English Deutsch Français Italiano Español Português 繁體中文 Bahasa Indonesia Tiếng Việt ภาษาไทย
All categories

Chapter7
7.5 Why does ASA 240 specifically require the auditor to consider manipulation of revenue and override of controls in relation to fraud?

7.7 Why are risks concerning irregularities and the going concern basis important to the audit planning process?


7.8 Identify the matters an auditor is particularly concerned about when evaluating materiality as part of planning.


Please it will help for my studying of your contribution. I'm not an Australian but I 'm studying in your professional area..

2007-08-31 23:25:15 · 2 answers · asked by Anonymous in Business & Finance Other - Business & Finance

2 answers

The ASA 240 is almost identical to the ISA 240 THE AUDITOR’S RESPONSIBILITY TO CONSIDER FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS. Fraud at lower levels have a higher chance of detection if you have a good internal control system, but no matter how good your system, if the fraud occurs at the highest level, no-one is likely to find out. That's why auditors have to ensure that the system does not allow one man to have the power of override of controls. Overstatement of revenue is a presumed risk cos profit is revenue minus expenses. It's harder to hide expenses cos the auditor can always conduct tests for completeness. It's easier to fake your own sales invoices at year-end cos invoices are internally generated documents.

The audit planning process is one of the most important phases of an audit. Risk assessment is performed at the planning stage to identify the existence of any irregularities or potential irregularities. Identification of risk areas allows an appropriate focus to be set. The audit strategy sets out the resources to deploy for specific audit areas, such as the use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters.

In obtaining an understanding of the entity, the auditor should consider whether there are events or conditions and related business risks which may cast significant doubt on the entity’s ability to continue as a going concern. The auditor considers events and conditions relating to the going concern assumption when performing risk assessment procedures, because this allows for more timely discussions with management, review of management’s plans and resolution of any identified going concern issues.

In designing the audit plan, the auditor establishes an acceptable materiality level so as to detect quantitatively material misstatements. However, both the amount (quantity) and nature (quality) of misstatements need to be considered.
Examples of qualitative misstatements would be the inadequate or improper description of an accounting policy when it is likely that a user of the financial statements would be misled by the description, and failure to disclose the breach of regulatory requirements when it is likely that the consequent imposition of regulatory restrictions will significantly impair operating capability.

2007-09-01 01:31:54 · answer #1 · answered by Sandy 7 · 0 0

This is excerpt taken from US SAS:

Chapter7
7.5 Why does ASA 240 specifically require the auditor to consider manipulation of revenue and override of controls in relation to fraud?

The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control to assess the risk of material misstatement of the financial statements whether due to error or fraud and to design the nature, timing, and extent of further audit procedures.
Certain accounts, classes of transactions, and assertions that have high inherent risk because they involve a high degree of management judgment and subjectivity also may present risks of material misstatement due to fraud because they are susceptible to manipulation by management. For example, revenues for software developers may be deemed to have high inherent risk because of the complex accounting principles applicable to the recognition and measurement of software revenue transactions.
Material misstatements due to fraudulent financial reporting often result from an overstatement of revenues (for example, through premature revenue recognition or recording fictitious revenues) or an understatement of revenues (for example, through improperly shifting revenues to a later period). Therefore, the auditor should ordinarily presume that there is a risk of material misstatement due to fraud relating to revenue recognition.
Even if specific risks of material misstatement due to fraud are not identified by the auditor, there is a possibility that management override of controls could occur, and accordingly, the auditor should address that risk apart from any conclusions regarding the existence of more specifically identifiable risks.

7.7 Why are risks concerning irregularities and the going concern basis important to the audit planning process?

The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited (hereinafter referred to as a reasonable period of time). The auditor's evaluation is based on his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report. Information about such conditions or events is obtained from the application of auditing procedures planned and performed to achieve audit objectives that are related to management's assertions embodied in the financial statements being audited.
Irregularities and the going concerns issue may significantly impact the presentation of financial statments hence it is to be considered significant risk that requires special audit consideration.

7.8 Identify the matters an auditor is particularly concerned about when evaluating materiality as part of planning.

The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for fair presentation of financial statements in conformity with generally accepted accounting principles, while other matters are not important. In performing the audit, the auditor is concerned with matters that, either individually or in the aggregate, could be material to the financial statements. The auditor’s responsibility is to plan and perform the audit to obtain reasonable assurance that material misstatements, whether caused by errors or fraud, are detected.
The auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor’s perception of the needs of users of financial statements. The perceived needs of users are recognized in the discussion of materiality in Financial Accounting Standards Board , Qualitative Characteristics of Accounting Information, which defines materiality as "the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement." That discussion recognizes that materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative considerations.
In an audit of financial statements, the auditor’s judgment as to matters that are material to users of financial statements is based on consideration of the needs of users as a group; the auditor does not consider the possible effect of misstatements on specific individual users, whose needs may vary widely.
Misstatements can result from errors or fraud and may consist of any of the following:
a. An inaccuracy in gathering or processing data from which financial statements are prepared
b. A difference between the amount, classification, or presentation of a reported financial statement element, account, or item and the amount, classification, or presentation that would have been reported under generally accepted accounting principles
c. The omission of a financial statement element, account, or item
d. A financial statement disclosure that is not presented in conformity with generally accepted accounting principles
e. The omission of information required to be disclosed in conformity with generally accepted accounting principles
f. An incorrect accounting estimate arising, for example, from an oversight or misinterpretation of facts; and
g. Management’s judgments concerning an accounting estimate or the selection or application of accounting policies that the auditor may consider unreasonable or inappropriate.
Misstatements may be of two types: known and likely, defined as follows:
a. Known misstatements. These are specific misstatements identified during the audit arising from the incorrect selection or misapplication of accounting principles or misstatements of facts identified, including, for example, those arising from mistakes in gathering or processing data and the overlooking or misinterpretation of facts.
b. Likely misstatements. These are misstatements that:
i. Arise from differences between management’s and the auditor’s judgments concerning accounting estimates that the auditor considers unreasonable or inappropriate (for example, because an estimate included in the financial statements by management is outside of the range of reasonable outcomes the auditor has determined).
ii. The auditor considers likely to exist based on an extrapolation from audit evidence obtained (for example, the amount obtained by projecting known misstatements identified in an audit sample to the entire population from which the sample was drawn).

2007-09-01 02:55:41 · answer #2 · answered by RK 2 · 1 0

fedest.com, questions and answers