Auditing ABC123 (ACCT 4450)
What you need to know to perform an audit.
This is it. This is where you are going to learn how to become an auditor. Believe me, it's sexier than it sounds. Not only is a career in public accountant high paying, but it opens up endless possibility for other finance careers. So if you are new to finance, starting out in the field of auditing is your first step to a lasting and rewarding career, regardless of whether that is as an auditor or elsewhere.
The best way to learn audit is to dive right in and start with the end in mind. Auditors provide an independent opinion on whether information has been presented fairly or not. There are different types of audits and different types of auditors. Watch this video to get your feet wet and learn the basics.
Most learners and professionals alike ignore this issue, so I'll try not to dwell on it. But if you are new to auditing, what is it like to work in a public accounting firm? Accounting firms offer staff a well defined career path.
It is also important that you understand who the other relevant participants are in the accounting profession. If you can identify the relevant standard setters, rule makers, and regulators that are important points of reference. Believe me, someday when you get the chance to sign off audit reports or file financial statements with regulators, this stuff will be much more important and relevant. For now, a general awareness is sufficient.
Generally Accepted Accounting Standards, or GAAS, are extensively defined and outlined in professional standards. However, at a high level, they can be summarized in terms of the general standard, examination standards, and reporting standards. Let's learn more by watching the following video.
Public accounting is a profession. A profession dictates an obligation to serve the public interest. The reason public accountants can charge so much for their services is based on the credibility they hold with the public. For that reason, and others which we will discuss, ethics and rules of professional conduct are very important elements of the accounting profession.
An auditor will spend hundreds, if not thousands of hours, auditing the client and based on their findings, must communicate their opinion to stakeholders. An uqualified opinion is the standard opinion issued when the auditor largely agrees with the presentation of financial information represented by management.
When an auditor has reservations about the information represented by management, they will qualify or reserve their opinion. Qualified opinions are issued where the area of disagreement is isolated and not pervassive to the overall presentation. Where the areas of disagreement are pervassive, the auditor will either deny an opinion in circumstances where it was unable to gather sufficient evidence, or issue an adverse opinion if its findings refute those represented by management.
The audit process is composed of four phases and eight steps as depicted by this diagram. This course will discuss each of the eight steps in more detail so that by the end, you should have a firm grasp of the entire audit process.

Management is responsible for the preparation of the financial statements and in doing so, they are implicitly asserting that the information is fair and accurate. If you think about it some more, you realize that management is asserting all sorts of things. Everything from ownership of assets to occurance of revenues. Management assertions in turn get rephrased into audit objectives, for example, that all revenue has been recorded (completeness). The audit objectives guide the auditor's evidence gathering activities. So we had better understand what the implicit management assertions are.

