must indicate whether the selected financial data is fairly stated+ in all material respects+ in relation
to the F/S from which it has been deri%ed8
An accountants report should include

68 'rief description of the nature of the engagement
8 Statement that the engagement was performed in accordance with A,C#A standards
D8 ,dentification specific entity+ descriptions of the transactions+ statement about the source of the information
E8 A statement describing the appropriate acctg principles (including country of origin) to be applied
H8 Statement that mgmt is responsible
I8 A statement that any differences in the facts+ circumstances or assumptions may change the report
6
J8 estrict use of report to mgmt+ board of directors+ prior and current auditors
eporting on F/S prepared for use in other countries

.istribution outside 78S8 only: auditor may use either
 The report of the other country
 7S style report modified to the accounting principles of another country
.istribution within the 7S: auditors report should be the 7S standard report modified as appropriate for
departures from 7S "AA#8
7
#ualit$ Control Standards
The fi%e interrelated elements of 1uality control are:
A $ Acceptance and continuance of client’s engagement
, $ ,ndependence+ integrity and ob*ecti%ity
C $ Continuous monitoring
# $ #ersonnel management
A $ Assurance regarding engagement performance
Acceptance and continuance of clients and engagements

• Considers the ris0 associated with clients (don’t accept a client whose mgmt lac0s integrity)
• 7nderta0es only those engagements that the firm can reasonably expect to complete with professional care
Independence0 integrity and obectivity

• #olicies and procedures which help maintain personnel independence in fact and appearance
• ?ead partner and the re%iewing partner must rotate off the audit e%ery fi%e years
• outine tax return preparation+ tax planning and employee personal tax ser%ices are allowed under
Sarbanes&xley but must be appro%ed by the audit committee in writing
$ontinuous monitoring
• hat the title implies
#eer re%iew
 &ne C#A firm re%iews another C#A firms 1uality control system+ occurs e%ery D years for a C#A firm
that is a member of the A,C#A8
 #urpose is to determine and report whether C#A firm being re%iewed has de%eloped ade1uate policies
and procedures for 1uality control and they are following them
 7pon completion+ a report is issued with conclusions and recommendations
ersonnel !anagement
• Criteria for hiring+ assignment of the firms personnel to engagements+ professional de%elopment and
ad%ancement
Assurance regarding engagement performance

• #olicies and procedures that assure that the engagement wor0 meets professional standards+ regulatory
re1uirements+ and the firms own standards of 1uality
"AAS relate to the conduct of each indi%idual engagement+ whereas 1uality control relate to the conduct of all
professional acti%ities of the firms practice as a whole
The 1uality control standards of a firm affect both the performance of each audit and the performance of the
audit practice as a whole
.eficiencies in a firm’s 1uality control do not necessarily mean/indicate a lac0 of "AAS compliance8
!ther Enaements% Reports and Accountin Services

Auditing standards ha%e restricted special reports to the following H areas
68 &C'&A $ use of other comprehensi%e basis of accounting F/S (cash basis+ pricele%el ad*usted F/S)
The use of non"AA# re1uires the auditor to issue either a 1ualified or ad%erse opinion unless the non"AA#
method is an &C'&A (in which case an un1ualified opinion is appropriate)
8
23 Specific elements0 accounts or items of a 5S $ The auditor expresses an opinion on each of the specified
elements+ if the element is farreaching or per%asi%e (9,+ ST@ -;+ or any item based thereon) the auditor must
audit the complete set of financial statements8
A piecemeal opinion may be expressed if the items do not constitute a ma*or portion of the F/S8 A piecemeal
opinion cannot be issued if the auditor has expressed a disclaimer or ad%erse opinion8
63 Issue special report on a clients compliance 7it% contractual agreements or regulatory requirements
Auditor must ha%e audited the F/S and may only issue negati%e assurance8 Cannot be issued if the auditor has
expressed a disclaimer or ad%erse opinion8 ?imitedly distributed
43 Special purpose financial presentations to comply 7it% contractual agreements or regulatory provisions
H8 inancial information presented in prescribed forms or sc%edules $ the auditor may attest to the fairness on
financial information presented in prescribed forms such as loan applications or regulatory filings8
The auditor may ma0e modifications to an un1ualified special report by adding an explanatory paragraph after
the opinion paragraph
Compilation and Revie& of Financial Statements

C#A’s can perform two le%els of ser%ice (compilation and re%iew) with respect to unaudited F/S of a nonpublic
company8
$ompilation engagement $ 9o assurance or opinion8 C#A does not perform any audit or re%iew procedures8
A +evie7 $ ?imited (negati%e) assurance8 C#A performs in1uiry and analytical procedures
hen a C#A performs more than one ser%ice (such as complication and an audit) the C#A should issue a report
that is appropriate for the highest le%el of ser%ice rendered8
An engagement letter is recommended but not re1uired
Statements on Standards for Accounting and e%iew Ser%ices $ pronouncements issued by the accounting and
re%iew ser%ices committee of the A,C#A
A compilation engagement may in%ol%e compiling and reporting on only one financial statement
The compilation engagement report should include: A?A.
A $ Statement that a compilation has been performed in accordance with SSAS issued by the A,C#A
? $ Statement that a compilation is limited to presenting+ in the form of F/S+ information that is the
representation of mgmt
A $ Statement that the accountant has not audited the F/S
 $ Statement that the accountant has not re%iewed the F/S
. $ .isclaimer of opinion and a statement that the accountant gi%es no assurance on the F/S
Kou’re A ?A. when all you do is compile F/S
Compiled F/S that omit "AA# disclosures are acceptable if:

eason for omission was not to decei%e user
•
Compilation report warns user of missing disclosures

•
Compilation with limited disclosures are labeled Selected ,nformation $ Substantially All .isclosures
e1uired 'y "AA# Are 9ot ,ncluded!
9
An opinion+ e%en 1ualified or ad%erse+ re1uires and audit8 hen an accountant performing a compilation or
re%iew becomes aware of a "AA# departure+ the report should be modified or the C#A with withdraw from the
engagement8 An opinion would not be expressed
An accountant who submits unaudited F/S to the client that are not expected to be used by a third party may use
an engagement letter rather than a compilation report
e%iew of F/S $ a higher le%el of ser%ice than compilation because it results in an expression of limited
assurance8 e%iews include in1uiry and analytical procedures8 owe%er+ no re1uired to obtain an understanding
of internal control or assess control ris0
An auditor is re1uired to perform these in a e%iew:

7 $ 7nderstanding with client must be established
? $ ?earn and or obtain sufficient 0nowledge of the entity’s business
, $ ,n1uires
A $ Analytical procedures
 $ e%iew+ other procedures
C $ Client representation letter re1uired from mgmt (don’t need with a compilation)
# $ #rofessional *udgement should be used
A $ Auditor should communicate results
The ob*ecti%e of a re%iew of financial information is to determine whether material modifications are necessary
for the information to be in conformity with "AA#8
9ot re1uired to communicate with predecessor auditor
5a0e in1uires of internal personnel+ not external people or entities8
Client representation letter from mgmt is re1uired which co%ers all F/S’s and periods co%ered by the re%iew
report
Audit test wor0+ including testing internal controls+ is not performed
The accountants report in a re%iew engagement should include:

A $ the re%iew has been performed in accordance with SSAS standards established by the A,C#A
5 $ All F/S information is the representation of mgmt
, $ a re%iew consists principally of in1uiries of company personnel
A $ a re%iew consists of analytical procedures applied to financial data
S $ a re%iew is substantially less in scope than an audit
9 $ no opinion is expressed
5 $ accountant is not aware of any material modifications that should be made to the F/S in order for
them to be in conformity with "AA#
A5 , A S95
Reportin on Comparative F/S

hen the continuing auditor performs a higher le%el of ser%ice (ser%ice upgrade) in the current period+ the
report on the prior period should be updated and issued as the last paragraph of the current period’s report
.owngrade in ser%ice (last yr we re%iewed+ this yr we compile)8 ,ssue a compilation report and add a paragraph
to describe prior period responsibility assumed8 &r issue both a re%iew report and compilation report
10
hene%er prior accountants are as0ed to reissue a prior report (audit+ re%iew or compilation) they should reas
the new F/S and obtain a representation letter from the new accountant
eporting when one period is audited

• eissue the prior period report+ or
• ,nclude an additional paragraph in the current report describing the responsibility assumed for the prior
period statements
Revie& of "nterim Financial "nformation

