Auditors would perform the following steps in which order? Set audit risk; assess risk of material misstatement; calculate detection risk.

Answer: When an auditor discovers or suspects noncompliance with a law or regulation (illegal act), unless the matters involved are inconsequential, the auditor should: 1. Obtain an understanding of the nature and circumstances of the act.

1. When initiating communications with predecessor auditors, prospective auditors should expect: To take responsibility for obtaining the client’s consent for the predecessor to give information about prior audits.

Which of the following risks is entirely controlled by the auditor? Detection risk occurs when internal control activities fail to detect material misstatements. Audit care and attention should be greater where business and inherent risks are judged to be lower.

Control risk, which is the risk that a misstatement due to error or fraud that could occur in an assertion and that could be material, individually or in combination with other misstatements, will not be prevented or detected on a timely basis by the company’s internal control.

Inherent and control risk combine to form the risk of material misstatement, or RMM. These risks exist independent of the auditor and cannot be reduced through substantive procedures.

Inherent Risk Factors

• Susceptibility to theft or fraudulent reporting.
• Complex accounting or calculations.
• Accounting personnel’s knowledge and experience.
• Need for judgment.
• Difficulty in creating disclosures.
• Size and volume of accounts balance or transactions.
• Susceptibility to obsolescence.
• Prior year period adjustments.

Risk assessment is the foundation of an audit. Audit risk assessment procedures are performed to obtain an understanding of your company and its environment, including your company’s internal control, to identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error.

Factors affecting account inherent risk include:

• Dollar size of the account.
• Liquidity.
• Volume of transactions.
• Complexity of the transactions.
• New accounting pronouncements.
• Subjective estimates.

Auditing standards require that the auditor evaluate whether there is a substantial doubt about a client’s ability to continue as a going concern for at least: one year beyond the balance sheet date.

Although the bank statements are in the possession of the client, they originated outside of the client and, relative to the other responses, they are the most persuasive.

Auditing evidence is the information collected by an auditor to ascertain the accuracy and compliance of a company’s financial statements. Examples of auditing evidence include bank accounts, management accounts, payrolls, bank statements, invoices, and receipts.

The nature of an audit procedure refers to its purpose (that is, test of controls or substantive procedure) and its type (that is, inspection, observation, inquiry, confirmation, recalculation, reperformance, or analytical procedure).

The objective of an audit is to form an independent opinion on the financial statements of the audited entity. The opinion includes whether the financial statements show a true and fair view, and have been properly prepared in accordance with accounting standards.

Auditing is defined as the on-site verification activity, such as inspection or examination, of a process or quality system, to ensure compliance to requirements. Some audits have special administrative purposes, such as auditing documents, risk, or performance, or following up on completed corrective actions.

The purpose of an audit is for an independent third party to examine the financial statements of an entity. This opinion greatly enhances the credibility of the financial statements with users, such as lenders, creditors, and investors.

An audit is a formal examination, inspection, and verification of a commercial enterprise’s, organization’s, or any entity’s accounts. Audits are usually carried out by an independent party. A warehouse audit examines a warehouse’s stocks and control procedures. …

The basic principles of auditing are confidentiality, integrity, objectivity, and independence, skills and competence, work performed by others, documentation, planning, audit evidence, accounting system and internal control, and audit reporting.

There are five phases of our audit process: Selection, Planning, Execution, Reporting, and Follow-Up.

The five components of the internal control framework are control environment, risk assessment, control activities, information and communication, and monitoring.

Internal control, as defined by accounting and auditing, is a process for assuring of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies.