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1、Chapter 16 Audit Process1Learning Objectivesp Discuss what circumstances require the terms of engagement to be revised on recurring audits.p Learn the major steps required in preparing the audit planp Understand the audit risks effect on the audit procedurep Understand the importance of internal con
2、trol to management p Learn the components of internal control2Mini CaseAudit staff in the review of ABC Companys accounts payable at the end of the year,found that in 2016 the M Company has a credit balance of$86000,after verification of the relevant documents,is related to the purchase of chemical
3、raw materials in the M chemical plant in 2013.Analyze the possible problems,whether to conduct further review,and how to review.Outline of The ChapterpTopic 1:Client Acceptance,Continuance and Auditing planningpTopic 2:Audit Risk and Internal Control pTopic 3:Compliance TestingpTopic 4:Substantive T
4、esting4Topic 1:Client Acceptance,Continuance and Auditing planning p 1.Engagement Letters An audit engagement letter should be signed before auditing.Audit engagement letter refers to a written contract entered into by the accounting firm and the client.p 2.Communication with a Predecessor Auditor I
5、nquiry of the predecessor auditor is a necessary procedure because the predecessor may be able to provide the successor with information that will assist him in determining whether to accept the engagement.5Topic 1:Client Acceptance,Continuance and Auditing planning p 3.Auditing Planning Definitionh
6、e planning process is documented in the audit working papers through the preparation of audit plans,time budgets,and audit programs.Designing Audit Programs Designing Audit Programs 0rganization of The Audit Program 0bjecdves of audit programs General objectives of audit programs for asset accounts6
7、Topic 2:Audit Risk and Internal Control p 1.Audit Risk DefinitionAudit risk means the risk that the CPA gives an inappopriate audit opinion when the financial statements are materially misstated.Audit risk has three components:inherent risk,control risk and detection risk.The Audit Risk Model The au
8、dit risk model can be applied be both the overall financial statement level and the account balance or class of transactions level.7Topic 2:Audit Risk and Internal Control p 1.Audit Risk The Audit Risk Model AR=IR*CR*DR AR=Audit risk(the risk that the CPA may fail to modify the opinion on materially
9、 misstated financial statements)IR=Inherent risk(the risk that material misstatements will occur,assuming no related internal controls)CR=Control risk(the risk that material misstatements that could occur will not be prevented or detected by the internal control)DR=Detection risk(the risk that the C
10、PA will not detect a material misstatement that exists in the financial statements)8Topic 2:Audit Risk and Internal Control p 1.Audit Risk The Audit Risk Model AR=IR*CR*DR AR=Audit risk(the risk that the CPA may fail to modify the opinion on materially misstated financial statements)IR=Inherent risk
11、(the risk that material misstatements will occur,assuming no related internal controls)CR=Control risk(the risk that material misstatements that could occur will not be prevented or detected by the internal control)DR=Detection risk(the risk that the CPA will not detect a material misstatement that
12、exists in the financial statements)9Topic 2:Audit Risk and Internal Control p 1.Audit Risk Application of the audit riskhe assessed levels of inherent and control risks cannot be sufficiently low to eliminate the need for the CPA to perform any substantive procedures.Regardless of the assessed level
13、s of inherent and control risks,the CPA should perform some substantive procedures for material account balances and classes of transactions.10Topic 2:Audit Risk and Internal Control p 1.Audit Risk DefinitionAudit risk means the risk that the CPA gives an inappopriate audit opinion when the financia
14、l statements are materially misstated.Audit risk has three components:inherent risk,control risk and detection risk.The Audit Risk Model The audit risk model can be applied be both the overall financial statement level and the account balance or class of transactions level.11Topic 2:Audit Risk and I
15、nternal Control p 2.Internal Control DefinitionThe definition of internal control emphasizes that internal control is a process,or a means to an end,and not an end in and of itself.The Control Environment The control environment sets the tone of an organization by influencing the control consciousne
16、ss of people.It may be viewed as the foundation for the other components,of internal control.12Topic 2:Audit Risk and Internal Control p 2.Internal Control The Control EnvironmentControl environment factors include:Integrity and Ethical Values Commitment to Competence Broad of Directors or Audit Com
17、mittee Management Philosophy and Operating Style Organization Structure Assignment of Authority and Responsibility Human Resource Policies and Practices13Topic 2:Audit Risk and Internal Control p 2.Internal Control Control ActivitiesControl activities are policies and procedures that help ensure tha
18、t managements directives ate carried out.While there are many different types of control activities performed in an organization,only the following types are generally relevant to an audit of the organizations financial statements:Performance Reviews Information Processing Segregation of Duties14Top
19、ic 2:Audit Risk and Internal Control p 2.Internal Control Monitoring Monitoring,the last component of internal control,is a process that assesses the quality of internal control over time.Monitoring can be achieved by performing ongoing activities or by separate evaluations.An important aspect of th
20、e organizations monitoring system is the internal audit function.Internal auditors investigate and appraise internal control and the efficiency with which the various units of the organization are performing their assigned functions,and report their findings and recommendations to top management.15T
21、opic 3:Compliance Testingp 1.Plant AssetsIf the CPA plans to rely on the internal controls,he should perform compliance procedures to assess the control risk.The lower the preliminary assessment of control risk,the more evidence the CPA should obtain to show that internal controls are suitably desig
22、ned and operating effectively.General Overview of Compliance Test Plan Based on the results of the compliance tests,the CPA should assess whether the design and operation of the internal controls are in line with the conclusion drawn from the preliminary assessment of control risk.If there are discr
23、epancies the assessed level of control risk should be revised and the nature,timing be modified accordingly.16Topic 3:Compliance Testingp 1.Plant Assets Evaluating Compliance Test ResultsBased on the results of compliance procedures,the CPA should evaluate whether the internal controls are adequate
24、for his purposes.If compliance test results support his earlier evaluation of controls,the CPA would carry his planned substantive tests.Communicating of Control WeaknessesAs a result of the study and evaluation of internal accounting control and other auditing procedures,the CPA may become aware of
25、 weaknesses.For the benefit of the clients,the CPA should make management aware,on a timely basis,of material weaknesses which have come to his attention regardless of the nature of the engagement.17Topic 4:Substantive Testingp 1.Plant Assets DefinitionThe main objective of audit field work is to ob
26、tain relevant and reliable audit evidences which will enable us to draw a reasonable conclusion as to the truth and fairness of the financial statements being audited.Analytical ProceduresAnalytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data.It refers to the CPAs analysis of an entitys material rations of trends,including the investigation of any unusual fluctuations in these ratios or trends and their differences from expected amounts and relevant information.18The End19