Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the

Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition

Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the

Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition

William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State

University at San Luis ObispoUniversity at San Luis Obispo

Raymond N. Raymond N. JohnsonJohnson

Portland State UniversityPortland State University

Chapter 5 – Overview of the Financial Statement Audit

Chapter 5 OverviewChapter 5 OverviewChapter 5 OverviewChapter 5 Overview

Overview of the Audit Overview of the Audit ProcessProcess

Overview of the Audit Overview of the Audit ProcessProcess

Overview of the Audit Process Overview of the Audit Process (cont.)(cont.)

Overview of the Audit Process Overview of the Audit Process (cont.)(cont.)

Phase I - Perform Risk Phase I - Perform Risk Assessment ProceduresAssessment ProceduresPhase I - Perform Risk Phase I - Perform Risk

Assessment ProceduresAssessment Procedures

• Identify Relevant Financial Statement Assertions– Existence or Occurrence

– Completeness

– Rights and Obligations

– Valuation or Allocation

– Presentation and Disclosure

Phase I - Perform Risk Phase I - Perform Risk Assessment ProceduresAssessment ProceduresPhase I - Perform Risk Phase I - Perform Risk

Assessment ProceduresAssessment Procedures• Understand the Entity and its

Environment– Industry, Regulatory Environment, and

Other External Factors

– Nature of Entity, Including Accounting Policies

– Objectives, Strategies, and Business Risks

– Management and Review of Financial Performance

Phase I - Perform Risk Phase I - Perform Risk Assessment ProceduresAssessment ProceduresPhase I - Perform Risk Phase I - Perform Risk

Assessment ProceduresAssessment Procedures

• Make Decisions About Materiality– Based on professional judgment– Guides auditor in evaluation

• Perform Preliminary Analytical Procedures– Study of plausible relationships– Identification of potential

misstatements

Phase I - Perform Risk Phase I - Perform Risk Assessment ProceduresAssessment ProceduresPhase I - Perform Risk Phase I - Perform Risk

Assessment ProceduresAssessment Procedures

• Identify Risks – Audit Risk Model

Phase I - Perform Risk Phase I - Perform Risk Assessment ProceduresAssessment ProceduresPhase I - Perform Risk Phase I - Perform Risk

Assessment ProceduresAssessment Procedures

• Identify Risk – Risk of Fraud

Phase I - Perform Risk Phase I - Perform Risk Assessment ProceduresAssessment ProceduresPhase I - Perform Risk Phase I - Perform Risk

Assessment ProceduresAssessment Procedures

• Develop Preliminary Audit Strategies

• Understand Internal Control– Identify types of potential

misstatements– Consider factors that affect risk of

material misstatement– Design audit procedures

Phase II – Assess the Risk of Phase II – Assess the Risk of Material MisstatementMaterial Misstatement

Phase II – Assess the Risk of Phase II – Assess the Risk of Material MisstatementMaterial Misstatement

• Relate Risk to Potential Misstatements– Assertion Level Risks– Financial Statement Level Risks

• Determining the Magnitude of Potential Misstatements

• Considering the Likelihood of Material Misstatements

• Significant Inherent Risks

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1. This assertion deal with whether the accounts have been included in the financial statements at the appropriate amount.

A. Existence or OccurrenceB. CompletenessC. Rights and ObligationsD. Valuation or Allocation

D. Valuation or Allocation

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2. ________ is defined as the susceptibility of an assertion to a material misstatement assuming there are no internal controls.

A. Inherent riskB. Control riskC. Detection riskD. Audit risk

A. Inherent risk

Phase III – Respond to Phase III – Respond to Assessed RisksAssessed Risks

Phase III – Respond to Phase III – Respond to Assessed RisksAssessed Risks

• Staffing and Supervision

• Nature of Audit Tests– Risk Assessment Procedures– Tests of Control– Substantive Tests

Substantive TestsSubstantive TestsSubstantive TestsSubstantive Tests

• Initial Procedures

• Substantive Analytic Procedures

• Tests of Details of Transactions

• Tests of Details of Balances

• Tests of Details of Accounting Estimates

• Tests of Details of Disclosures

Phase III – Respond to Phase III – Respond to Assessed RisksAssessed Risks

Phase III – Respond to Phase III – Respond to Assessed RisksAssessed Risks

• Timing of Audit Tests

• Extent of Audit Tests

• Responding to Significant Inherent Risks

Phase IV – Perform Further Phase IV – Perform Further Audit ProceduresAudit Procedures

Phase IV – Perform Further Phase IV – Perform Further Audit ProceduresAudit Procedures

• Further Risk Assessment Procedures

• Tests of Controls

• Substantive Tests

Phase V – Evaluate Phase V – Evaluate EvidenceEvidence

Phase V – Evaluate Phase V – Evaluate EvidenceEvidence

• Reevaluate Risk Assessment Procedures

• Determine the Significance of Findings

• Form and Document Conclusions

Phase VI – Communicate Audit Phase VI – Communicate Audit FindingsFindings

Phase VI – Communicate Audit Phase VI – Communicate Audit FindingsFindings

• The Auditor’s Opinion

• Other Required Communications

• Other Assurance Service Findings

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3. Responding to assessed risks includes all of the following except:

A. Staffing and SupervisionB. Timing of Audit TestsC. Evaluating EvidenceD. Extent of Audit Tests

C. Evaluating Evidence

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4. Other required communications include all of the following except:

A. Disagreements with managementB. Significant audit adjustmentsC. Consultation with other accountantsD. Assessment of management

performance

D. Assessment of management performance