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Instructor Michael Brownlee B.Comm(Hons),CGACourse AU1

Exam 3 hours Wednesday eve 6:30-9:30pmJune 11 – check your schedule

� Key areas for Modules 1 through 10� Focus on Control objectives� Focus on Assertions/procedures� Focus on Cycles/Assertions/procedures� Sampling review-key elements� Focus Audit risk model

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� I will be going through a brief summary of the key elements of each module. I will add further explanations where/when required.

� I will do a quick audit ‘walkthrough’ to hopefully reinforce your understanding of how all the elements come together to form a complete audit. No more than 20 minutes.

� Exam weighting based on blueprint 8-12%� Expect at least one multiple choice and

one or part of one long answer.� Review your module summaries as they

give you the key concepts; then any area that you are unsure of requires more attention.

� Objective, purpose and key components

� Express an opinion as to whether or not the info in the F/S is presented fairly (compared to what framework)

� Fulfill statutory requirements; reduce info risk; address asymmetry of info

� Determine nature, extent and timing of evidence to obtain

� Communicate findings through Auditor’s report

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� Information risk – sources� Asymmetry of info; weak accounting systems;

deceptive management practices� Asymmetry of info –

� Remoteness of info; bias or motivation of info provider (mgmt); high volumes of transx & data; complexity of transx

� Audit reduction of info risk –� Auditor independence counters mgmt bias� Auditor accounting expertise to deal with volume &

complexity� Judgment within clearly defined prof.&ethical

standards

� Activities of public practice accounting firm� Know the differences between NTR, Review

& Audit; what they provide and when they might be required.� Audit provides high level of assurance (attest

engagement), written opinion on subject matter� Mgmt responsibility vs auditor responsibility� Review moderate assurance; ensure info is

credible� NTR – no assurance however professional

responsibility to not be associated with false or misleading info

� Standard unmodified auditor’s report

� Components

▪ Intro paragraph

▪ Mgmt responsibility paragraph

▪ Auditor responsibility paragraph

▪ Auditor’s opinion

� Must contain a title, name of the addressee, city and date of issue and auditor’s signature

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� Should be familiar with date on audit report –should be when draft is accepted by mgmt

� VERY IMPORTANT� What causes reservation of opinion:

� GAAP departure – unmodified; modified or adverse

� Scope limitation – unmodified; modified or disclaimer of opinion

� Determined by immaterial, material or pervasively material

� Exam weighting 8-12%� Expect it to be all or part of a long answer

question and/or several multiple choice� Review module 2 summary to determine

where you need more attention

� There are several important concepts in Module 2.� GAAS and CAS� CEPROC and ethics� Independence� Quality control� Liability vs. Ethical responsibility� etc

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� General Standard(1) – should be performed by person(s) having adequate technical training and proficiency in auditing. Comply with regulatory and ethical requirements

� Examination standards (4) – conduct audit according to CAS; determine procedures by following CAS scope of an audit; obtain reasonable assurance f/s free from material misstatement due to fraud or error; plan and perform audit to reduce risk to acceptably low level consistent with the audit objective; obtain understanding of entity and its environment including internal controls, sufficient to assess RMM due to fraud or error; collect SUFFICIENT, APPROPRIATE AUDIT EVIDENCE in order to draw reasonable conclusions that support the audit opinion

� Reporting standards(3) – identify f/s, management responsibility and auditor responsibility; describe scope of auditor’s examination; report expresses opinion of F/S or states that an opinion cannot be expressed and if so, why; should indicate whether F/S present fairly, in all material respects, the financial position, in accordance with disclosed appropriate basis or framework of accounting(ie – IFRS, ASNPO, ASPE)

� Review CEPROC!!!� You should know the difference between

legal liability and ethical responsibility. What constitutes legal liability and how do auditors disprove liability….know the 4 elements of negligence (duty of care; breach of that duty; proof of damage result; causal relationship between breach and damage)

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� Ethical principles (six)� 1. Responsibility to society� 2. Trust and duties – obligation to clients,

employers and third parties (ie client confidentiality and conflict of interest – in fact and in appearance)

� 3. Due care and professional judgment� 4. Deceptive information – can’t be

associated with false or misleading info

� 5. Professional practice – how CGA’s carry on as a business

� 6. Responsibilities of the profession –reputation

� Refer to CEPROC for the Rules

� In mind and appearance� Affected by self interest, self review,

advocacy, familiarity and intimidation� Safeguards to eliminate threat to

independence:� Those created by profession, legislation,

regulation

� Those within assurance client

� Those within public accounting firms systems and procedures

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� Exam weighting is 10-12%� Expect a combination of multiple choice

and long answer � Review module summary

� Biggest area here is likely to be Assertions and Audit objectives� Assertions (income statement) about classes

of transactions and events in period under audit:▪ Occurrence; completeness; accuracy; cut-off;

classification

� Assertions (Balance sheet) about account balances in the period:▪ Existence; rights and obligations; completeness;

valuation and allocation

� Assertions about presentation and disclosure

▪ Occurrence; rights and obligations; completeness, classification, understandability; accuracy and valuation

� Specific audit objectives are to gather and evaluate sufficient(quantity) appropriate (quality)evidence about each account balance or classes of transactions and the associated assertions; evidence must be persuasive

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� Persuasiveness of evidence is hierarchy, starting from highest to lowest:

� •Auditor’s direct knowledge - obtained through physical observation, own mathematical computations.) Most reliable

� •Documentary evidence – obtained directly from third parties. Extremely reliable.