,n an initial re%iew of interim financial information+ the accountant should ma0e in1uires of the predecessor
auditor+ and if allowed+ re%iew the predecessor’s documentation
,n1uiry of clients lawyer is not re1uired but may be appropriate in certain circumstances
"oing concern is not re1uired but may be appropriate
?i0ely misstatement $ best estimate of the total misstatement in an account balance or class of transactions8 The
accountant should:
• Accumulate all such estimates for further e%aluation
• Consider that the aggregated effect of se%eral immaterial misstatements
• -%aluate potential effect on current and future periods
A re%iew of interim F/S of a public company is conducted in accordance with A,C#A auditing standards not
SSAS
Should modify their report if+ during the re%iew+ they become aware of a departure from "AA#
"oing concern no modification if disclosed
?ac0 of Consistency no modification if disclosed
'etters for (nder&riters

A comfort letter is a letter from the C#A to the named underwriter8 ,t co%ers the period from the date of the last
auditors’ report to the effecti%e date! of the registration8
hen a comfort letter is issued+ the C#A is re1uired to perform a re%iew of interim financial information in
accordance with auditing standards
To obtain a comfort letter+ parties other than the names underwriter must pro%ide the C#A with an attorney’s
opinion or representation letter+ confirming that such a party has a due diligence defense!
Comments in a comfort letter a limited to:

•Financial info expressed in dollars+ and
•Financial info deri%ed from accounting records
A comfort letter is solely to assist the underwriters in conducting and documenting their in%estigation of the
company in connection with the offering
#ro%ide positi%e assurance on:
11
• C#A’s independence
• Compliance of the F/S with the S-C Act+ assuming the F/S are audited
#ro%ide negati%e assurance on:

•7naudited F/S $ if a re%iew has not been performed+ procedures performed and findings obtained should be
listed
•Changes in selected financial information during subse1uent period
•hether nonfinancial data in the registration statement complies with regulation S@
Attest Enaements
Attest engagements $ C#A is engaged to issue or does issue an examination+ a re%iew+ or an agreedupon
procedures report on sub*ect matter+ or an assertion that is the responsibility of another party (usually mgmt)8
5a*or attest ser%ices:
• Agreedupon procedures
• Financial forecasts and pro*ections
• #ro forma F/S
• ,nternal control o%er financial reporting
The following standards apply to ser%ices a C#A may offer:

Audit engagements $ SAS (Statements on Auditing Standards)
Compilation and re%iew engagements $ SSAS (Statements on Standards for Accounting and e%iew
Ser%ices)
Attest engagements $ SSA- (Statements on Standards for Attest -ngagements)
SSA- does not apply to:

•#ro%iding consulting/ad%isory ser%ices
•&perational audits (usually performed by internal auditors)
There are 66 attestation standards: T,##K #- ACS

"eneral Standards $ T,##K
T $ Training and proficiency
, $ ,ndependence
# $ #erformance/due professional care in planning and performance
# $ #rofessional 0nowledge of sub*ect matter
K $ Kour belief that the assertion and the criteria is ob*ecti%e+ measurable and complete
Field wor0 Standards $ #-
# $ #lanning and super%ision
- $ -%idence to pro%ide reasonable basis for the conclusion
eporting Standards $ ACS
A $ Assertion or sub*ect matter should be identified
C $ Conclusions should be expressed
 $ eser%ations or unresol%ed issues should be disclosed
S $ Statement restricting use of the report to specified parties should be included (if necessary)
Agreed-upon procedures $ C#A is engaged to issue a report of findings based on specific agreed upon
procedures (example is mutual fund performance)8 Agreed upon procedures may be performed is the following
conditions exist:
, $ ,ndependence of the practitioner
A $ Agreement of the parties
5 $ 5easurability and consistency
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S $ Sufficiency of the procedures
7 $ 7se of the report is restricted to the specified parties
 $ esponsibility for the sub*ect matter rests with the client
- $ -ngagements to perform agreed upon procedures on prospecti%e financial statements
, A5 S7- you can perform these agreed upon procedures
inancial forecasts $ the expected financial results of a future period+ based on expected conditions (i8e8
budget)
inancial proection $ financial results based on a what if! scenario+ based on hypothetical assumptions
Forecasts and pro*ections are two types of prospecti%e F/S8 #ro forma F/S are different+ because it shows what
past financial results of an expired period would ha%e been if something had been different8
&nly a financial forecast is appropriate for general use8 hile both+ forecasts and pro*ections are appropriate
for limited use8
Compilation of prospecti%e F/S $ the proper assembling of financial data based on the party’s assumptions
9o assurance of any 0ind gi%en
•
•The practitioner is not re1uired to gather supporting e%idence

•Significant assumptions must be disclosed otherwise cannot issue compilation
13
Plannin and Supervision
T,# #,- AC.&
The audit committee is responsible for the selection and the appointment of the auditor and the re%iewing the
nature and scope of the engagement
,n a new client relationship+ it is mandatory to ma0e in1uiries of the predecessor auditor8 Client permission is
needed8 ,f the client is unwilling it is a scope limitation8
'efore accepting the client+ in1uiry the old C#A regarding:

•,nformation that may re%eal mgmt integrity
•.isagreements with mgmt (accounting principles+ auditing procedures)
•easons for change of auditor
•Communication to the audit committee regarding fraud+ illegal acts+ internal control matters
After acceptance+ in1uiry the old C#A regarding:
•5a0e specific in1uiries about the audit
•e%iew predecessors audit documentation (wor0papers)
#reliminary -ngagement Acti%ities

• Assess the integrity of mgmt
• Assess the a%ailability and ade1uacy of the clients accounting records (lac0 of records 3 scope limitation)
• -%aluate the firm’s 1uality control policies and procedures
An engagement letter $ a signed contract which documents the understanding with the client is re1uired for an
audit engagement (should be signed and dated by the client)
5anagement’s is responsible for:

The F/S
•
,nternal controls
•
Compliance with laws

•
epresentation letter (letter to auditor at end of the engagement that confirms the representation made)
•
Auditor is responsible for:

•Conduct the audit in accordance with "AAS (obtain reasonable assurance about whether the F/S are free
from material misstatements
An audit is not designed to detect error or fraud that is immaterial to the F/S
An audit is not designed to pro%ide assurance on internal control or to identify significant deficiencies
Audit is sub*ect to inherent ris0s that errors and fraud will not be detected8 ,f we disco%er fraud then we report
it to the audit committee
#lanning the Audit

The nature+ extent and timing of planning procedures will %ary based on the engagement (the 9-T we cast o%er
the audit)
The auditor is re1uired to obtain an understanding of the entity+ its en%ironment and internal controls
&btain 0nowledge about the clients industry and business through:

•Audit guides+ trade publications and public information
14
• Tour client facilities
• e%iew financial history of client
• &btain understanding of client accounting
• ,n1uire of client personnel
Analytical #rocedures used for:

•For planning the nature+ extent+ and timing of other audit procedures (re1uired)
•Substanti%e tests to obtain e%idential matter (optional)
•&%erall re%iew in the final stage of the audit (re1uired)
Analytical procedures performed during planning

•7sed to enhance the auditors understanding+ and identify unusual transactions+ e%ents and amounts
•.uring planning+ analytical procedures consist of a re%iew of data aggregated at a high le%el+ such as
comparing financial statements to budgeted amounts
•Financial data is used through rele%ant nonfinancial data (number of employees+ s1uare footage)
The audit plan

•5ust be written
•Specific audit procedures are documented
•.escription of the nature+ extent+ and timing of:
 #lanned ris0 assessment procedures (assess ris0 of material misstatement) (re1uired)
 #lanned further audit procedures
•Timing of audit procedures should be discussed with mgmt
5ateriality
8no7n misstatements $ specific misstatements identified during the audit
/iely misstatements $ misstatements the auditor considers li0ely to exist due to differences between auditor
and mgmt *udgements or from audit e%idence
9olerable misstatements $ maximum error in a specific population that the auditor is willing to accept
All misstatements must be communicated to mgmt
'ecause the F/S are interrelated+ the auditor should use the smallest le%el of misstatement that could be material
to any one of the F/S
The auditor must consider the effects+ both indi%idually and in aggregate+ of the uncorrected misstatements
(both 0nown and li0ely)
5isstatements are more li0ely to be considered if they:

