ZeePedia buy college essays online


Fundamentals of Auditing

<<< Previous Business Operations Next >>>
 
img
Fundamentals of Auditing ­ACC 311
VU
Lesson 12
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
2.
Understanding the Entity and Its Environment, including Its Internal Control
The auditor's understanding of the entity and its environment consists of an understanding of the following
aspects:
(a)
Industry, regulatory, and other external factors, including the applicable financial reporting
framework (like; insurance companies, leasing companies, banking companies, textile
industry etc.).
(b)
Nature of the entity, including the entity's selection and application of accounting policies
(like; sugar, textile, hotel, tourism, services, etc.).
(c)
Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements (like; growth maximization, cost effectiveness,
quality leadership, downsizing, etc.).
(d)
Measurement and review of the entity's financial performance.
(e)
Internal control.
a)
Industry, regulatory and other External Factors, including the Applicable Financial
Reporting Framework
The auditor should obtain information about these. Such knowledge includes information about
competitors, suppliers, customers, technological developments, the regulatory environment, legal and
political environment and the environmental requirements affecting the industry and the entity. The auditor
should also consider general economic conditions.
Examples of matters an auditor may consider include the following:
 Industry conditions
The market and competition, including demand, capacity, and price competition.
Cyclical or seasonal activity
Product technology relating to the entity's products
Energy supply and cost
 Regulatory environment
Accounting principles and industry specific practices
Regulatory framework, for a regulated industry (like; baking sector)
Legislation and regulation that significantly affect the entity's operations
Regulatory requirements (like; labor laws, minimum wage rate)
Direct supervisory activities (like; NAB, Excise & taxation Dept)
Taxation (corporate and other)
Government policies currently affecting the conduct of the
entity's business.
Monetary, including foreign exchange controls
Fiscal
Financial incentives (for example, government aid
programs)
Tariffs, trade restrictions
Environmental requirements affecting the industry and the
entity's business.
 Other external factors currently affecting the entity's business.
General level of economic activity (for example, recession, growth)
Interest rates and availability of financing
Inflation currency revaluation.
b)
Nature of the Entity
The nature of an entity refers to the entity's operations, its ownership and governance, the types of
investments that it is making and plans to make, the way that the entity is structured and how it is financed.
44
img
Fundamentals of Auditing ­ACC 311
VU
An understanding of the nature of an entity enables the auditor to understand the classes of transactions,
account balances, and disclosures to be expected in the financial statements.
The auditor should obtain an understanding of the accounting policies selected and their application. It
includes understanding the methods to account for significant and unusual transactions, the effect of
significant accounting policies in controversial areas and changes in accounting policies. The auditor should
assess appropriateness, of accounting policies selected and their consistency with financial reporting
framework and industry practice.
Examples of matters an auditor may consider include the following:
Business Operations
 Nature of Business (for example, manufacturer, wholesaler, banking, insurance or other
financial services, import/export trading, utility, transportation and technology products
and services.
 Products or services and markets (for example, major customers and contracts, terms of
payment, profit margins, market share, competitors, exports, pricing policies, reputation of
products, warranties, order book, trends, marketing strategy and objectives, manufacturing
processes).
 Conduct of operations (for example, stages and methods of production, business
segments, delivery of products and services, details of declining or expanding operations).
 Alliances, joint ventures and outsourcing activities
 Involvement in electronic commerce, including internet sales and marketing activities.
 Geographic dispersion and industry segmentation.
 Location of production facilities, warehouses, and offices.
 Key customers.
 Important supplies of goods and services (for example, long-term contracts, stability of
supply, terms of payment, imports, methods of delivery such as "just-in-time").
 Employment (for example, by location, supply, wage levels, union contracts, pension and
other post employment benefits, stock option or incentive bonus arrangements, and
government regulation related to employment matters).
 Research and development activities and expenditures.
 Transactions with related parties.
Investments
 Acquisitions, mergers or disposals of business activities (planned or recently executed).
 Investments and dispositions of securities and loans.
 Capital investment activities, including investments in plant and equipment and
technology, and any recent or planned changes.
 Investments in non-consolidated entities, including partnerships, joint ventures and
special-purpose entities.
Financing
 Group structure ­ major subsidiaries and associated entities, including consolidated and
non-consolidated structures.
 Debt structure, including covenants, restrictions, guarantees, and off-balance-sheet
financing arrangements.
 Leasing of property, plant or equipment for use in the business.
 Beneficial owners (local, foreign, business reputation and experience)
 Related parties
 Use of derivative financial instruments.
Financial Reporting
 Accounting principles and industry specific practices.
 Revenue recognition practices.
 Accounting for fair values.
 Inventories (for example, locations, quantities).
45
img
Fundamentals of Auditing ­ACC 311
VU
Foreign currency assets, liabilities and transactions.
Industry-specific significant categories (for example, loans and investments for banks,
accounts receivable and inventory for manufacturers, research and development for
pharmaceuticals).
Accounting for unusual or complex transactions including those in controversial or
emerging areas (for example, accounting for stock-based compensation).
Financial statement presentation and disclosure.
46
Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT