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Audit Exam 1 Cheat Sheet (DRAFT) by

Types of Engagements

This is a draft cheat sheet. It is a work in progress and is not finished yet.

ASSURANCE

Definition
Any indepe­ndent profes­sional service that improves the quality of inform­ation, or its context, for decision makers.
Purpose
To lend credib­ility to inform­ation used in decision making.
Core Elements
Indepe­ndence (fact & appear)
 
Profes­sional judgment
 
Due profes­sional care
 
Improves inform­ation quality or context
 
For decision makers
Report?
no
Key signals
lending credib­ility
 
improves quality
 
indepe­ndent profes­sional service

ATTEST­ATION

Definition
An engagement in which a practi­tioner issues a report on subject matter or an assertion that is the respon­sib­ility of another party.
Purpose
To provide assurance through a written report regarding reliab­ility of manage­ment’s assertion.
Levels of Assurance
Examin­ation = high
 
Review = moderate
 
Agreed­-upon procedures = no opinion, findings only
Report?
Yes — always
Standards
SSAE / AT-C standards (nonis­suers)
 
PCAOB attest­ation standards (issuers)

AUDITING

Definition (AAA)
A systematic process of object­ively obtaining and evaluating evidence regarding assertions to determine corres­pon­dence with establ­ished criteria and commun­icating results to users.
Purpose (AICPA)
To enhance the degree of confidence intended users can place in the financial statem­ents.
Objective
Express an opinion on whether financial statements are presented fairly, in all material respects, in accordance with GAAP or applicable financial reporting framework.
Core Charac­ter­istics
Systematic process
 
Eviden­ce-­based
 
Materi­ali­ty-­driven
 
Indepe­ndent
 
Commun­icated via auditor’s report

ADVISORY / CONSULTING (Non-a­ssu­rance)

Definition
Providing recomm­end­ations to management for specific outcomes.
Focus
Design and operat­ions, system improv­ements, decision support.
Restri­ctions (impairing indepe­ndence)
Bookke­eping
 
Appraisal or valuation services
 
Internal audit outsou­rcing
 
Management or HR
 
Legal and expert services
 

RESPON­SIB­ILITIES PRINCIPLE

Phase
all phases of audit
Components
Competence
education, training, experience
fact and appear­ance; financial or relati­onship
Practical indepe­ndence
no subord­inating judgement
Due profes­sional care (GAAS)
execution and reporting
 
conduct, special training, superv­ision and review,
Skepticism
Profes­sional judgment
Procedures may change.
Standards do not.
Reasonable person standard applies.

PERFOR­MANCE PRINCIPLE

Phase
execution phase
Objective
Obtain reasonable assurance that financial statements are free of material missta­tement (error or fraud).
Requires
Planning and superv­ision
 
Determ­ining materi­ality
 
Risk assessment
unders­tanding entity & internal control
 
Sufficient & Approp­riate evidence
Execution phase
Planning
properly plan and supervise
 
Risk Assessment
unders­tanding of the entity
 
Materi­ality Determ­ination (NTE)
Risk determ­inants
Nature
type of procedure
 
timing
when performed
 
extent
how much (sample size)
Evidence Gathering
sufficient
quantity
 
approp­riate
quality
   
Relevance & Reliab­ility
 
Relevance — the assertion being tested
Reliab­ility — source and nature of the evidence

REPORTING PRINCIPLE

Phase
conclusion and commun­ication
Purpose
Standa­rdize reporting and commun­icate conclu­sions clearly.
Requires auditor to:
State whether financial statements follow GAAP
 
Identify incons­ist­encies
 
Address adequacy of disclo­sures
 
Express an opinion or explain why none is given
Types of Opinions
Unqual­ified (unmod­ified)
 
Qualified
 
Adverse
 
Disclaimer
Audit docume­ntation must:
Show who performed work
 
Show who reviewed work
 
Support planning, superv­ision, and conclu­sions
 

TYPES OF AUDITS

FINANCIAL STATEMENT AUDIT
Opinion on fair presen­tation under GAAP
INTERNAL AUDIT
Evaluates risk manage­ment, govern­ance, internal control.
OPERAT­IONAL AUDIT
Evaluates efficiency and effect­ive­ness.
COMPLIANCE AUDIT
Determines adherence to laws, regula­tions, policies.
PERFOR­MANCE AUDIT
Economy and efficiency
 
