AFM351 Study Guide - Midterm Guide: Audit Risk
28 Jun 2018
School
Department
Course
Professor
Don't use transaction assertions to test balance sheet items •
Don’t mix•
The assertions are made by management and as an auditor, we test those
assertions
Want you to identify there's an increased level of risk which comes from industry
being competitive. - increased assessment of the RMM
1.
The industry is very competitive
•
Can lead to price cutting and thus decrease revenue•
Industry is affected by changes in technology
•
Products are currently not competitive with industry leader in terms of performance•
The company is not as profitable as financially strong as the major companies in the
industry
•
Risk of obsolescence
-
valuation issue
•
This is a follower company, so higher risk
•
Need to have a lower determination of detection risk•
You disagree with management2.
Increased assessment of RMM
•
Audit firm has been the bank's auditor for only two years•
There have been contentious accounting issues related to major F/S accounts
(involves estimates)
•
Prior audits have indicated the presence of misstatements in a major account
•
Lower determination of detection risk
•
The brother wants his sister to audit his company.
3.
Problem is independence issue - brother is in senior position•
Independence or objectivity She can't audit her brother's company
Confidentiality She can't talk to her friends about her clients
Examination standard
Lack of supervision
Margaret is being sent out on her first audit all
alone when she lacks experience
Lack of adequate training and
knowledge of the client
Lack of investigative
independence/scepticism
The partner's attitude is the client gets what they
want. This doesn't reflect an independent attitude
•
If seniors are able to help her through phone calls even if she's on her own, then it
wouldn't be as much as an issue for lack of supervision.
•
Can also talk about competence (lack of training)
•
The users and critical for two assessments made by the auditors4.
Materiality
-
the magnitude of omitted or misstated information that would
change or influence the decision of someone relying on the F/S so the materially is
dependent on the users
•
Audit risk is the probability that the auditor will fail to find a material
misstatement that exists in the F/S. The more users the less risk the audit is willing
to accept
•
Why important
5.
Valuation purposes - as the transaction is not between independent parties they
may be valued incorrectly
•
May change your audit risk assessment
•
Transactions are non-arm's length so the probability of manipulation
exists/fraud
•
May take place without consideration therefore they don’t appear in the
account records
•
May be concealed intentionally•
GAAP requires they be disclosed in the F/S
•
Whenever a change is unexpected it should be investigated further so the
simple answer is yes
6.
Inquire of client why the change•
Expenses understated and capitalized costs overstated
○
The accounts may be misstated •
Capitalizing expenses improperly○
RM may have decreased because new equipment was acquired which
requires much less RM then in previous years
○
Consider impairments on equipment since repairs are not done
For financial reasons the company may have postpones general
maintenance on their equipment
○
Why might it R&M expense decrease?
•
Yes, provided the CPA is able to supervise the specialist and evaluate the
specialist's end product
7.
Evaluate the significance of the threats and apply appropriate safeguards to
reduce them to an acceptable level
8.
The key point is you don't immediately do it. •
You need to know if its an legitimate independence issue and how to mitigate
it? Maybe rotate partners.
•
May have to resign but not immediate decision
•
C
9.
Midterm review
May 23, 2018 3:38 PM
AFM 351 Page 1
Document Summary
The assertions are made by management and as an auditor, we test those assertions. Don"t use transaction assertions to test balance sheet items. Want you to identify there"s an increased level of risk which comes from industry being competitive. Can lead to price cutting and thus decrease revenue. Products are currently not competitive with industry leader in terms of performance. The company is not as profitable as financially strong as the major companies in the industry. This is a follower company, so higher risk. Need to have a lower determination of detection risk. Audit firm has been the bank"s auditor for only two years. There have been contentious accounting issues related to major f/s accounts (involves estimates) Prior audits have indicated the presence of misstatements in a major account. The brother wants his sister to audit his company. Problem is independence issue - brother is in senior position. She can"t talk to her friends about her clients.
