The auditor has four primary responsibilities related to the conduct of the audit: (1) to plan the audit so as to have reasonable assurance that errors and fraudulent misstatements will be detected and corrected, (2) to evaluate the effectiveness of internal control over financial reporting, (3) to evaluate the potential for illegal acts on the part of the client, and (4) to evaluate the likelihood that the company will continue as a going concern.
Auditors are not providing a guarantee that all significant misstatements will be discovered because auditors are not able to evaluate every transaction or account balance detail. Furthermore, management can collude with employees to conceal misstatements or instruct subordinates to override otherwise effective control systems such that auditors might fail to find existing misstatements.
Fraudulent misstatements are intentional misstatements or omissions of amounts or disclosures in financial statements to deceive users. Fraudulent misstatements can result from the alteration or forgery of documents and records, omission or misrepresentation of key facts, or misuse of accounting principles. The difference between an error and a fraudulent misstatement is the existence or absence of "intent." All organizations and all accounting systems are subject to mistakes. On the other hand, fraudulent misstatements occur when one or more persons try to achieve personal or organizational goals at the expense of other stakeholders of the organization.
The auditor is responsible for verifying that all important management assertions related to transactions, accounts, and line items and disclosures in the financial statements are reasonable, that is, free of significant misstatement.
As a practical matter, an auditor focuses on errors and fraudulent financial reporting because they directly affect the financial statements and are often highly significant. Auditors are less concerned with misappropriation of assets because the amounts involved tend to be small and often have little direct impact on the financial statements unless the culprit tries to hide the theft by manipulating the accounting records. Professional standards require that the audit be planned so as to provide reasonable assurance that significant errors or fraudulent misstatements will be detected, regardless of their cause. Professional standards also acknowledge that a well-planned audit may not detect all fraudulent misstatements, especially those involving collusion among multiple persons or forgery of documents.
a. The three concepts of risk, evidence, and materiality interact during the course of the audit to guide the appropriate conduct of the audit. An auditor will gather more evidence for a client who is considered to be high risk than for a client who is considered to be low risk. At the same time, the auditor's perception of materiality will affect the risk of the client. If the materiality threshold is low (that is, small errors are important) the auditor will have to gather more evidence because it is harder to find small errors than large errors.
Reasonable assurance for an audit engagement is defined as "a high, but not absolute, level of assurance, expressed positively in the auditor's report as reasonable assurance, that the information subject to audit is free of material misstatement."
The auditor has four primary responsibilities related to the conduct of the audit: (1) to plan the audit so as to have reasonable assurance that errors and fraudulent misstatements will be detected and corrected, (2) to evaluate the effectiveness of internal control over financial reporting, (3) to evaluate the potential for illegal acts on the part of the client, and (4) to evaluate the likelihood that the company will continue as a going concern.
Auditors are not providing a guarantee that all significant misstatements will be discovered because auditors are not able to evaluate every transaction or account balance detail. Furthermore, management can collude with employees to conceal misstatements or instruct subordinates to override otherwise effective control systems such that auditors might fail to find existing misstatements.
Fraudulent misstatements are intentional misstatements or omissions of amounts or disclosures in financial statements to deceive users. Fraudulent misstatements can result from the alteration or forgery of documents and records, omission or misrepresentation of key facts, or misuse of accounting principles. The difference between an error and a fraudulent misstatement is the existence or absence of "intent." All organizations and all accounting systems are subject to mistakes. On the other hand, fraudulent misstatements occur when one or more persons try to achieve personal or organizational goals at the expense of other stakeholders of the organization.
The auditor is responsible for verifying that all important management assertions related to transactions, accounts, and line items and disclosures in the financial statements are reasonable, that is, free of significant misstatement.
As a practical matter, an auditor focuses on errors and fraudulent financial reporting because they directly affect the financial statements and are often highly significant. Auditors are less concerned with misappropriation of assets because the amounts involved tend to be small and often have little direct impact on the financial statements unless the culprit tries to hide the theft by manipulating the accounting records. Professional standards require that the audit be planned so as to provide reasonable assurance that significant errors or fraudulent misstatements will be detected, regardless of their cause. Professional standards also acknowledge that a well-planned audit may not detect all fraudulent misstatements, especially those involving collusion among multiple persons or forgery of documents.
a. The three concepts of risk, evidence, and materiality interact during the course of the audit to guide the appropriate conduct of the audit. An auditor will gather more evidence for a client who is considered to be high risk than for a client who is considered to be low risk. At the same time, the auditor's perception of materiality will affect the risk of the client. If the materiality threshold is low (that is, small errors are important) the auditor will have to gather more evidence because it is harder to find small errors than large errors.
Reasonable assurance for an audit engagement is defined as "a high, but not absolute, level of assurance, expressed positively in the auditor's report as reasonable assurance, that the information subject to audit is free of material misstatement."