Program effect­iveness
Key signals
“following laws” = compliance
“efficient and effective” = operat­ional
“economy and effici­ency” = perfor­mance audit

FINANCIAL STATEMENT ASSERTIONS

PCAOB — PERCV
Presen­tation & Disclosure
M.A. that all transa­ctions and events have been presented correctly and that all relevant inform­ation has been disclosed to financial statement users.
Existence / Occurrence
Existence
Management assertion that all assets, liabil­ities, and equity interests do actually exist.
Occurrence
Management assertion that all of the transa­ctions and events that have been recorded are valid, pertain to the entity, and have actually taken place.
Rights & Obliga­tions
Rights
the entity is entitled to all rights of the assets
Obliga­tions
the liabil­ities are the legal respon­sib­ility of the entity, and all of the disclosed events and transa­ctions pertain to the entity.
Comple­teness
All items that should be included are included.
Valuation / Allocation
Amounts recorded approp­ria­tely.
Tracing Direction
Source → books
comple­teness
Books → source
occurrence
Key signals
liabil­ities and revenue = comple­teness focus
assets = existence focus
inventory consig­nment = rights focus
consig­nment = rights and obliga­tions
accrued liabil­ities = comple­teness
credit ratings = valuation
ASC 606 accuracy = valuat­ion­/al­loc­ation
push/pull revenue = cutoff­/oc­cur­rence

ATTEST­ATION STANDARDS

General
Training and profic­iency
Indepe­ndence
Due profes­sional care
Suitab­ility
objective
 
measurable
 
complete
 
relevant
Availa­bilty
Publicly
 
By presen­tation or assertion
 
Practi­tio­ner's report
 
Well understood
 
Only to specified parties
Fieldwork
Planning and superv­ision
 
Sufficient evidence
 
Repres­ent­ation letter
Reporting
Identify subject matter
 
State nature of engagement
 
Express conclusion
Key signals
“suitable criteria,” “repre­sen­tation letter,” “subject matter evaluated against criteria”

QUALITY CONTROL (Respo­nsi­bil­ities)

Leadership respon­sib­ilities
Commun­icating /Tone at the Top
Relevant ethical requir­ements
Mainta­ining indepe­ndence in fact and appearance
 
Annual indepe­ndence confir­mations
 
Monitoring financial relati­onships
 
Identi­fying prohibited nonattest services
 
Resolving indepe­ndence violations promptly
Acceptance and contin­uance
Management integrity
 
Firm competence to perform the engagement
 
Risk profile of the client
 
Firm competence to perform the engagement
Human Resources
Engagement perfor­mance
Proper planning and superv­ision
 
Consul­tation on difficult matters
 
Review of work performed
 
Docume­ntation standards
Monitoring
Identi­fying defici­encies

RISK & EVIDENCE

RISK TYPES
Business Risk
entity fails to meet objectives
Inform­ation Risk
Probab­ility inform­ation is false or mislea­ding.
Inherent Risk
Risk of missta­tement assuming no controls
Control Risk
Risk controls fail to preven­t/d­etect missta­tement.
Detection Risk
Risk auditor procedures fail to detect missta­tement.
 
Detection risk assigned my audit firm?
INTERNAL CONTROL
Purpose
Prevent or detect missta­tem­ents.
Effective control
Reduces control risk
 
Allows reliance on management
 
May reduce substa­ntive testing
Weak control
Increases substa­ntive procedures
SUFFIC­IENCY VS APPROP­RIA­TENESS
Suffic­iency
Quantity of evidence
Approp­ria­teness
Quality of evidence.
 
Relevance – does it relates to assertion
 
Reliab­ility – trustw­orthy source
HIERARCHY OF EVIDENCE
Direct personal knowledge
auditor physically inspected
Fully external evidence
third-­party confir­mation
Extern­al-­int­ernal evidence
bank statement obtained from client records
Internal docume­ntation
internal reports
Inquiry of management
discussion with controller
Key signals
“absence of controls” = inherent risk
“internal control effect­ive­ness” = control risk
“suffi­cient approp­riate evidence” = detection risk

Key signals
“more internal control” = lower control risk
“less effective controls” = increase procedures