•Affect trends in profitability
•Affect’s entity’s compliance with loan co%enants+ contracts or regulatory pro%isions
•,ncrease mgmt’s compensation
•Affect significant F/S elements
•Can be ob*ecti%ely determined
The auditor should document:

•#lanning le%els of materiality and tolerable misstatement+ the basis for those le%els and any subse1uent
changes
15
•@nown and li0ely misstatements that were corrected by mgmt
•A summary of uncorrected misstatements (0nown and li0ely)+ auditors conclusions on whether those
misstatements cause the F/S to be materially misstated+ and the basis for the conclusion
.ocumentation of uncorrected misstatements should include:
•Separate identification of 0nown and li0ely misstatements
•The aggregate effect on the F/S
•ele%ant 1ualitati%e factors affecting materiality *udgements
Audit is0
Audit ris0 is the ris0 that the auditor may un0nowingly fail to modify appropriately the opinion on the F/S that
are materially misstated (ris0 that the auditor will gi%e the wrong opinion)
A 3 55 L .
A 3 (, L C) L .
Audit ris0 (A) should be low

+is of !aterial !isstatement (+!! ) $ assessed by auditor and is independent of F/S audit
In%erent ris (I+) $ susceptibility of a rele%ant assertion to a material misstatement+ assuming there are
no related controls (mista0e in the clients acctg system)8 Auditor assesses , but can’t change
$ontrol ris ($+) $ ris0 that a material misstatement could occur in a rele%ant assertion will not be
pre%ented or detected on a timely basis by the clients internal controls (clients internal control does not
catch it)
#etection ris (#+) $ ris0 that the auditor will not detect a misstatement that exists within a rele%ant assertion
(auditor will miss the mista0e)8 .etection ris0 is a function of the effecti%eness of audit procedures8 The auditor
can change the detection ris0
55 and . ha%e in%erse relationship8 hen ris0 of material misstatement is high+ detection ris0 should be
set low (so we ha%e to do more wor0)
Substanti%e procedures are always re1uired
.irect relationship between 55 and assurance re1uired from Substanti%e procedures8 "reater the ris0
(55) the more persuasi%e e%idence needed8
Audit ris0 and materiality must be considered at both the F/S le%el and the account balance (item le%el)
•At the F/S le%el+ the auditor should consider ris0s that ha%e per%asi%e effect on the F/S+ potentially affecting
many rele%ant assertions
•The account balance le%el (transaction G item le%el) is used to determine the nature+ extent+ and timing of
audit procedures8 ,n%erse relationship between audit ris0 and materiality
Audit #rocedures:
68 is0 assessment procedures
8 Test of controls $ test of internal controls (C,5-)
D8 Substanti%e procedures $ tests M balances
F/S Assertions (made by mgmt)

Transactions and e%ents
C $ Completeness
# $ #roper period cutoff
A $ Accuracy
C $ Classification
& $ &ccurrence
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Account balances
C $ Completeness
A $ Allocation and %aluation
 $ ights and obligations
- $ -xistence
#resentation and disclosure

C $ Completeness
7 $ 7nderstandability and classification
 $ ights and obligations
B $ Baluation and accuracy
After sufficient planning information has been gathered+ an audit plan should be drafted8 A written audit plan is
re1uired for e%ery audit8
hen planning the audit+ the auditor should consider the extent of in%ol%ement of the client’s internal auditors
in the audit8 ,nternal auditors are not independent+ thus+ the external auditor can’t share with the internal auditor
any responsibility for audit decisions8
• Auditor must obtain an understanding of the internal audit function
• ,f the auditor uses the wor0 of internal audit+ competence and ob*ecti%ity must be assessed
• The higher the le%el the internal auditors report to+ the more ob*ecti%ity can be assumed
• The auditor remains solely responsible for the report on the F/S8 The internal auditor may not be utili>ed to
ma0e *udgement calls
,f a specialist is used must e%aluate the competence and ob*ecti%ity of the specialist8 Treat li0e one of your staff8
Fraud and "lleal Acts

.rrors $ unintentional
raud $ intentional2  types
68 Fraudulent financial reporting (lying) $ designed to decei%e F/S users8 7sually in%ol%e
manipulation+ misrepresentation+ intentional misapplication of accounting principles
8 5isappropriation of assets (stealing) $ theft of an entities assets
Fraud ris0 factors include:

•,ncenti%es/pressures: a reason to commit fraud
•&pportunity: lac0 of effecti%e controls
•ationali>ation/attitude: an attempt to *ustify fraudulent beha%iour
,ts mgmt’s responsibility to design and implement programs and controls to pre%ent and detect fraud
The auditor has a responsibility to plan and perform (referred to as design) the audit to obtain reasonable
assurance about whether the F/S are free from material misstatement+ whether caused by error or fraud8
5gmt o%erride of controls is a ma*or factor in fraud8
,n1uire entire personnel regarding their %iews of fraud ris0

 ,nconsistent responses indicate a need for additional e%idence
Consider the results of analytical procedures (re1uired during the planning and final stage)
17
Attributes of ris0:
• Type of ris0: fraudulent F/S or misappropriation of assets
• Significance of ris0: can it lead to a material misstatement
• ?i0elihood of the ris0: how li0ely is this to happen
• #er%asi%eness of the ris0: does it affect the whole F/S or only specific accounts or transactions
 Areas of greatest fraud concern:
68 ,mproper re%enue recognition
8 5gmt o%erride controls
,tems are more susceptible to manipulation when they in%ol%e:

68 igh degree of mgmt *udgement and sub*ecti%ity
8 ighly complex accounting principles
The auditor is re1uired to respond to the results of the ris0 assessment on three le%els
68 &%erall+ general response
 assigning personnel to the engagement
 determining the appropriate le%el of super%ision of engagement personnel
 e%aluating mgmt’s selection and application of accounting principles
8 esponse encompassing specific audit procedures
 change nature
 change extent
 change timing
D8 esponse addressing ris0s related to mgmt o%erride
 examine *ournal entries and other ad*ustments
 re%iew accounting estimates for biases
 e%aluate the business purpose for significant unusual transactions
Significant fraud ris0 $ may consider withdrawing from the engagement
e%enue recognition
 perform substanti%e analytical procedures relating to re%enue
 confirm with customers contract terms and the absence of side agreements
e%enue recognition criteria
68 must ha%e an arrangement (signed agreement)
8 must be a deli%ery
D8 must be fixed or determinable price
E8 collectability
,n%entory 1uantities
 concern that there may be a failure to reconcile boo0s to physical in%entory
5gmt estimates
 engage a specialist
 de%elop an independent estimate
 perform a retrospecti%e re%iew of prior period estimates (how good were last yr’s estimates)
5isstatements caused by fraud (e%en immaterial misstatements) may be indicati%e of an underlying problem
with mgmt integrity8 The auditor may need to ree%aluate the assessment of fraud ris0+ the assessed effecti%eness
of controls+ and the appropriateness of audit procedures applied8
,nform the audit committee of any fraud8 #arties outside the entity that we may communicate with in certain
circumstances:
18
 to comply with certain legal and regulatory re1uirements
 to a successor auditor
 in response to a subpoena
 to a funding agency
Complete documentation of the auditors ris0 assessment and response is re1uired
,f the auditor has not identified improper re%enue recognition as fraud ris0+ support for this conclusion
,llegal acts $ %iolation of law
The auditors responsibility to detect illegal acts are the same for fraud and errors8
The auditor has no obligation to loo0 for illegal acts ha%ing an indirect effect on the F/S
The auditor generally does not include procedures to specifically detect illegal acts
-ffect of illegal acts on the auditors report

.eparture from "AA# $ expect for! or ad%erse
,nsufficient e%idence $ except for! or disclaimer
Clients refuses to modify report $ withdraw
Ris) Assessment
T,# #,- AC.& (fieldwor0)
Audit Steps ,5AC#A

, $ ,nternal control+ understand
5 $ 5aterial misstatement+ assess
A $ Assess ris0 control
C $ Control testing
# $ #erform substanti%e testing
A $ Audit e%idence+ e%aluate appropriateness and sufficiency
,  ,nternal control $ obtain an understanding of the entity and its en%ironment

is0 assessment procedures
• ,n1uires
• Analytical procedures (re1uired for planning and final stages)
• &bser%ation and inspection
• .iscussion among audit team
• &ther procedures
• The auditor may choose to perform substanti%e procedures or tests of controls+ if its efficient to do so
Factors to understand
• ,ndustry+ regulatory+ and other external factors
• 9ature of the entity
• &b*ecti%es+ strategies and business ris0s
 'usiness ris0s $ e%ents or circumstances that could ad%ersely affect the firm (ie competition)
• Financial performance
• ,nternal controls and accounting policies
5 $ 5aterial misstatement+ assessing the ris0s