� •Documentary evidence – obtained from third parties, received & processed by client. Reliable

� Internal evidence – documents produced, processed, and stored in clients information system. Strong IC’s can increase reliability. Easier to obtain and less costly than other evidence. Low reliability.

� •Spoken or written assertions by client officers, directors, managers, or staff. Least reliable, however can be improved with corroborative evidence.

� What, how much and when (nature, extent and timing)

� Determined by judgment using following factors:

▪ Materiality; inherent risk and control risk; experience from prior audits; persuasiveness of evidence and error or fraud found during audit

� Appropriate – Nature and timing� Sufficient - Extent

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� The other important area from Module 3 (later discussed in 8 thru 10) are the procedures:� Computation (Recalculation or re-

performance)

� Observation

� Confirmation

� Enquiry

� Inspection includes vouching and tracing (know the difference) and scanning

� Vouching – start at an account – follow backwards through accounting and control system to find source documentation (ieyou are looking for the original vouchers)

� Tracing – Start at source documents and follow forwards through control and accounting system to get to the account.

� The direction is important for the assertion.

� For Vouching, you are trying to prove existence or occurrence – it is recorded in the GL but did it really happen? You are looking for the source documents to prove it really happened.

� Tracing goes to prove the assertion of completeness. You have the source documentation that shows a transaction occurred, now follow it forward to make sure it was recorded in the proper account.

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� Procedures – cont’d� Analysis – GAAS requires it at planning and final

stage – optional during audit procedure stages� Online review lecturer uses acronym AEIOC2� Meaning:� Analysis� Enquiry� Inspection� Observation� Computation� Confirmation

� Other areas to be aware of:� Working paper requirements� Pre-engagement activities – client

acceptance or retention check lists

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� Exam weighting 11-21%� Likely both multiple choice and long

answer� Review module summary – a lot of difficult

material in this module

� Audit planning:� Develop overall strategy; then detailed

strategy for obtaining the sufficient appropriate evidence within framework.

� Obtain understanding of entity and its environment and assess risks of material misstatement

� Audit planning:� Characteristics of audit� Reporting requirements� Consider important factors (ie materiality;

areas that may pose higher RMM, etc)

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� Audit planning: Five steps

� Conducting preliminary analysis

� Assessing materiality

� Assessing risk

� Determining extent, timing and nature of audit work

� Preparing the audit program

� Understand the use of analysis� Know the aspects of materiality

� Quantitative – potential $$ misstatement

� Qualitative:

▪ Potential breaches of laws or regulations

▪ Inadequate disclosure of accounting policies

▪ Inadequate disclosure of non-financial ongoing concerns that may impact fair presentation of company position

� Know your basis for materiality level

� ie 5-10% of net income from continuing ops

� How are misstatements dealt with in regards to materiality

� Know:� Likely misstatements – LM� Likely aggregate misstatements – LAM� Further possible misstatements – FPM� Maximum possible misstatements-MPM

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� Audit risk components� Audit risk – AR� Risk of Material Misstatement –RMM� Inherent risk – IR� Control risk - CR� Detection risk – DR� A strong possibility is that you will be

given a narrative about a company and you will be required to pick out those things that would affect inherent risk

� Inherent risk examples:

� First year of business

� Down turn in economy

� Increase competition in market

� New loan with performance targets

� Management incentives/ethics (have they lied, cheated stolen?)

� You should understand the Audit risk model and the expanded audit risk model

� Audit risk model:� AR = IR x CR x DR� Expanded:� AR = IR x CR x APR x RIA� You could be given values for some of the

above and be expected to calculate for the missing factor.

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� Audit risk model� RMM = IR x CR� AR = IR x CR x DR� AR = RMM x DR� DR = AR� IR x CR

� DR = RIA x APR (Risk of Incorrect Acceptance x Analytical Procedures Risk)

� RIA = AR� IR x CR x APR

� Exam weighting 9-12 %� Likely all going to be in long answer

except of course the March 2015 exam put this module in the multiple choice

� Review module summary

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� Internal control components

� Control environment

� Risk assessment process

� Information system

� Control activities

� Monitoring of controls

� Three phases of internal control evaluation

� Gain understanding of controls

� Assess preliminary control risk; determine audit approach (test of controls or substantive)

� Test controls

� Internal control objectives

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� Good control system components

� See module summary

� When to assess control risk at maximum

� Internal controls do not address assertion

� IC not effective

� Not efficient for auditor to evaluate

� Almost whole module is level 2� Exam weighting 4-7%� Seem to be either all MC or all long

answer

� Sampling risk – probability that auditor’s conclusion based on sample is different from conclusion based on full audit of entire population

� Type I risk – auditor concludes population has more errors than it actually does