In order to support the auditor's opinion, audit evidence is gathered. There are a variety of different types of evidence as well as a variety of different types of methods to gather evidence. The key point to remember is that not all evidence is created equal. Some audit evidence is more persuassive than otheres and you need to know the distinction.
The audit risk model is a conceptual model that ties together the three elements that drive audit risk, that is, the possibility that the auditor issues an unqualified opinion when there is in fact a material misstatement contained in the financial statements. The three elements of the model are inherent risk, control risk, and planned detection risk.
Inherent risk is the risk that a material misstatement exists in the first place in the absence of any internal controls. Certain businesses are just inherently more risky than others. Think of factors like complexity, judgement, subjectivity, and management bias as drivers of inherent risk.
Control risk is the risk that a material misstatement is not prevented or detected by the clients system of internal controls. Every client has a different approach to internal control and thus every client needs to be evaluated on their own merits.
Planned detection risk, or just detection risk, is the element that the auditors control because it represents how much evidence they have to gather to support their opinion. If inherent risk and control risk are high, the auditor will have to gather more evidence.
The audit risk model is represented by the equation:
Audit Risk = Inherent Risk x Control Risk x Detection Risk.
Inherent risk is one of the three components of the audit risk model. Inherent risk is assessed by the auditor based on their knowledge of the client's business. It's a tricky thing to assess and you've got to know what to look for.
Materiality quantifies the amount of tolerable error in the financial statements. Materiality in set in the context of those stakeholders who are relying on the financial statements to make decisions.
The client risk profile is one of the first things we do in preparing for the audit. The client risk profile helps the auditor determine the degree of audit risk it is willing to accept. Obviously issuing a wrong opinion in a highly risky engagement can be costly to an auditor in terms of potential litigation and loss of reputation. So in these instance, the auditor will design the audit to mitigate this increased risk.
One of those skills that you learn as an auditor that will be invaluable throughout your career in finance is how to document your work. In the audit profession this is crucial because of the multiple layers of review within the firm as well as to defend one's work subsequently if subjected to a practice inspection or litigation. There is nothing more satisying the have prepared or reviewed a well documented file.
Internal control is one of the most challenging areas for auditors to evaluate and assess. Internal controls are all those policies and procedures that a client performs to ensure that errors are prevented and detected and assets are adequately safeguarded. Controls either directly or indirectly substantiate the management assertions. So let's start with the basics. What is an internal control?
Now that we can identify an internal control, we need a framework in place to implement internal controls throughout the organization before they can be effective.
We start with the control environment. Think of the control environment like the air we breathe. Its all around us and has a pervassive effect on our health. If we have polluted air, then it really doesn't matter what else we do, our health is going to be negatively affected.
Now the other stuff we do to stay healthly includes preventive measures- like eat right and exercise- and detective measures- like regular check ups and vaccinations. These are called control activities and as you'll learn in this lesson, systems of internal control in a company work the exact same way.

GAAS requires the auditor to gain an understanding of a client's internal controls- whether they intend to rely on them or not. This allows the auditor to assess control risk. Let's learn about how this is done.
Control reliance is often a more efficient approach for large complex client organizations. But for an auditor to take this approach, the key controls upon which auditor is relying must be tested.
This is a sleeper topic because for whatever reason, its human nature to trust their fellow citizens. However, statistics don't lie. Fraud is a multi-trillion dollar problem for businesses. Did you know that fraud experts have estimated that on average, companies lose 5% of their revenues to fraud? How does that smack you? Let's learn about what fraud is, why it happens, how it happens, what can be done to prevent it, and finally, how we audit for fraud.
Let's begin with an understanding of some of the most common fraud schemes. Timeless classics that never go out of style (unfortunately!
Next, let's tackle why people commit fraud and how they are able to do it without detection.
Okay, my goal is not to make you a better criminal. Time now to fill in the holes and safeguard the assets of the organization. A far more noble way to use your professional smarts.
And finally, auditors need to incorporate fraud detection as a conscience part of their audit. Time to learn how they do it.
The audit plan documents our approach to the evidence gathering procedures. It is a strategic assessment of where risks lie and tactical approach to addressing each of the significant areas of risks of material misstatements.
The audit program documents the procedures the auditor will perform during fieldwork. These lists of procedures are extensive, but are necessary to gather sufficient appropriate audit evidence to cover off the relevant risks.
By the time audit fieldwork begins, audit programs have been prepared documenting the planned procedures for the audit team to perform. The procedures will include a mix is tests of control and substantive tests. It's impossible to memorize all the procedures an auditor will perform across all the cycles. What's far more practical is to understand how procedures address management assertions so that if necessary, you can conjure up a relevant audit procedure if necessary to gather sufficient appropriate audit evidence.
Let's break this module into two parts. In the first part, let's dig into the sales cycle and use that as an example of a transaction cycle. Let's document and test controls.
Now let's look at the audit programs and more specifically the substantive procedures we will perform over accounts receivable. Audit programs for other cycles and accounts work the same way, albeit using different procedures (and I'll leave that for your on the job learning).
Small business makes up the majority of our economy and for firms other than the Big 4, represents the the bulk of the client base. Auditing small businesses poses unique challenges. Sometimes the cost of an audit is prohibitive for a small business and unnecessary. Review engagements and compilation engagements are alternatives to be considered.
As the audit winds down, the auditor must finalize the file. Part of that process is to summarize the misstatements uncovered through the audit execution and compare them to materiality. Additional procedures will be performed to evaluate whether any subsequent events have occured that require accrual or dislosure.
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