About Me
CPA
1 Regulation (REG)
1.1 Ethics, Professional Responsibilities, and Federal Tax Procedures
1.1 1 Professional ethics and responsibilities
1.1 2 Federal tax procedures and practices
1.1 3 Circular 230
1.2 Business Law
1.2 1 Legal rights, duties, and liabilities of entities
1.2 2 Contracts and sales
1.2 3 Property and bailments
1.2 4 Agency and employment
1.2 5 Business organizations
1.2 6 Bankruptcy
1.2 7 Secured transactions
1.3 Federal Taxation of Property Transactions
1.3 1 Basis determination and adjustments
1.3 2 Gains and losses from property transactions
1.3 3 Like-kind exchanges
1.3 4 Depreciation, amortization, and depletion
1.3 5 Installment sales
1.3 6 Capital gains and losses
1.3 7 Nontaxable exchanges
1.4 Federal Taxation of Individuals
1.4 1 Gross income inclusions and exclusions
1.4 2 Adjustments to income
1.4 3 Itemized deductions and standard deduction
1.4 4 Personal and dependency exemptions
1.4 5 Tax credits
1.4 6 Taxation of individuals with multiple jobs
1.4 7 Taxation of nonresident aliens
1.4 8 Alternative minimum tax
1.5 Federal Taxation of Entities
1.5 1 Taxation of C corporations
1.5 2 Taxation of S corporations
1.5 3 Taxation of partnerships
1.5 4 Taxation of trusts and estates
1.5 5 Taxation of international transactions
2 Financial Accounting and Reporting (FAR)
2.1 Conceptual Framework, Standard-Setting, and Financial Reporting
2.1 1 Financial reporting framework
2.1 2 Financial statement elements
2.1 3 Financial statement presentation
2.1 4 Accounting standards and standard-setting
2.2 Select Financial Statement Accounts
2.2 1 Revenue recognition
2.2 2 Inventory
2.2 3 Property, plant, and equipment
2.2 4 Intangible assets
2.2 5 Liabilities
2.2 6 Equity
2.2 7 Compensation and benefits
2.3 Specific Transactions, Events, and Disclosures
2.3 1 Leases
2.3 2 Income taxes
2.3 3 Pensions and other post-retirement benefits
2.3 4 Derivatives and hedging
2.3 5 Business combinations and consolidations
2.3 6 Foreign currency transactions and translations
2.3 7 Interim financial reporting
2.4 Governmental Accounting and Not-for-Profit Accounting
2.4 1 Governmental accounting principles
2.4 2 Governmental financial statements
2.4 3 Not-for-profit accounting principles
2.4 4 Not-for-profit financial statements
3 Auditing and Attestation (AUD)
3.1 Engagement Planning and Risk Assessment
3.1 1 Engagement acceptance and continuance
3.1 2 Understanding the entity and its environment
3.1 3 Risk assessment procedures
3.1 4 Internal control
3.2 Performing Audit Procedures and Evaluating Evidence
3.2 1 Audit evidence
3.2 2 Audit procedures
3.2 3 Analytical procedures
3.2 4 Substantive tests of transactions
3.2 5 Tests of details of balances
3.3 Reporting on Financial Statements
3.3 1 Audit report content
3.3 2 Types of audit reports
3.3 3 Other information in documents containing audited financial statements
3.4 Other Attestation and Assurance Engagements
3.4 1 Types of attestation engagements
3.4 2 Standards for attestation engagements
3.4 3 Reporting on attestation engagements
4 Business Environment and Concepts (BEC)
4.1 Corporate Governance
4.1 1 Internal controls and risk assessment
4.1 2 Code of conduct and ethics
4.1 3 Corporate governance frameworks
4.2 Economic Concepts
4.2 1 Microeconomics
4.2 2 Macroeconomics
4.2 3 Financial risk management
4.3 Financial Management
4.3 1 Capital budgeting
4.3 2 Cost measurement and allocation
4.3 3 Working capital management
4.3 4 Financial statement analysis
4.4 Information Technology
4.4 1 IT controls and security
4.4 2 Data analytics
4.4 3 Enterprise resource planning (ERP) systems
4.5 Operations Management
4.5 1 Strategic planning
4.5 2 Project management
4.5 3 Quality management
4.5 4 Supply chain management
3 1 Engagement Planning and Risk Assessment Explained

1 Engagement Planning and Risk Assessment Explained

Key Concepts

Engagement Planning

Engagement planning is the process of developing a strategy for an audit engagement. It involves understanding the client's business, assessing the risks, and determining the appropriate audit procedures to be performed. Effective planning ensures that the audit is efficient, effective, and meets professional standards.

Example: An auditor planning an audit of a manufacturing company would first review the company's operations, industry trends, and financial statements to identify key areas of focus.

Risk Assessment

Risk assessment is the process of identifying and evaluating the risks of material misstatement in the financial statements. This involves understanding the client's business environment, internal controls, and inherent risks. The goal is to determine the level of audit effort required to address these risks.

Example: During a risk assessment, an auditor might identify that a company's inventory valuation is subject to significant risk due to complex production processes. This would lead to a more detailed audit of inventory.

Materiality

Materiality is the concept that determines the significance of an item in the financial statements. Items that could influence the decisions of users are considered material and require more attention during the audit. Materiality is used to focus audit efforts on areas that are most likely to affect the financial statements.

Example: If a company's revenue is $10 million, an error of $100,000 in revenue would be considered material and would require correction and disclosure in the financial statements.

Audit Risk Model

The audit risk model is a framework used to assess the risk of material misstatement in the financial statements. It consists of three components: Inherent Risk (IR), Control Risk (CR), and Detection Risk (DR). The model is expressed as: Audit Risk (AR) = IR x CR x DR. By understanding these risks, auditors can tailor their procedures to manage audit risk.

Example: If an auditor assesses Inherent Risk as high, Control Risk as moderate, and Detection Risk as low, the overall Audit Risk would be moderate. This would lead the auditor to perform more extensive audit procedures to reduce Detection Risk.

Internal Controls

Internal controls are the policies and procedures implemented by a company to ensure the reliability of financial reporting, enhance operational efficiency, and prevent fraud. Auditors evaluate internal controls to assess Control Risk and determine the extent of substantive procedures needed.

Example: A company's internal control over cash disbursements includes segregation of duties, approval processes, and reconciliation of bank statements. An auditor would test these controls to assess their effectiveness.

Audit Procedures

Audit procedures are the specific actions taken by auditors to gather evidence and evaluate the assertions in the financial statements. These procedures are designed based on the results of engagement planning and risk assessment to ensure that the audit is thorough and effective.

Example: After identifying a high risk in inventory valuation, an auditor might perform physical counts of inventory, review inventory turnover rates, and compare inventory levels to historical data.

Examples and Analogies

Consider engagement planning as "mapping a journey" for an audit, where understanding the client's business is like knowing the terrain. Risk assessment is akin to "identifying potential hazards" along the route, while materiality helps determine "which hazards are critical."

The audit risk model is like a "risk calculator" that helps auditors balance the risks they face. Internal controls are the "guardrails" that keep the financial reporting on track, and audit procedures are the "tools" used to inspect and ensure everything is in order.

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