� Type II risk – auditor concludes population has fewer errors than it actually does

� Non-sampling risk are all other risks not related to sampling(ie failure to evaluate sample properly due to inexperience, not exercising due care and attention when testing; tests not appopriate

� Mitigate non-sampling risk with proper planning and supervision

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� Sampling errors – part of Sampling risk� Type I errors – incorrect rejection of

population� Type II – Incorrect acceptance� Auditor more concerned with Type II

where incorrect acceptance of population with Material Misstatement

� Differences between statistical and non-statistical sampling

� Statistical sampling you can quantitatively calculate the sampling risk

� Statistical can calculate effect of results of sample on population

� Non-statistical uses more auditor judgement

� etc

�

� Sample size factors(test controls):

� Acceptable risk of overreliance (ARO)

� Tolerable deviation rate (TDR)

� Expected population deviation rate (EPDR)

� Population size

� Sample size is selected by using table based on given ARO, EPDR and TDR

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� Sample size factors (substantive):

� Acceptable Risk of incorrect acceptance (ARIA)= Risk of incorrect acceptance (RIA)

� Risk of incorrect rejection (RIR)

� Tolerable misstatement

� Expected dollar misstatement

� Variability within the population

� Population size

� Dollar Unit Sampling:� Know the characteristics vs other sampling

methods� DR = APR x RIA

� We now learn that DR is a factor of two risks – analytical procedures risk (APR) and Risk of incorrect acceptance (RIA)

� APR – probability that analytical procedures will fail to detect material errors

� RIA – probability that test-of-detail procedures will fail to detect material errors

� Don’t sweat this area too much. Weighting is only 4-7%

� Some typical MC questions ask you to identify which is a form of sampling error or they give you values for all but one of AR=IR x CR x APR x RIA and you have to calculate the missing

� You should know the key components of sampling – sampling risk, sampling error, DR= APR x RIA,TDR,EPDR

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� Exam weighting 5-8%� Again not too heavy� Could be either MC or long answer

� Nothing about an audit changes with computer based audits

� GAAS, mgmt assertions, control objectives, sufficient appropriate audit evidence requirement, auditor’s report all still the same

� Recognize controls and/or control deficiencies

� Recognize computer test limitations� Identify functionality of components of

information technology (ie firewalls, EDI, etc)

� Recognize the impact to the auditor of a change from manual to computer accounting or changing from one computer accounting method to another

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� Exam weighting 8-12%� Can be either MC or long answer

� This is the same for 8,9 & 10:� Know the procedures� Know the control objectives� Know the assertions� Be able to come up with 2-4 procedures

for any possible cycle� Recognize the characteristics of each

cycle and the most significant assertion� Be able to identify strengths and

weaknesses in given procedures

� Procedures

� Recalculation or reperformance

� Observation

� Confirmation

� Enquiry

� Inspection - includes vouching and tracing (know the difference) and scanning

� Analysis

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� Control Objectives:

� Will be different for each cycle – Module summary lists them

� Main assertions:� Receivables – existence� Liabilities - Completeness

� Should also be able to identify some sources of evidence – module summary has a good list for each cycle

� Know how testing balance sheet supports income statement (ie – testing of A/R supports revenue and collections cycle)

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� Exam weighting 8-12%� Again MC or long answer

� This is the same for 8,9 & 10:� Know the procedures� Know the control objectives� Know the assertions� Be able to come up with 2-4 procedures

for any possible cycle� Recognize the characteristics of each

cycle and the most significant assertion� Be able to identify strengths and

weaknesses in given procedures

� Main assertions:� Inventory – Existence,valuation,

ownership� Capital assets – same as inventory

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� Exam weighting 9-12%� MC or long answer

� This is the same for 8,9 & 10:� Know the procedures� Know the control objectives� Know the assertions� Be able to come up with 2-4 procedures

for any possible cycle� Recognize the characteristics of each

cycle and the most significant assertion� Be able to identify strengths and

weaknesses in given procedures

� Contingencies – legal enquiry letter� Client representation letter – dates� Related party issues� Subsequent events and Type I/II events� Evaluation of results� Management communication

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� Perform procedures� Evaluate results� Determine misstatements and if

adjustments necessary or expand procedures

� Form opinion� Consider subsequent events,

contingencies or other items that may need adjusting or disclosure

� Communicate opinion and draft statements to management along with Client rep letter

� Audit closing – file review, etc.

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� We can go through some Multiple Choice and short answer/short case questions from past exams if you want. Some find this helpful others do not.

� You can do this. � Use your exam blueprint, module

summaries and practice multiple choice and practice exams.

� And in the words of Douglas Adams…� “Don’t Panic”

� GOOD LUCK ON YOUR EXAM.� UTILIZE ALL OF YOUR RESOURCES IF

YOU ARE UNCLEAR ON ANY CONCEPTS

� REVIEW PAST AND PRACTICE EXAMS, ONLINE FORUMS, ETC

� I AM AVAILABLE� EMAIL ME IF YOU NEED ADDITIONAL

CLARIFICATION, ETC. MY GOAL IS FOR ALL OF YOU TO PASS!!!