assurance and attestation services ba 427 winter 2007 substantive procedures glenn lovett,...
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Assurance and Attestation Assurance and Attestation ServicesServices
BA 427Winter 2007
Substantive Procedures
Glenn Lovett, Shareholder
What can Certified Public Accountants
do that no one else can?
Answer: Express an opinion on financial statements
Audit Report
Independent Auditors' Report
Board of DirectorsPortland, Oregon
We have audited the accompanying balance sheets of ABC Corporation as of December 31, 2006 and 2005, and the related statements of operations and shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility
of the Company’s management. “Our responsibility is to express an opinion on these financial statements based on our audits.”
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we “plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.” An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement. “An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management”, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ABC Corporation
as of December 31, 2006 and 2005, and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Significant Cycles
Significant Cycles
• Revenue > Sales > Accounts Receivable
• Conversion > Cost of Sales > Purchases > Accounts Payable > Inventory
• Financial Management >Interest > Cash > Investments > Goodwill > Debt > Equity
Significant Cycles
• Payroll > Payroll Expenses > Accruals > Compensated Absences
• Expenditure > All other expenses > Prepaids > Accruals
• Other > Taxes
Assertions
• Completeness• whether all transactions and accounts that should be present in the
financial statements are included.
• Rights and Obligations • whether, at a given date, all assets are the rights of entity and all
liabilities are the obligations of the entity.
• Valuation or Allocation • whether the assets, liabilities, revenues, and expenses of an entity
have been included in the financial statements at the appropriate amounts in conformity with GAAP.
• Existence or Occurrence • whether assets/liabilities exist at a given date and whether recorded
transactions have occurred during a given period.
• Statement Presentation and Disclosure • whether financial statement components have been properly
classified, described, and disclosed.
Risks - Overall and Direction
Risks - Overall and Direction
• Management
• Industry
• Economic
• Governance
• Ownership
• Susceptibility to Misappropriation
Fraud Risk
Fraud Risk
• Pressure
• Opportunity
• Rationalization
Glenn’s Insight #1
“You always trust the one that steals from you”
Internal Controls
Internal Controls
• Control Environment
• Risk Assessment
• Control Activities
• Information and Communication
• Monitoring
Glenn’s Insight #2
“You cannot audit financial statements that are
unauditable”
Relationship Between Risk, Internal Control and Detection
(Substantive) Procedures
Relationship Between Risk, Internal Control and Substantive Procedures
Low Inherent Risk
Low Analytic Risk
Low Internal Control
Risk
None of the Above
Moderate or High Substantive Risk
Moderate or High Substantive Risk
Moderate or High Substantive Risk
Low or very low
Substantive Risk
Low Control, Inherent and Analytic Risk
High Substantive Risk
High Control (SAS) Inherent and Analytic Risk
Low Substantive Risk
Types of Substantive Procedures
Types of Substantive Procedures
• Initial understanding of the client
• Analytical procedures
• Tests of details
• Tests of balances
• Tests of accounting estimates
• Tests of Disclosures
Selecting the Appropriate Substantive Tests
Selecting the Appropriate Substantive Tests
• Level of detection risk
• Timing of procedures
• Quality of Results (competence of evidential matter)
• Efficiency
Glenn’s Insight #3
“An audit workpaper should be designed to be read on
an average computer screen in 10pt font.”
Level of Quality of Substantive Procedures
Level of Quality of Substantive Procedures
• Personal Inspection/Observation
• Specialist report
• Third party corroboration
• Vouching to documents
• Analytical procedures
• Related party representation
Audit Procedures for Substantive Tests
Audit Procedures for Substantive Tests
• Counting• Tracing/Vouching• Observing/Inspecting• Confirming• Analytical Procedures• Inquiring• Reperforming• Experts
Glenn’s Insight #4
“Don’t put workpapers in the file that don’t have any audit procedures on them.”
Examples of Substantive Procedures Related to Cycles
and Assertions
Conversion
• Completeness Counting
Inventory Observation
Vouching
Experts
• Existence Inventory Observation
Vouching
Experts
Conversion• Valuation Inventory Observation
Reperformance
Observation/Inspection
Vouching
• Rights and Obligations Inventory Observation
Vouching
• Disclosure Vouching/Tracing
Reading Contracts
Revenue
• Completeness Vouching
• Existence Confirmation
Vouching
Inquiry
Revenue• Valuation Reperformance
Analytical Procedures
• Rights and Obligations Vouching
• Disclosure InquiryVouching
Glenn’s Insight #5
“Document all work outlined in the audit
program and only do work outlined in the audit
program.”