Factors that my be indicati%e of significant ris0s
• 7nusual+ complex transactions
• 'usiness ris0s
• Fraud ris0
19
•Significant related party transactions
•ighly sub*ecti%e accounting estimates and principles
esponse to significant ris0s
• -%aluate the design of the entity’s related controls
• .etermine whether the controls ha%e been implemented
• -%aluate whether and how mgmt responds to such ris0s
Test of controls $ test strengths to be relied upon+ not wea0nesses

Controls that are more directly related to an assertion are more effecti%e in pre%enting+ detecting and correcting
a misstatement in that assertion+ than controls which only relate indirectly to an assertion8
.ocumentation re1uirements
•.iscussion among the audit team
•@ey elements of the understanding of the entity and its en%ironment
•The assessment of the ris0s of material misstatement
•The identified ris0s and related controls e%aluated by the auditor
.ocument
68 control factors that were used/helped to plan the audit engagement
8 control factors that helped ensure mgmt rules and directi%es were followed
Forms of documentation may include any item the auditor can F,9.
F $ Flowchart
, $ ,nternal control 1uestionnaire or chec0lists
9 $ 9arrati%e
. $ .ecision table
Flowcharts $ symbolic diagram representing the se1uential flow of authority+ processes and documents8 .epicts
the auditors understanding of the system
• An ade1uate flowchart shows the origin of each document in the system+ its subse1uent processing+ and its
final disposition
• ,T flowcharts are initially created to document the logic and existing flow of a computer program
,nternal control 1uestionnaires $ used for each item of mgmt assertions
9arrati%es $ a narrati%e is a written %ersion of a flow chart (hard to see! wea0nesses
.ecision tables or trees $ graphic illustrations that depict the logic of an operation or a process
A flowchart is se1uential while a decision table/tree is logical
"nternal Control
T,# #,- AC.&
-ntity ob*ecti%es
68 eliability of financial reporting (most rele%ant to the audit)
8 -ffecti%eness and efficiency of operations
D8 Compliance with applicable laws and regulations
20
Controls that pertain to the first ob*ecti%e (reliability of financial reporting) are the most rele%ant to the audit+
and these are the controls that the auditor must consider and understand8
Fi%e components of internal controls $ C,5-

C $ Control en%ironment: o%erall tone of the organi>ation
 $ is0 assessment $ mgmt’s identification of ris0
, $ ,nformation and communication systems
5 $ 5onitoring: assessment of internal controls o%er time
- $ -xisting control acti%ities: control policies and procedures
,t’s a C,5- not to ha%e strong internal controls
Control testing 3 internal controls (C,5-)

Substanti%e testing 3 M balances
The auditor should obtain an understanding of C,5- as it pertains to financial reporting:

68 e%aluate the design of rele%ant controls and determine whether then ha%e been implemented
8 assess the ris0 of material misstatement
D8 design the nature+ extent and timing of further audit procedures (C#A tests internal controls in order to
ade1uately plan the 9-T audit)
?imitations of internal controls

• uman error
• Collusion
• 5gmt o%erride
• Segregation of duties may be difficult to achie%e in a smaller entity
,T system may ma0e it impossible to reduce detection ris0 through substanti%e testing alone (must do control
testing as well)
,T benefits:
• Ability to process large %olumes of transactions accurately
• ,mpro%ed timeliness and a%ailability of information
• Facilitation of data analysis and performance monitoring
• eduction is the ris0 that controls will be circum%ented
• -nhanced segregation of duties through effecti%e security controls
,T is0s:
• #otential reliance on inaccurate systems
• 7nauthori>ed access to data
• 7nauthori>ed changes to data+ systems and programs
• Failure to ma0e re1uired changes and updates to systems or programs
Auditor should document use of programs and perform tests more often during the yr
&rgani>ational structure of the ,T department

C $ Control group $ responsible for internal control within ,T dept8
& $ #rogram &perators $ input data
# $ #rogrammers $ write and de%elop computer programs
A $ System Analysts $ design the o%erall program+ while programmers do the detailed wor0
? $ ?ibrarian $ maintains the storage of the data
21
Anyone doing for an 6 *ob or super%ising another area is a wea0ness
C,5-
C $ Control -n%ironment $ has per%asi%e effect on the auditors ris0 of assessment and preliminary *udgements
about its effecti%eness may influence 9-T of further audit procedures to be performed
• Sets the tone of an organi>ation+ influencing the control consciousness of its people
• Communication and enforcement of integrity and ethical %alues
• 5gmt’s philosophy and operating style
• &rgani>ational structure
• Assignment of authority+ responsibility and accountability
• uman resource policies and practices
 $ is0 assessment
• C#A should obtain understanding and 0nowledge
, $ ,nformation and communication

• Accounting process (automated and manual)+ from initiation of a transaction to F/S
• Accounting records (electronic and manual) supporting information and specific accounts in%ol%ed in
initiating+ authori>ing+ recording+ processing and reporting transactions
• The financial reporting process+ including the de%elopment of significant accounting estimates and the
inclusion of appropriate disclosure
5 $ 5onitoring
• #rocess that assesses the 1uality of internal control performance o%er time
• -stablishing and maintaining internal control is a responsibility of mgmt
- $ -xisting control acti%ities

Control acti%ities in a strong internal control system ha%e #A,. T,#S
# $ #renumbering of documents
A $ Authori>ation of transactions
, $ ,ndependent chec0s to maintain asset accountability
. $ .ocumentation
T $ Timely and appropriate performance re%iews
, $ ,nformation processing controls $ ensure that transactions are %alid+ authrori>ed+ and accurate
 Application controls $ controls for processing of indi%iduals transactions
 "eneral controls $ apply to information processing throughout the company
# $ #hysical controls for safeguarding assets $ simply security
S $ Segregation of duties $ client should separate: A+$
 Authori>ation
 ecord0eeping
 Custody of related assets
The internal control en%ironment should be detected in the ordinary course of business by an employee+ not
 Collusion
 5gmt o%errides
For internal controls the auditor should

• &btain the necessary understanding of the user organi>ations internal control to plan the audit
• Assess the control ris0 at the user organi>ation+ and
22
• #erform substanti%e procedures
eport on controls placed in operation $ may aid the auditor in obtaining an understanding of controls+
howe%er+ it is pro%ided when tests of operating effecti%eness were not performed+ and therefore it does not
pro%ide the user with a basis for reducing the assessment of control ris0
Respondin to Assessed Ris)s

,5AC#A
Audit approach $ the auditors specific approach to identified ris0s at the rele%ant assertion le%el may consist of
either a substanti%e or combined approach
7se substanti%e approach when:

•Controls are not strong for an assertion
9ot cost/benefit to test the effecti%eness of the controls
•
Combined approach $ both control testing and substanti%e procedures are used8 ,f controls are operating
effecti%ely+ less assurance will be re1uired from substanti%e procedures8
Test of controls may be re1uired in highly electronic en%ironments+ substanti%e procedures alone may not be
sufficient
Audit approach
Status of internal control is0 le%el #erform control tests #erform substanti%e tests
9one or wea0 high 9o (because nothing to rely on) yesmaximum
Some medium Kes
Strong low Kes minimal (but ne%er
eliminate for material
balances+ transaction classes+ or disclosures)
Test of Controls  ,5AC#A

Test of controls are performed when the auditors ris0 assessment is based on the assumption that controls are
operating effecti%ely+ or when substanti%e procedures alone are insufficient8 (test control strengths+ not
wea0nesses)
&btaining an understanding of internal controls includes e%aluating the design of controls and determining
whether they ha%e been implemented
&nly controls that are suitably designed to pre%ent or detect material misstatements are sub*ect to tests of
operating effecti%eness
,nspect client records documenting use and changes to ,T programs
9ature of tests of controls

• Tests of operating effecti%eness of controls include: in1uiries+ inspection+ obser%ation+ and reperfornance
• As the planned le%el of assurance (about operating effecti%eness) increases+ the auditor should obtain more
reliable or more extensi%e audit e%idence
-%idence hierarchy:
68 #ersonal obser%ation and 0nowledge
8 -xternal e%idence
23
D8 ,nternal e%idence
E8 &ral e%idence
Timing of tests of controls

• hen tests of controls are performed at one particular time+ they pro%ide e%idence that controls operated
effecti%ely only at that time8 Controls tested throughout the period pro%ide e%idence of operating
effecti%eness during that period
• Controls that are tested only during an interim period should be supplemented by additional e%idence for
the remaining period (roll forward)
• ,f controls ha%e changed since they were last tested+ operating effecti%eness must be retested in the current
period
• -%en if controls ha%e not changed+ operating effecti%eness must be tested at least one e%ery third year
#erform substanti%e testing $ ,5AC#A
• 7sed to detect material misstatements at the rele%ant assertion le%el
• Substanti%e procedures should be designed to be responsi%e to assessed ris0s+ howe%er+ regardless of the
assessed ris0+ substanti%e procedures are re1uired for each material transaction class or account balance
 types of substanti%e procedures

68 Test of details $ applied to transaction classes+ account balances and disclosures8 M balances+ ratios
8 Substanti%e analytical procedures $ used for large %olume predictable transactions
.irectional testing
To test existence or occurrence assertion $ Top down+ start from F/S8 ?oo0 for support 3 %ouching
Test existence for o%erstatement of assets and re%enues
To test completeness assertion $ 'ottom up+ start from item+ loo0 to see its included/co%ered in F/S 3 tracing
Test completeness for understatement of liabilities and expenses
,f substanti%e procedures are performed at an interim date+ the auditor should perform further substanti%e
procedures (maybe with test of controls) to pro%ide reasonable basis for extending audit conclusions to period
end
,f ris0 of material misstatement is low+ performing substanti%e procedures at interim increases the ris0 that the
auditor will not detect material misstatements in the F/S
,n certain situations+ such as those in which there is an identified fraud ris0+ the auditor may choose to perform
substanti%e procedures at or near period end8
Audit e%idence+ e%aluate appropriateness and sufficiency $ ,5AC#A

•Audit e%idence obtained may cause the auditor to modify this or her initial ris0 assessment
•The auditor should not assume that an identified instance of fraud or error is an isolated occurrence
•hen there is a change in the assessed le%el of ris0+ the auditor should modify planned procedures
accordingly
•The auditor uses *udgement to e%aluate the sufficiency and appropriateness of audit e%idence
24
Transaction C$cles
T,# #,- AC.& $ whole chapter E
e%enue cycle $ includes sales re%enues+ recei%ables and cash receipts

Sales (serially number documents are #A,. T,#)
68 #reparation of sales order $ a serially numbered sales order is prepared and sent to the credit department
for appro%al
8 Credit appro%al $ %aluation assertion+ credit department determines (AC)
D8 Shipment $ Shipping department prepares a serially numbered bill of lading (AC)
E8 'illing $ 'illing dept8 prepares serially numbered sales in%oice8 Shipping documents+ sales orders+ and
in%oices are compared to ensure that all shipments were based on customer orders and properly billed8
The in%oice is then sent to the customer and A/ dept8 (AC)
H8 Accounting $ the sale is entered into the sales *ournal and a recei%able is recorded (AC)
Accounts recei%able
68 Sales
8 Collection of cash receipts
D8 7ncollectible recei%ables $ an aging schedule is prepared and sent to the credit department for use in
carrying out its collection program8 Auditor obser%es the preparation of aging schedule to support
assessing control ris0 below maximum
E8 Sales returns $ a serially numbered recei%ing report may be used as a sales return slip8 &nce the return
is appro%ed+ the related recei%able is eliminated
Cash receipts
68 Collection $ incoming mail must be opened by a person who does not ha%e access to the A/ ledger8
&ne receipt copy should be sent to cashier (or treasury) for ban0 deposit8 Another copy sent to A/ dept8
for entry into the A/ subsidiary ledger8 A third copy should be sent to acctg dept8 for entry into the
general ledger
Testing controls for Sales

• ,n1uire about credit procedures for new customers (%aluation) (AC)
• Compare sales *ournal to subsidiary ledgers
• ,nspect a sample of prenumbered shipping documents and
 agree to sales order (existence)
 account for prenumbered (completeness)
• Bouch a sample of sales in%oices+ trace a sample of shipping documents
• ,nspect customer exception file and disposition (existence+ completeness+ rights and %aluation)
• Send confirmations $ follow up on error reports (rights and obligations)
• Test cutoff
• Test ade1uacy of uncollectible accounts
-xpenditure cycle
#urchases
68 #urchase re1uisition $ the dept8 needing an asset or ser%ices sends an appro%ed serially numbered
re1uisition to the purchasing dept
8 #urchase orders $ obtain competiti%e bids from %arious suppliers to ma0e sure that the best price is
obtained8 7se prenumbered purchase orders
D8 eceipt of goods or ser%ices it is preferable that the copy not indicate the 1uantity ordered (blind copy)+
thus the recei%ing dept is forced to count the goods upon arri%al
25
Accounts payable
68 record the payable
8 appro%e the bill $ when the in%oice arri%es+ the accounting department appro%es it by matching the
in%oice+ purchase order+ recei%ing report+ and (sometimes) the re1uisition
Cash disbursements
68 best for internal controls to pay in%oices by chec0
8 best for internal control to segregate appro%ing payment and writing chec0s
D8 Treasurer pays the bills
The accounting department has three functions

68 to record the payable
8 to appro%e the in%oice for payment
D8 to record the payment after its paid by the treasurer
The auditor should re%iew bills in =anuary to determine is they were incurred in 9o% or .ec (search for
unrecorded liabilities8
Audit procedures related to cash

•,nternal controls o%er the handling of cash is one the most critical areas of an audit2 proper segregation of
duties
•The auditor should obtain cutoff ban0 statements used to test for lapping and 0iting
•Bouch postings to ledger accounts+ reconcile ban0 statements+ and %erify cash transactions
Simultaneously %erify internal and external e%idence

,nternal e%idence $ includes counting cash on hand and reconciling it with the *ournals
-xternal e%idence $ includes confirming accounts on deposit with ban0s+ all securities on deposit and
obtaining ban0 cutoff statements
/apping $ theft of cash is often concealed by failing to account for cash receipts (today’s cash receipts co%er
yesterday’s theft)
• 'est way to guard against lapping is to use a loc0 box system8 ,nspect chec0s when deposited/cashed and
compare to when accts recei%able was boo0ed
@iting $ when a chec0 drawn on one ban0 is deposited in another ban0 and no record is made (cash is recorded
in  places at once (.ec D6))
• A ban0 transfer schedule compares the dates chec0s are drawn to the dates chec0s are deposited
A standard ban0 confirmation should be sent to all ban0s that the client has done business with during the year+
regardless of whether there is a year end balance to confirm8
#otential misstatements
•ecording fictitious sales (existence assertion)
•olding open the sales *ournal to include next year’s sales (improper cutoff)
•Shipping unordered goods near year end which can be returned (bill and hold)
•Failure to record payments
•Sales ad*ustments may be used to conceal thefts of cash collections
educe ris0 by AC
26
Audit *ocumentation
Audit documentation (wor0papers) belong to the C#A (not the clients acctg records) and are meant to support
the auditors opinion and record audit procedures performed and e%idence obtained
Audit documentation should:

•,ndicate that the accounting records support/reconcile to the F/S
•Contain enough detail so an auditor with no prior 0nowledge can understand the whole audit
•Support that the audit was conducted in accordance with "AAS
eport release date $ date on which the auditor grants the client permission to use the report (usually date
report is deli%ered to the client)
For pri%ate companies+ auditing standards re1uire audit documentation be completed I days from report
release date and held for H years from that date
For pri%ate companies+ the #CA&' re1uires audit documentation be completed EH days from report release
date and held for J years from that date
The specific 1uantity+ type and content of audit documentation are based on the auditors *udgement
ermanent (continuous) file $ audit documentation that has continuing interest from year to year
 contracts+ pension plans+ leases+ stoc0 options+ bylaws
$urrent file $ all audit documentation applicable to the year under the audit
Audit documentation should include significant audit findings+ actions ta0en+ and conclusions reached+ such as:
•Selection and application of accounting principles
•#ossible material misstatements
9eed to re%ise the auditors pre%ious ris0 assessment
•
•Significant difficulty in applying necessary audit procedures

