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Modern Auditing:

Assurance Services and the Integrity


of Financial Reporting, 8th Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 5 – Overview of the Financial Statement Audit


Chapter 5 Overview
Overview of the Audit Process
Overview of the Audit Process
(cont.)
Phase I - Perform Risk
Assessment Procedures
• Identify Relevant Financial Statement
Assertions
– Existence or Occurrence

– Completeness

– Rights and Obligations

– Valuation or Allocation

– Presentation and Disclosure


Phase I - Perform Risk
Assessment 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
Assessment 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
Assessment Procedures
• Identify Risks – Audit Risk Model
Phase I - Perform Risk
Assessment Procedures
• Identify Risk – Risk of Fraud
Phase I - Perform Risk
Assessment 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
Material 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


Study Break
1. This assertion deal with whether the
accounts have been included in the
financial statements at the appropriate
amount.
A. Existence or Occurrence
B. Completeness
C. Rights and Obligations
D. Valuation or Allocation

D. Valuation or Allocation
Study Break
2. ________ is defined as the susceptibility
of an assertion to a material
misstatement assuming there are no
internal controls.
A. Inherent risk
B. Control risk
C. Detection risk
D. Audit risk

A. Inherent risk
Phase III – Respond to Assessed
Risks
• Staffing and Supervision

• Nature of Audit Tests


– Risk Assessment Procedures
– Tests of Control
– Substantive Tests
Substantive 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 Assessed
Risks
• Timing of Audit Tests

• Extent of Audit Tests

• Responding to Significant Inherent


Risks
Phase IV – Perform Further Audit
Procedures
• Further Risk Assessment Procedures

• Tests of Controls

• Substantive Tests
Phase V – Evaluate Evidence
• Reevaluate Risk Assessment
Procedures

• Determine the Significance of


Findings

• Form and Document Conclusions


Phase VI – Communicate Audit
Findings
• The Auditor’s Opinion

• Other Required Communications

• Other Assurance Service Findings


Study Break
3. Responding to assessed risks
includes all of the following
except:
A. Staffing and Supervision
B. Timing of Audit Tests
C. Evaluating Evidence
D. Extent of Audit Tests

C. Evaluating Evidence
Study Break
4. Other required communications include
all of the following except:
A. Disagreements with management
B. Significant audit adjustments
C. Consultation with other accountants
D. Assessment of management
performance

D. Assessment of management
performance