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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 14
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
Inquiries
Analytical procedures
Observation & Inspection
Risk
assessment
External Factors
procedures
How
Nature of entity
to
Objectives and strategies and the related business risks
Understanding
obta
Measurement & review of financial performance
consists of:
in
Internal Control
und
erst
andi
Assessing the risk of material
misstatement
ng
Communication
Documentation
d)
Measurement and Review of the Entity's Financial Performance
The auditor should obtain an understanding of the measurement and review of the entity's financial
performance. Performance measures, internal and external, some times create pressures on the
entity and motivate management to misstate the financial statements.
Internally generated information may highlight entity's position vis-ŕ-vis, its competitors and
reports from credit rating agencies and analysts may provide information useful to the auditors
understanding of the entity and its environments.
Examples of matters an auditor may consider include the following:
·  Key ratios and operating statistics
·  Key performance indicators
·  Employee performance measures and incentive compensation policies.
·  Trends
·  Use of forecasts, budgets and variance analysis
·  Analyst reports and credit rating reports
·  Competitor analysis
·  Period ­on-period financial performance (revenue growth, profitability leverage)
e)
Internal Control
Understanding of Internal Control is used by the auditor to identify types of potential
misstatements and to consider factors that affect the risks of material misstatements and design the
nature, timing and extent of further audit procedures.
50
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Fundamentals of Auditing ­ACC 311
VU
Definition of internal control
Internal controls is the process designed and effected by those charged with governance,
management, and other personnel to provide reasonable assurance about the achievement of the
entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of
operations and compliance with applicable laws and regulations. It follows that internal control is
designed and implemented to address identified business risks that threaten the achievement of any
of these objectives.
Components of internal control
(a)
The control environment
(b)
The entity's risk assessment process
(c)
The information system, including the related business processes relevant to financial
reporting and communication.
(d)
Control activities
(e)
Monitoring of controls
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Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORS’ 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 Entity’s 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. AUDITOR’S REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITOR’S REPORT