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chapter 8

chapter 8. audit planning analytical procedures. Related Party Transactions No one could explain how Enron actually made money Incredibly complicated business structure

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chapter 8

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  1. chapter 8 audit planning analytical procedures

  2. Related Party Transactions No one could explain how Enron actually made money Incredibly complicated business structure “What we are looking at here is an example of superbly complex financial reports. They didn’t have to lie. All they had to do was to obfuscate it with sheer complexity,” John Dingell, U.S. Congressman Michigan Enron

  3. Obtain engagement Analytical procedures Understand the client Internal controls AU-c 315 Risk assessment Tests of controls Substantive tests of transactions AU-c 500 Substantive Analytical procedures Substantive tests of details of balances Reporting AU-c 700

  4. environmental client auditor

  5. Jacquelynn What is the definition of audit risk?

  6. AU-C Section 200 The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the Risk of Material Misstatement and Detection Risk

  7. Carly What is the definition of inherent risk?

  8. AU-C Section 200 The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements before considerations of any related controls.

  9. Stages of the Audit Accepting the engagement client acceptance 1) integrity of management

  10. Client Acceptance page 79-80 • Why the client needs an audit • New client investigation • Competency, industry knowledge • Communicate with predecessor auditor • Risks • Intended users of the financial statements • Independence • Engagement Letter

  11. February 1997 Statement on Auditing Standards 84 AICPA Communications between Predecessor and Successor Auditors

  12. Geoffrey what issues need to be discussed with the predecessor auditor ?

  13. Communications with Predecessor Auditor • Integrity of senior management • Disputes with the client over accounting principles • Disputes with the client over audit procedures • Disputes with the client over fees

  14. Jose who is responsible for initiating the communication between the successor auditor and the predecessor auditor ?

  15. Nathan Why must the predecessor contact the audit client prior to discussing the client with the successor auditor?

  16. AICPA Code of Professional Conduct Rule 301 – Confidential Client Information

  17. Chris Do we care about the nature of the client’s business? Do we care about the reasons they are having their financial statements audited? Do we care who is going to rely on the audited financial statements?

  18. RISK RISK RISK identify the users of the financial statements

  19. Katie G How does the AICPA’s Code of Professional Conduct define the Ethical Principle “Objectivity and Independence?”

  20. Objectivity and Independence A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attest services.

  21. Does this effect our decision whether to accept the engagement ?

  22. Elizabeth When an accounting firm considers a new client, it distributes an “independence memo” To whom does the audit firm need to distribute this memo ?

  23. independence memo to partners and staff Partners in the engagement office Everyone in the engagement office Everyone in the firm Consulting and tax employees or just auditors must consider spouses & dependents

  24. Ronni How might the investments of non-dependent, close relatives affect the firm’s decision whether to accept a new client ?

  25. Trevor If a non-dependent, close relative is employed by a potential client, what issues does the audit firm need to consider in their decision whether to accept the client?

  26. Anyone on the engagement team Anyone in position to influence the engagement All partners in the engage partner’s office Close relatives (including immediate family): parent, sibling or nondependent child, spouse, dependents Holding a key position with the client Holding a financial interest in the client that is material to the relative (covered member must know) Holding a financial interest that enables the relative to exercise significant influence over the client

  27. Key positions • positions that allow significant influence over the client’s, accounting, financial or operating policies • positions subject to significant internal accounting controls • positions that are an element of significant internal accounting controls

  28. Phases of the Audit Accepting the engagement Engagement Letter page 82

  29. Understand the Client’s Business

  30. Jackie what is the objective of AU-c 315?

  31. AU-C Section 315 The objective of the auditor is to identify and assess the risk of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity’s internal control, thereby providing a basis for designing and implementing responses to the assessed risk of material misstatement.

  32. Many litigation cases result from the auditor’s failure to fully understand the nature of transactions in the client’s industry. ZZZZ Best ESM

  33. RISK of Material Misstatement Page 135 Related Party transactions Complex transactions Nonroutine transactions Judgment Declines in economic conditions Information technology Expansion Accounting complexity of judgments Accounting complexity of estimates Complex financial instruments

  34. Kevin how does the Auditor’s Responsibility Paragraph in the independent auditor’s report describe the auditor’s responsibility to detect material misstatements? Does the auditor’s responsibility differ for misstatements that are the result of an error or a fraud?

  35. Auditor’s Responsibility Paragraphstandard unmodified opinion Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

  36. Zack what is the overall objective of the indepent auditor?

  37. Overall ObjectiveAU-C 200 …obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are presented fairly, in accordance with an applicable financial reporting framework.

  38. Related Parties --- RISK p. 86 .. an affiliated company, principal owner of the client company, or any other party with which the client deals, where one of the parties can influence the management or operating policies of the other. investors are concerned that the terms of the transaction may not reflect “arms length” bargaining. There is risk that the transaction may not be valued at the same amount as a transaction with a non-related party.

  39. Related Parties --- RISK p 77 Enron - Andy Fastow

  40. Related Parties --- RISK Essentially a related party is one that can exert significant influence over another party. Related parties are frequently involved in fraudulent transactions because they can conceal problems that the auditor would likely detect if the transactions occurred between unrelated parties.

  41. Sandra what is Client Business Risk?

  42. Box at the Bottom of Page 89 increased emphasis on how the client manages risk

  43. Analytical Procedures Pages 93-102 Look at table on page 94 Go to links on web page

  44. Analytical Procedures Reasonableness tests evaluations of financial information by a study of plausible relationships among financial and nonfinancial data … ….involving comparisons of recorded amounts … to expectations developed by the auditor.

  45. Dominik at which stages of the audit are Analytical Procedures required ?

  46. Analytical Procedures • planning phase • testing phase (as substantive tests) • completion phase (as an overall review)

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