•5odification to the auditors standard report
Kou can pro%ide audit documentation to another party without the clients permission:
•,f it’s subpoenaed in court
•To your defense team: lawyers+ insurance company+ expert witnesses
•A,C#A for an in%estigation or 1uality re%iew
Audit Evidence
Audit e%idence $ all the information an auditor uses to arri%e at the opinion
The auditor should ha%e access to all pertinent accounting data and corroborating e%idential matter (otherwise
it’s a scope limit)
Types of audit e%idence

•7nderlying accounting records $ test through analytical procedures and substanti%e tests+ such as retracing+
recalculation and reconciliation
•Corroborating e%idence $ pro%ides additional support for the acctg data2 obser%ation+ in1uiry and inspection
27
• -lectronic e%idence $ consider the time during which information exists or is a%ailable in determining the
nature+ extent and timing of audit procedures8
The third standard of fieldwor0 $ The auditor must obtain sufficient appropriate e%idence by performing audit
procedures to afford a reasonable basis for an opinion regarding the F/S under audit!
-%idential matter must persuade the auditor that the ending balance in the F/S are fairly presented (persuasi%e
rather than conclusi%e)
Cost/benefit relationship may be a %alid reason for performing only certain procedures+ cost alone or difficulty
in obtaining e%idence is not a %alid basis for omitting a procedure
-%idential matter should be %alid and rele%ant

The greater the ris0 of material misstatement the more e%idence will be re1uired
The higher the 1uality of audit e%idence the less audit e%idence needed
-%idence must relate to the financial statement assertion under consideration
The e%aluation of e%idential matter must ta0e into consideration the achie%ement of audit ob*ecti%es
Substanti%e procedures are performed to e%aluate mgmt’s assertions which help detect material misstatement
Substanti%e procedures consist of:

68 Test of details (applied to transactions balances and disclosures)
8 Substanti%e analytical procedures
Analytical #rocedures
•Comparison of financial data $ re%iew current and prior year’s F/S and the current years budget+ industry
norms+ and nonfinancial information
•5ost effecti%e and efficient for assertions in which potential misstatements are not apparent from detailed
e%idence or is not a%ailable
The ,/S has more predictable relationships than the '/S

Accts with mgmt discretion are less predictableN
Analytical procedures for planning phase and final re%iew phase are re1uired8 owe%er analytical procedures
used as substanti%e tests are not re1uired8
.ocumentation re1uirements+ expectation+ factors+ results+ additional audit procedures performed and results of
those procedures
,n%estigate significant differences (if found): ma0e in1uires of mgmt+ in necessary expand audit procedures or
alternati%e substanti%e procedures8 .ifferences do not necessarily indicate errors or fraud+ but simply indicate
the need for further in%estigation
Analytical procedures are applied during the o%erall re%iew stage of an audit to e%aluate the o%erall F/S
presentation and assess the conclusions reached
Test of .etails
.irectional testing refers to testing either forward or bac0ward
,f a test starts with items in the accounting records+ the proper assertion is most li0ely existence
28
,f a test starts with source documents+ it is most li0ely related to the completeness assertion
Standard auditing procedures $ F,B- CA&TS

F $ Footing+ crossfooting+ recalculation $ %erify mathematical accuracy
, $ ,n1uiry $ both internal and external
B $ Bouching $ directional testing2 auditor examines support for existence and occurrence assertions
- $ -xamination/,nspection $ pro%ides e%idence about the existence assertion
C $ Confirmation $ Type of in1uiry obtained from third party
A $ Analytical procedures $ e%aluate financial information through the study of data relationships
 $ eperformance $ auditor reperforms procedures or controls originally performed by the client
 $ econciliation $ substantiates the existence and %aluation of accounts
& $ &bser%ation $ auditor loo0s at a process or procedure performed by others
T $ Tracing $ directional testing2 examines support for the completeness assertions
S $ Subse1uent e%ents re%iew $ perform certain procedures after balance sheet date
&ther procedures
•Cutoff testing
•Test related account simultaneously
•e1uesting a comprehensi%e mgmt representation letter
•eading pertinent information
Evidential Procedures for Selected Accounts

,n%entory
The obser%ation of beginning and ending in%entory is re1uired8 5ay use alternati%e procedures to *ustify an
opinion (acceptable when its impractical or impossible to obser%e in%entory8
The client counts the in%entory and the auditor simply obser%es and test counts certain items
Consigned in%entory on hand is excluded from in%entory count
elated accounts $ in%entories+ purchases+ sales+ sales returns and allowances+ and C&"S
The auditor should examine purchase in%oices and recei%ing report around yr end for cutoff testing
The auditor should examine sales in%oices and compare them to shipping documents around yr end for cutoff
.etermine whether in%entory adhere to lower of cost or mar0et principles and whether in%entory is pledged or
sub*ect to liens
-xamine %endor in%oices+ direct labor rates and test the computation of o%erhead rates
Accounts recei%able confirmations

#ositi%e confirmations $ re1uest response from the recipient (may be blan0)
•'est type of confirmation for: large accounts+ expect errors and disputes+ wea0 internal controls
•A greater degree of assurance but may result in lower response rate
9onresponses should be: followed up+ the client may ha%e to inter%ene+ perform alternati%e procedures
•
•"enerally pro%ide e%idence regarding existence and rights and obligations
9egati%e confirmations $ recipient is as0ed to respond only if the amount stated in incorrect
• 9ot as good as positi%e confirmation
29
• 7se when there is low ris0+ small balances+ belief that the receipt would respond if there was a discrepancy
Accounts payable confirmation $ not re1uired

• Are positi%e confirmations and generally left blan0
• &b*ecti%e is to determine whether A/# is understated
• Should be sent when internal control is wea0
• Typically send to %endors with small or >ero balances would be selected for confirmation
owe%er+ unrecorded liabilities generally surface e%entually when unpaid %endors stop deli%ering goods
#ayroll and #ersonnel

There should be segregation of duties as follows
• Authori>ation to employ and pay $ function of  to hire new employees
• Super%ision $ all pay base data (hours+ timeoff) should be appro%ed
• Time0eeping and costs accounting $ data on which pay is based+ hours wor0ed or *obs completed
• #ayroll chec0 preparation $ computes salary based on information recei%ed+ later signed by the treasurer
Control procedures $ #A,. T,#S
##-
• Ac1uisition $ a special re1uisition form is needed8 Ac1uisitions are ties to the capital budget and the board
of directors should also ha%e to appro%e the ac1uisition8
• Subsidiary ledgers $ detailed information on each asset is 0ept in the subsidiary ledger
• #hysical security
• ritten policies $ on depreciation and capitali>ation
• .isposition $ retirement of assets should be documented and se1uentially numbered
Audit procedures
• Bouch additions
• e%iew retirements and recalculate any gains/losses
• e%iew repair and maintenance accounts in order to locate items that should ha%e been capitali>ed
• 'e alert for lien’s on assets (borrowed)
 Companies cannot/do not insure fixed assests they do not ha%e
 Companies do not pay real estate taxes on property they don’t own
 Tour plant and in1uire
?iabilities
• 9otes payable $ examine the note+ comparing terms and amounts to board appro%al8 ,nterest expense should
be independently computed
• ?ong term debt $ ensure that interest expense is properly reported+ %aluation is fairly reported+ all debt has
been recorded8 Compare interest expense with the bond payable amount for reasonableness
• Contingencies $ loo0 at guarantees+ purchase commitments+ leases+ tax returns+ clients legal counsel
&wners -1uity
•Treasury stoc0 $ auditor should examine all shares of treasury stoc0 and reconcile the number of TS shares8
Compare to authori>ation in the minutes of the board meeting
•Stoc0 transactions $ %ouch to supporting documentation
All issues relating to stoc0+ di%idends+ and TS must be authori>ed by the board of directors
Articles of incorporation goes in the permanent audit file

30
,f the client uses a stoc0 transfer agent+ use third party confirmations
,f the client doesn’t use a stoc0 transfer agent+ chec0 the stoc0 certificate boo0
Consider whether any appropriations of retained earnings are necessary (due to loan co%enants)8 The auditor
focuses on e%aluating the presentation and disclosure of the F/S (mgmt assertions 3 classification G
understandability)
Audit Evidence+ ,iscellaneous "tems

elated #arty Transactions
• Concerned about %aluation and accuracy
• A related party transaction is not considered to be an arms length transaction
• Should be ade1uately disclosed
.etermining the existence of related party transactions

• -%aluate company’s procedures and policies for related party transactions
• ,n1uire mgmt and predecessor auditor
• e%iew entity’s filings with the S-C
• e%iew board minutes
• Compensating balance agreements
• ?oan agreements
• 7nusual+ nonrecurring transactions new year end
Accounting -stimates
•Assess mgmt’s written policies and practices of acctg estimates
•Berify that all material estimates ha%e been de%eloped
•.etermine that the accounting estimates are reasonable
•-nsure that the accounting estimates are properly presented and disclosed in conformity with "AA#
•Test for reasonableness
•Are they using the same methods
•#ast trac0 record of estimates is good
•=ustify any changes in approach
Auditing Fair Balues

• -stimates and %aluation methods may be used when mar0et %alues are not a%ailable
• Changes in fair %alue measurements may be treated in different ways under "AA# (9, or &C,)
• -%aluate the sufficiency+ competency+ and consistency of e%idence obtained with respect to fair %alue
measurements and disclosures8
• .etermine whether mgmt’s significant assumptions pro%ide a reasonable basis for fair %alue measurement
?itigation
• 5gmt is the primary source of information regarding litigation8 An external in1uiry of the entity’s attorney
is simply a means to corroborate information pro%ided by mgmt8 
• e%iew minutes+ in%oices from lawyers+ and ,S correspondence
• ,ts mgmt’s responsibility to identify and account for litigation+ claims
?etter in1uiry to clients attorneys should be signed by the client but sent to the lawyer by the auditor
31
The lawyers response to the letter should include a professional opinion on the expected outcome of any
lawsuit and the li0ely outcome of any liability+ including court costs
,f the lawyer refuses to respond  scope limitation  1ualified or disclaimer opinion

Client refuses to permit in1uiry  disclaimer opinion
32
Audit Samplin -statistic samplin.
Sampling ris $ reach the wrong conclusion based on the sample
Although statistical sampling aids the auditor in 1uantitati%e ways+ it is not a substitute for professional
*udgement8 #rofessional *udgement is still needed/re1uired to set parameters and e%aluate the results8
 main types of sampling

68 Attribute sampling (rate of occurrence) $ used for testing internal controls (yes/no 1uestions)
8 :ariable sampling (probability-proportional to si'e S or estimation sampling or numerical quantity) $
used in substanti%e testing of account balances (M %alues)
Audit ris $ ris0 of getting the opinion wrong due to uncertainty in applying audit procedures (sampling and
other)
+is of assessing control ris too lo7 $ ris0 that the assessed le%el of control ris0 based on the sample is less
than the true ris0 based on the actual operating effecti%eness of the control (i8e8 sample results indicate a lower
de%iation rate than actually exists in the population)
+is of assessing control ris too %ig% $ ris0 that the assessed le%el of control ris0 based on the sample is
greater than the true ris0 based on the actual operating effecti%eness of the control8 sample results indicate a
greater de%iation rate than actually exists in the population
There are two sorts of mista0es an auditor can ma0e with sampling:
68 The auditor may fail to identify an existing problem (incorrect acceptance and assessing control ris0 too low)
8 The auditor may falsely identify a problem where none exist (incorrect re*ection and assessing control ris0
too high)
The ris0 of incorrect acceptance and the ris0 of assessing control ris0 too low relate to the effecti%eness of an
audit in (possibly not) detecting an existing material misstatement8 Auditors usually accept a ris0 of HO (or
6O)8 ,n%erse to the ris0 is the confidence le%el (also called reliability)8 The auditor is PHO confident that the
sample is representati%e of the population8
The ris0 of incorrect re*ection and the ris0 of assessing control ris0 too high relate to the efficiency of the audit
(the auditor does more audit wor0 than is necessary)
Attribute Sampling
#lanning considerations
• elationship between the sample to the ob*ecti%e of the test of controls
• Tolerable de%iation rate $ maximum rate of de%iation from a prescribed procedure the auditor will tolerate
without modifying planned reliance (or changing control ris0 assessment) on internal control8 ate set by
the auditor
• Auditors allowable ris0 of assessing control ris0 too low
• Characteristics of the population
.e%iation rate $ auditors best estimate of the de%iation rate in the population from which the sample was
selected8 There is a direct relationship to sample si>e: the fewer the de%iations expected+ the smaller the sample
si>e would be needed8
#opulation of 6 and sample 6 items and J de%iations identified within the sample
JO sample de%iation rate
-stimate J de%iations in the population (JO sample de%iation rate)
33
,f the estimated de%iation rate for the entire population is less than the tolerable rate for the population+ the
auditor should consider the ris0 that such a result might be obtained e%en though the true de%iation rate for the
population exceeds the tolerable rate for the population8 For example assume the tolerable rate for a population
is HO and the sample consists of I items:
• ,f no de%iations are found in the sample of I+ the auditor may conclude that there is an acceptably low
sampling ris0 that the true de%iation rate in the population exceeds the tolerable rate of HO (this is because
the sample de%iation rate is much less than the tolerable rate)
• ,f the sample includes two or more de%iations ( in I 3 D8DDO)+ the auditor may conclude that there is an
unacceptably high sampling ris0 that the rate of de%iations in the population exceeds the tolerable rate of
HO (this is because the sample de%iation rate is close to the tolerable rate)
• The auditor applies professional *udgement in ma0ing such e%aluations
#erform the following steps when conducting attribute sampling

•.efine the ob*ecti%e of the test
•.efine the population
•.efine the sampling unit
•.efine the attributes of interest
•.etermine the sample si>e including ris0 of assessing control ris0+ tolerable de%iation rate+ expected
de%iation rate
Sample de%iation rate Q allowance for sampling ris0 3 7pper de%iation rate
Allowance for sampling ris0 3 what we found in the sample isn’t representati%e of the population
,f the upper de%iation rate is less than or e1ual to the auditors tolerable de%iation rate+ the auditor may rely on
the control (assuming results of other audit tests do not contradict such results)
,f the upper de%iation rate exceeds the auditors tolerable de%iation rate+ the auditor would not rely on the
control8 ,nstead the auditor would either:
• Select and test compliance with some other internal accounting control+ or
• 5odify the nature+ extent+ or timing of related substanti%e tests to reflect the reduced reliance
.isco%ery sampling $ used for detecting fraud

Stoporgo sampling $ allows auditor to stop and audit test before completing all the steps (to a%oid o%er
sampling) used when few error are expected in the population
Bariable sampling (estimation sampling)

Stratification $ items sub*ect to sampling are separated into relati%ely homogenous groups and treated as a
separate population+ which usually results in a reduced sample si>e8 Commonly used when a population has
highly %ariable recorded amounts
igher the tolerable misstatement the lower the sample si>e
The auditor pro*ects the misstatements found in the sample to the population using one of se%eral methods
(5#7+ ratio+ difference+ etc)8 The pro*ected misstatement is applied to the recorded balance to obtain a point
estimate! of the true balance8
The auditor must then add an allowance for the sampling ris0 (sometimes called a precision inter%al) to this
estimate
34
,n deciding whether to accept the clients boo0 %alue+ the auditor determines whether the recorded boo0 %alue
falls within the acceptable range (i8e8 point estimate Q/ the allowance for sampling ris0)8 ,f so+ the boo0 %alue
is fairly stated
#robability#roportional to si>e (##S)

##S $ sampling unit is defined as an indi%idual dollar in a population
Ad%antages
•-mphasi>es larger items by stratifying the sample8 The chance of an item being selected is proportionate to
its dollar amount
•,f no errors are expected+ ##S sampling generally re1uires a smaller sample than other methods
.isad%antages
•,tems with >ero+ negati%e or understated balances re1uire special design considerations
Sampling inter%al 3 tolerable misstatement R reliability factor
Sample si>e 3 recorded amount of the population R sampling inter%al
Tolerable misstatement  the maximum dollar error that may exist in the account without causing the F/S to be
materially misstated
eliability factors correspond to the ris0 of incorrect acceptance and are generally obtained from a table
The Effect of "nformation Technolo$ on the Audit

