Audit Planning, Analytical Procedures, Risk, Internal Control Evaluation and Audit Plan

BUS 425AuditingTad Miller03/02/2017

Audit Sampling Inventory has 1,000 SKU items and a book value of $2,908,144. You test a sample of 200 SKU items having a book value of $581,628. The audited value of your sample is $541,628 indicating $40,000 in know errors.

It tolerable error is $250,000, are you able to conclude whether inventory is materiallyoverstated? yes no

Explain you answer.

Financial Interest Sue is a staff auditor who is assigned to the audit of largest client in the San Luis Obispo office. Sue's sister, owns an immaterial amount of stock in the client. Roxie lives in Florida.

no group of professional employees or their immediate families’ own 5% of the client’s equity

Is the firms independence impaired?Yes No

Explain why the firm's independence either is impaired or is not impaired. Be sure to address the following issues as they relate to independence: covered member, immediate family / close relative, and materiality.

Financial Interest Although Tom is an audit manager in the San Luis Obispo office he is not assigned to the engagement in question nor is he in a position to influence the engagement. Tom’s Mother gave his eight-year-old son, who is living at home, a material amount of common stock in the largest client audited by the SLO office.

no group of professional employees or their immediate families’ own 5% of the client’s equity

Is the firms independence impaired?Yes No

Financial Interest George is an audit partner in the Phoenix Office. He is not in a position to influence the engagement. George’s wife owns a material amount of stock in one of the largest clients of the San Luis Obispo office.

no group of professional employees or their immediate families’ own 5% of the client’s equity

Is the firms independence impaired?Yes No

Financial Interest Kenny is a senior manager in the Phoenix office, who together with a group of senior managers from the Dallas office own 8% of the common stock in one of the San Luis Obispo office’s clients. Kenny is not assigned to the engagement and is not a position to influence the audit. The amount of stock Kenny owns is not material to him.

Is the firms independence impaired?Yes No

Explain why the firm's independence either is impaired or is not impaired.

Client Acceptance Before accepting a new client, what is the single most important characteristic about the client we need to evaluate.

AU-C Section 315 State the objective of AU-C section 315.

Communication with Predecessor Auditor What four points do auditing standards require the successor auditorto discuss with thepredecessor auditor ?

Related PartiesDescribe related parties as the term is used in auditing literature.

Analytical Procedures Briefly describe why auditors are required to perform analytical procedures in the planning stages of an audit (the objective of AP).

Analytical Procedures Briefly describe or define analytical procedures.

Audit risk Write the definition of audit risk or acceptable audit risk. Indicate which you are defining.

Control risk Write the definition of control risk.

Detection risk Write the definition of detection risk.

Internal Control How does COSO define internal control?

Sarbanes Oxley As a result of Sarbanes Oxley, the PCAOB establishes specific reporting requirements for management regarding the company's internal control structure. Specifically, the company's annual report must include the following (3) three statements pertaining to internal controls.

Sarbanes Oxley As a result of Sarbanes Oxley, in addition to their opinion on the financial statements, auditors of public companies must issue a second opinion. What is the additional report auditors must now issue?
Components of Internal Control List the five components of internal control.

Segregation of Duties with regard to segregation of duties, what four functional responsibilities need to be performed by different people

Understanding the client's Accounting System In order to document our understanding of the design of client’s accounting information system which includes components of their internal controls. We need to demonstrate that we understand the flow of transactions.

identify significant classes of transactions

how those transactions are

Classes of Significant Transactions List the transaction cycle we have been studying and the significant classes of transactions that comprise this transaction cycle.

Types of Documentation What are the three types of documentation are typically used to document our understanding of the internal controls?

Significant Deficiency / Material Weakness What is the definition of a significant deficiency.

Significant Deficiency / Material Weakness What is the definition of a material weakness.

Significant Deficiency / Material Weakness If an auditor of a public companybecomes aware of either a significant deficiency of a material weakness, to whom must it be reported.

Management Assertions During the audit, you observe an entry in the sales journal for which there is no underlying shipping document or sales order. To which financial statement assertion does this condition relate?

Management Assertions As you reviewed invoices for sales transactions you observe several invoices where the price on the invoice ishigher than the price on the official price list. To which financial statement assertion does this condition relate?

Management Assertions You observe a customer order and a shipping document indicating the goods were shipped to the customer but the transaction was not recorded in the sales journal. To which financial statement assertion does this condition relate?
Management Assertions While auditing accounts receivable, you become concerned that the client’s footnotesdo not include the required disclosures concerning the concentration of risks. Although the risks are significant and the amounts are material the client does not have a footnote discussing these mattersas required by ASC 275. To which financial statement assertion does this condition relate?

Audit Risk Model If we want to assess control risk as high what does that imply about the effectiveness of the audit client's internal controls?

Audit Risk Model SEC CLIENT subject to Sarbanes Oxley We have obtained a sufficient understanding of the client's internal controls and have properly documented that understanding. We believe the client's controls are effective and we preliminarily assess control risk as LOW.

Discuss

Which audit approach will you use?
the extent of Testing Controls you will perform ?
briefly explain why you will or will not perform tests of controls.
the extent of Substantive Tests you will perform ?

Audit Risk Model SEC CLIENT subject to Sarbanes Oxley We have obtained a sufficient understanding of the client's internal controls and properly documented that understanding. We DO NOT believe the client's controls are effective and we preliminarily assess control risk as HIGH.

Discuss

Which audit approach will you use?
the extent of Testing Controls you will perform ?
briefly explain why you will or will not perform tests of controls.
the extent of Substantive Testing you will perform ?

Audit Risk Model PRIVATE CLIENT not subject to SEC (Sarbanes Oxley) We have obtained a sufficient understanding of the client's internal controls and properly documented that understanding. We believe the client's controls are effective and we preliminarily assess control risk as LOW

Discuss

Which audit approach will you take (what additional factor do you need to consider in your discussion?)
the extent of Test of Controls you will perform
briefly explain why you will or will not perform tests of controls.
the extent of Substantive Testing you will perform

Audit Risk Model PRIVATE CLIENT not subject to SEC (Sarbanes Oxley) You believed the client's controls were effective, preliminarily assessed control risk as LOW and took a reduced level of control risk approach. While performing substantive tests, you detected material misstatements. Explain what actions you would take upon detecting material misstatements?

NOT related to the previous problem

Asset Accounts With regard to a typical asset account as of Dec.31,2016.

Over UnderAre we most concerned about overstatement or understatement ?

CompleteExist Are we most concerned about completeness or existence ?

Will we trace from the supporting documents to the Gen Ledger

TraceVouchor vouch from the Gen. Ledger to the supporting documents ?

Expense Accounts With regard to a typical expense account for the year

Over UnderAre we most concerned about overstatement or understatement ?

CompleteOccur Are we most concerned about completeness or occurrence ?

Will we trace from the supporting documents to the Gen Ledger

TraceVouchor vouch from the Gen. Ledger to the supporting documents ?