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

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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

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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 Auditors 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

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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