Test data (test dec0) $ techni1ue that uses the application program to process a set of test data+ the results of
which are already 0nown8 (the clients system is used to process the auditors data+ offline+ and while under the
auditors control
,ntegrated test facility (,TF) $ similar to test data approach except that the test data is commingled with li%e
data (the clients system is used to process the auditors data+ online)
• Test data must be separated from the li%e data before the reports are created8 This is usually accomplished
by processing the test data to dummy accounts (fictitious customer+ branch+ %endor)
• Client personnel are not informed that the test is being run
#arallel simulation (reperformance test) $ auditor reprocesses some or all the clients li%e data (using auditor
software) and then compares the results with the clients files (the auditors system is used to process client data)
"enerali>ed audit software pac0ages ("AS#s) $ allows the auditor to ha%e little technical 0nowledge of the
clients system (computeri>ed en%ironment)
"nternal Control Communication

 types of control deficiency $ deficiency in design and deficiency in operation
Significant deficiency $ ad%ersely affects the fairness of the F/S
#re%iously communicated significant deficiencies and material wea0nesses that ha%e not been corrected should
be communicated again
,t is mgmt’s responsibility to e%aluate and address control deficiencies

35
eporting on an entity’s internal control o%er financial reporting (not an audit+ *ust hired to re%iew internal
controls)
The C#A may report on mgmt’s assertion or may report directly on the effecti%eness of the entity’s internal
control
&btain from mgmt a written assertion about the effecti%eness of the entity’s internal control8 The assertion may
be presented in two ways:
68 a separate report that will accompany the accountants report
8 a representation letter to the accounts
hen a material wea0ness exists+ the C#A should express an opinion directly on the effecti%eness of internal
control+ and not on mgmt’s assertion
,n a F/S audit+ use of the report on the internal control is restricted+ while
,n a separate examination of internal control+ use of the report is generally not restricted
S& re1uirements related to internal controls

#CA&' standards re1uire:
,ssuers report (within the annual report) on mgmt’s assessment of the effecti%eness of the company’s
•
internal control o%er financial reporting+ and

Auditors attest to (audit) the accuracy of mgmt’s report
•
The auditors report must disclose material wea0nesses in internal control+ but is not re1uired to disclose
significant deficiencies that are not material wea0ness (different than the attestation standards)
,f an auditor conducts the audit (of a nonissuer) in accordance with both "AAS and #CA&'+ the auditor may
indicate in the auditors report that the audit was conducted in accordance with both standards
overnment Auditin
Auditors responsibilities
•&btaining reasonable assurance that the F/S are free of material misstatements resulting from %iolations of
laws and regulations that ha%e direct and material effect on the F/S
•&btaining an understanding of the possible effects on F/S of laws and regulations
•Assessing whether mgmt has identified laws and regulations that ha%e direct and material effect
•Communicating to mgmt and the audit committee that an audit in accordance with "AA# may not be
sufficient if+ during the audit+ the auditor becomes aware that the entity is sub*ect to additional audit
re1uirements that may not be encompassed in the terms of the engagement
Attestation engagements performed in conformity with "enerally Accepted "o%ernment Auditing Standards
("A"AS) (the yellow boo0) incorporate the A,C#A’s standards for examinations+ re%iews+ and agreed upon
procedures by reference and include expanded re1uirements
Audit re1uirements for federal financial assistance

68 -xpanded internal control documentation and testing re1uirements
8 -xpanded reporting to include formal written reports on the consideration of internal control and the
assessment of control ris0
D8 -xpanded reporting to include whether the federal financial assistance has been administered in
accordance with applicable laws and regulations (compliance re1uirements)
E8 Application of single audit standards to federal financial assistance
H8 Auditors pro%ide a copy of their peer re%iew to go%ernment audit clients
36
5gmt is responsible for the entity’s compliance with laws and regulations
5gmt has identified and disclosed in writing to the auditor all the laws and regulations that ha%e a direct and
material effect on its F/S
Audit reports should be distributed to the appropriate officials of the entity re1uiring or arranging for the audit
(including external funding sources)
"A"AS re1uires a written report on the auditors understanding of internal control and the assessment of
control ris0 in all audits8 This is different from "AAS+ which re1uires written communication only when
significant deficiencies are noted
Single audits: &5' Circular A6DD

The single audit act (&5' Circular A6DD) re1uires entities that expend total federal assistance e1ual to or in
excess of MH+ in a fiscal year to ha%e an audit performed in accordance with the Act
• #rograms classified as ma*or are those that expend MD+ or more in federal financial assistance+ but
smaller programs may be deemed ma*or is they are classified as high ris0
• 5ateriality e%aluation in a single audit includes a separate e%aluation of materiality for each ma*or program
selected
• Single audits  audits of an entire organi>ation that include additional audit procedures on specific programs
and include a report on the F/S of the whole organi>ation and audit reports on the specific programs
• program-specific audits  audits of specific programs and do not include reports on the F/S of the
organi>ation ta0en as a whole
Auditor communication re1uirements increase in go%ernment settings8 Auditors often ha%e the responsibility of
reporting significant deficiencies to specific regulatory bodies or grantor agencies
A;-4& c%art memori'e
Communication &ith the Audit Committee

Audit committee $ committee of the board of directors+ composed of DH members of the board who are outside
directors8 &utside directors are not employees of the firm and do not ha%e a material financial interest in the
firm
• main purpose is to enhance the internal control by creating a means of direct communication between the
committee and the auditors8 An audit committee is considered to be part of the internal control structure
• S& re1uires the audit committee to appro%e the engagement of an auditor+ and o%ersee the ser%ices
• All material communications must be made to the audit committee before the auditors report is filed with
the S-C
• Communication may be oral or written8 ,f its oral the auditor should document the con%ersation
• .o not communicate with the audit committee on how we (the auditor) plan to implement the audit
,anaement Representations
&btained from mgmt at the conclusion of fieldwor0 and should address all F/S co%ered by the report e%en if
current mgmt was not present during all such periods
#urpose:
68 To confirm representations explicitly or implicitly gi%en to auditor
8 To indicate and document the continuing appropriateness of such representations
D8 To reduce the possibility of misunderstanding concerning matter that are the sub*ect of the
representations
37

Cpa Audit Notes

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Cpa Audit Notes

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AUD - Notes Chapter 1

"AAS $ T,# #,- AC.&

"AAS in referenced to in the Scope paragraph

#CA&' Standards $ for publicly traded companies

$%art on A1-1& memori'e

7ncertainties $ impairments+ intangibles+ lawsuits+ warranties

emember under "AA#

"AAS in referenced to in the Scope paragraph

#CA&' Standards $ for publicly traded companies

$%art on A1-1& memori'e

7ncertainties $ impairments+ intangibles+ lawsuits+ warranties

emember under "AA#

ass ey c%art on A1-1* memori'e

(reference in report) $ The principal auditor decides

oing $oncern – The auditor should perform the following procedures:

The explanatory paragraph occurs after opinion paragraph

• Significant subse1uent e%ents

• -ntity is a component of a larger business

• ,tems that affect the comparability (except changes in accounting principles)

An explanatory paragraph is not re1uired

;ualified except for! &pinion for material "AAS problems

.isclaimer &pinion for significant "AAS problems

Changes to the report include

Reports on Comparative Statements

eport of a predecessor auditor $ presented

eport of a predecessor auditor $ not presented

Auditors responsibility for subse1uent e%ents $ #,5- is included in yr end fieldwor0

Auditors responsibility after the original date of the auditors report

Facts disco%ered after report is issued (the auditors missed it)

Reportin on !ther "nformation

Segment information is re1uired by "AA#

Selected financial data

An accountants report should include

eporting on F/S prepared for use in other countries

Acceptance and continuance of clients and engagements

Independence0 integrity and obectivity

Sarbanes&xley but must be appro%ed by the audit committee in writing

Assurance regarding engagement performance

re1uirements+ and the firms own standards of 1uality

!ther Enaements% Reports and Accountin Services

Compilation and Revie& of Financial Statements

An engagement letter is recommended but not re1uired

Compiled F/S that omit "AA# disclosures are acceptable if:

Compilation report warns user of missing disclosures

An auditor is re1uired to perform these in a e%iew:

9ot re1uired to communicate with predecessor auditor

5a0e in1uires of internal personnel+ not external people or entities8

Audit test wor0+ including testing internal controls+ is not performed

The accountants report in a re%iew engagement should include:

Reportin on Comparative F/S

eporting when one period is audited

Revie& of "nterim Financial "nformation

"oing concern is not re1uired but may be appropriate

"oing concern no modification if disclosed

?ac0 of Consistency no modification if disclosed

'etters for (nder&riters

Comments in a comfort letter a limited to:

#ro%ide positi%e assurance on:

#ro%ide negati%e assurance on:

• Financial forecasts and pro*ections

• #ro forma F/S

• ,nternal control o%er financial reporting

The following standards apply to ser%ices a C#A may offer:

SSA- does not apply to: