1 / 27

AUDITING CHAPTER 7

AUDITING CHAPTER 7. Audit Process & Detecting Fraud By David N. Ricchiute. TOPICS. Audit process Client acceptance, client strategies, planning, interim & year end work Auditor’s responsibility to detect, report fraud. PRELIMINARY STEPS IN AUDIT PROCESS. Communication with audit committee

laddie
Télécharger la présentation

AUDITING CHAPTER 7

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. AUDITINGCHAPTER 7 Audit Process & Detecting Fraud By David N. Ricchiute

  2. TOPICS • Audit process • Client acceptance, client strategies, planning, interim & year end work • Auditor’s responsibility to detect, report fraud GBW 8th ed., Ch. 7

  3. PRELIMINARY STEPS IN AUDIT PROCESS • Communication with audit committee • Accepting, continuing engagements • Understand client’s business strategies • Planning • Interim, year-end audit work GBW 8th ed., Ch. 7

  4. AUDIT COMMITTEES:History • 1940 SEC ASR #19 encouraged • 1978 required by NYSE • 1999 recommendations from Blue Ribbon on audit committee effectiveness • Consistency of accounting principles • Clarity, completeness of financial statements GBW 8th ed., Ch. 7

  5. SEC & SARBANES-OXLEY RULES: Post 2000 • Mandates • Reviews of public company financial statement interim reports • Disclosure in proxy statements whether audit committee discussed • Financial statements with management • Estimates, uncertainties, unusual transactions, new accounting principles, independence with auditor GBW 8th ed., Ch. 7

  6. QUALITY OF EARNINGS • Auditor must discuss quality not just acceptability of accounting principles & earnings with Audit committee (SAS 89) • Consistency in use of accounting principles • Clarity, completeness of financial statements GBW 8th ed., Ch. 7

  7. ACCEPTING, CONTINUING ENGAGEMENTS • Establish policies, procedures to accept, continue clients (Stmt. Quality Control Stds. No. 1 ) • For new client • Evaluate ability to service client • Review financial statements • Inquire about reputation, bankruptcy • Investigate key managers GBW 8th ed., Ch. 7

  8. COMMUNICATIONS WITH PREDECESSOR • Successor auditor initiatescommunication • Predecessor auditor obtains permission to disclose confidential information (Rule 301) • Is prior auditor’s resignation, replacement linked to (SAS 84) • Disagreement with management? • Management integrity? • Other reasons? GBW 8th ed., Ch. 7

  9. UNDERSTANDING WITH CLIENT • Objectives & limitations of engagement • Management’s responsibilities • Example: financial statement audit • Objective: express opinion whether statements • Present fairly • In all material respects • In conformity with GAAP SAS 83 & SSAE 7 GBW 8th ed., Ch. 7

  10. MANAGEMENT’S RESPONSIBILITIES • Financial statements • Establishing, maintaining effective internal over financial reporting • Assuring compliance with laws & regulations • Making records, information available • Confirming representations made during engagement GBW 8th ed., Ch. 7

  11. ENGAGEMENT LETTERS • Drafted by auditor for CEO’s signature • Written agreement to state purpose of engagement & role of auditor • Optional but recommended by SAS 84 which requires some form of written understanding in work papers GBW 8th ed., Ch. 7

  12. PROPOSED ADJUSTING JOURNAL ENTRIES (AJE) • SAS 88 “Audit Adjustments” • Management’s responsibility to record material proposed adjustments • Management must confirm responsibility for adjustments at year end in representation letter • Auditor informs audit committee of management’s responsibilities for adjustments GBW 8th ed., Ch. 7

  13. UNDERSTANDING CLIENT’S BUSINESS • Auditor considers effects of client business & strategies on • Risks • Strategies to overcome risk • Transactions, events as products of management’s strategies GBW 8th ed., Ch. 7

  14. CLIENT STRATEGY TEMPLATE-Strategies • Growth strategy • Financial goals & operating priorities GBW 8th ed., Ch. 7

  15. CLIENT STRATEGY TEMPLATE-Characteristics • Characteristics of business • Major business units • Markets • Products • Customers • Competitors • Strategic alliances & joint ventures • Potential adverse influences GBW 8th ed., Ch. 7

  16. BUSINESS: Units, Markets, Products, Customers • Demonstrate value of product • R&D to develop new products GBW 8th ed., Ch. 7

  17. FINANCIAL GOALS, OPERATING PRIORITIES: Merck • Remain in top quartile • Maximize revenue growth • Preserve profitability of core business • Achieve full potential GBW 8th ed., Ch. 7

  18. ERRORS VS. FRAUD • Errors • Unintentional misstatements or omissions in financial statements • Fraud • Fraudulent financial reporting: intentional misstatement or omission • Misappropriation of assets: theft GBW 8th ed., Ch. 7

  19. PLANNING • Risk of misstatement from fraud • First quarter planning • Second quarter planning GBW 8th ed., Ch. 7

  20. RISK OF FRAUD: Auditor’s Responsibility • Discuss risk with staff • Obtain pertinent information • Identify & assess risks • Plan according to assessment • Evaluate evidence GBW 8th ed., Ch. 7

  21. RISK OF FRAUD: Other Aspects • Professional skepticism • No presumption of dishonesty balanced with possibility of misstatement due to fraud • Fraud screens • Some financial ratios help • Asset quality • Total accruals to total assets • Days sales in receivables GBW 8th ed., Ch. 7

  22. IDENTIFYING, ASSESSING RISK OF FRAUD • Fraud triangle • Incentives, pressures to commit fraud • Opportunities to commit fraud • Management’s rationalizations for committing fraud GBW 8th ed., Ch. 7

  23. FIRST-QUARTER PLANNING • Review prior-year audit work • Review 1st quarter results • Prepare preliminary audit time budget • Consider adverse influences GBW 8th ed., Ch. 7

  24. SECOND-QUARTER PLANNING • Review 2nd quarter results • Finalize budget • Perform analytical procedures • Prepare preliminary planning memo • Coordinate staff with client • Prepare interim audit programs GBW 8th ed., Ch. 7

  25. INTERIM AUDIT WORK: Controls & Programs • Understand internal control • Perform tests of controls • Assess control risk • Prepare preliminary audit programs GBW 8th ed., Ch. 7

  26. YEAR-END AUDIT WORK • Coordinate with client • Finalize audit program • Perform substantive tests, analytical procedures • Evaluate audit test results • Material errors, fraud • Subsequent events GBW 8th ed., Ch. 7

  27. YEAR-END AUDIT DOCUMENTATION • Management, legal representations • Audit documentation review • Staff work reviewed • Audit reports GBW 8th ed., Ch. 7

More Related