Accept client’s and perform initial planning
Understanding the clinet’s business and industry
Assess client business risk
Perform preliminary analytical procedur Set materiality and assess
acceptable audit risk and inherent risk
Understand IC and assess control risk
Gather information to assess fraud risks Develop overall audit plan
Pemahaman Pengendalian
Internal dan Risiko Pengendalian
3. Compliance with laws and regulations
2. Efficiency and effectiveness of operations 1. Reliability of financial reporting
Internal Control Objectives
Auditor Responsibilities Related to Internal Control
Auditor responsibilities for
understanding internal control
Control over classes of transactions
Auditor responsibilities for testing
Controls over the reliability of financial reporting
Five Components of Internal Control
assessmentRisk Control
activities Information and
communicationMonitoring
Control Environment
The Control Environment
Integrity and ethical values
Commitment to competence
Board of directors or audit committee participation
Management’s philosophy and operating style
Organizational structure
Human resource policies and practices
Risk Assessment
Identify factors that may increase risk
Assess the likelihood of the risk occurring
Estimate the significance of the risk
Control Activities
1. Adequate separation of duties
2. Proper authorization of transactions and activities 3. Adequate documents and records
4. Physical control over assets and records 5. Independent checks on performance
Information and Communication
The purpose of an accounting information and communication system is to…
initiate, record, process, and report
the entity’s transactions and to maintain accountability for the related assets.
Monitoring
Monitoring activities deal with management’s ongoing and periodic assessment of the
quality of internal control performance…
to determine whether controls are operating as intended and modified when needed.
Evaluating Internal Control
Update and evaluate auditor’s previous experience with the entity
Make inquiries of client personnel
Examine documents and records
Observe entity activities and operations
Perform walk-throughs of the accounting system
Evaluating Significant Control Deficiencies
Material Weakness LIKELIHOOD
SIGNIFICANCE Material
Probable Remote
Identify Deficiencies and Weakness
Identify existing controls
Identify the absence of key controls
Consider the possibility of compensating controls
Decide whether there is a significant deficiency or material weakness
Determine potential misstatements that could result
Communications of IC
Management letters
Communications to those charged with governance (TCWG)
Tests of Controls
The procedures to test effectiveness of controls in support of a reduced assessed control
risk are called tests of controls.
Procedures for Tests of Controls
1. Make inquiries of client personnel
2. Examine documents, records, and reports 3. Observe control-related activities
4. Reperform client procedures
Accept client’s and perform initial planning Understanding the clinet’s
business and industry
Assess client business risk
Perform preliminary analytical procedur Set materiality and assess
acceptable audit risk and inherent risk
Understand IC and assess control risk
Gather information to assess fraud risks Develop overall audit plan
Pertimbangan Risiko Fraud
Types of Fraud
Fraudulent financial reporting
Misappropriation of assets
Corruption
The Fraud Triangle
Pressures
Opportunities Rationalization
Fraudulent Reporting
Financial stability or
profitability is threatened by economic, industry, or entity operating conditions
Excessive pressure exists for management to meet debt requirements
Fraud Risk - Pressures
Misappropriation of Assets
Personal financial obligations create pressure to
misappropriate assets
Adverse relationships between management and employees motivate employees to
Fraudulent Reporting
Fraud Risk - Opportunitites
Misappropriation of Assets
There are significant
accounting estimates that are difficult to verify
There is ineffective oversight over financial reporting
High turnover or ineffective accounting, internal audit, or
There is a presence of large amounts of cash on hand or inventory items
There is an inadequate
internal control over assets
Fraudulent Reporting
Fraud Risk - Rationalization
Misappropriation of Assets
Inappropriate or inefficient communication and support of the entity’s values
is evident
A history of violations of laws is known
Management has a practice
Disregard for the need to monitor or reduce risk of
misappropriating assets exists
There is a disregard for internal controls
Assessing the Risk of Fraud
ISA provides guidance to auditors in assessing the risk of fraud.
ISA states that, in exercising professional
skepticism, an auditor “neither assumes that management is dishonest nor assumes
unquestioned honesty.”
Sources of Information Gathered to Assess Fraud Risks
Communication
among audit teamInquiries of
management Risk
factors Analytical
procedures Other
information
Corporate Governance Oversight to Reduce Fraud Risks
1. Culture of honesty and high ethics 2. Management's responsibility
to evaluate risks of fraud 3. Audit committee oversight
Specific Fraud Risk Areas
Inventory fraud risks
Revenue and accounts receivable fraud risks
Purchases and accounts payable fraud risks
Other areas of fraud risk
Responding to Misstatements That May Be the Result of Fraud
When fraud is suspected, the auditor gathers additional information to determine whether fraud actually exists.
Assessing Risks of
Information Technologies
Risks to hardware and data
Reduced audit trail
Need for IT experience and separation of IT duties
Risks to Hardware and Data
Reliance on the functioning capabilities of hardware and software
Systematic versus random errors
Unauthorized access
Loss of data
Reduced Audit Trail
Visibility of audit trail
Reduced human involvement
Lack of traditional authorization
Need for IT Experience and Separation of Duties
Reduced separation of duties
Need for IT experience
Internal Controls Specific to Information Technology
General controls
Application controls
General Controls
Administration of the IT function
Separation of IT duties
Systems development
Physical and online security
Backup and contingency planning
Hardware controls
Application Controls
Input controls
Processing controls
Output controls
Issues for Different IT Environments
Issues for network environments
Issues for database management systems
Issues for e-commerce systems
Issues when clients outsource IT
Accept client’s and perform initial planning Understanding the clinet’s
business and industry
Assess client business risk
Perform preliminary analytical procedur Set materiality and assess
acceptable audit risk and inherent risk
Understand IC and assess control risk
Gather information to assess fraud risks Develop overall audit plan
Role of All Audit Tests in the Sales and Collection Cycle
Sales Accounts
Receivable Cash in
Bank Sales
transactions Cash receipts transactions
Ending
balance Ending balance
TOC + STOT + AP + TDB
Audited by
TOC, STOT, and AP
Audited by AP and TDB
Audited by
TOC, STOT, and AP
Relationship Between Further Audit Procedures and Evidence
Physical examination Confirmation Documentation Observation
Type of Evidence
Inquiries of the Client Reperformance Analytical Procedures Recalculation
Further Audit Procedures
Tests of controls
Substantive tests of transactions Analytical procedures
Tests of details of balances
Audit Sampling for Tests of
Controls and Substantive Tests of
Transactions
Representative Samples
A representative sample is one in which the characteristics in the sample of audit interest are approximately the same as those of the population.
Nonsampling risk is the risk that audit tests do not uncover existing exceptions in the sample.
Representative Samples
Sampling risk is the risk that an auditor reaches an incorrect conclusion
because the sample is not
representative of the population.
Sampling risk is an inherent part of sampling that results from testing less than the entire population.
Minimizing Sampling Risk
1. Adjust sample size
2. Use an appropriate method of selecting sample items from the population
Nonprobabilistic Sample Selection Methods
Directed sample selection is the selection of each item based on auditor judgmental criteria.
Items most likely to contain misstatements
Items containing selected population characteristics
Large dollar coverage
Block sample selection is the selection of several items in sequence.
Haphazard sample selection is the selection of items
Probabilistic Sample Selection Methods
A simple random sample is one in which every possible combination of elements in the population has an equal Chance of constituting the sample.
Computer generation of random numbers
Random number tables
Systematic sample selection :The auditor calculates an interval and then selects the items for the sample
based on the size of the interval.
Stratified sample selection :The population is divided into
Completing the Audit
Test for Presentation and Disclosure
Occurrence and rights and obligations: Disclosed events and transactions have occurred and pertain to the entity.
Completeness: All disclosures that should have been included in the financial statements have been included.
Accuracy and valuation: Financial and other information Are disclosed fairly and at appropriate amounts.
Classification and understandability: Financial information is appropriately presented and described and disclosures
are clearly expressed.
Contingent Liabilities
A contingent liability is a potential future obligation to an outside party for an
unknown amount resulting from activities that have already taken place.
Likelihood of Occurrence and Financial Statement Treatment
Reasonably
possible Footnote disclosure is necessary
Probable
(likely to occur)
Adjust financial statements
or note disclosure Remote
(slight chance) No disclosure is necessary Likelihood of
Occurrence of Event Financial Statement Treatment
Auditor’s Concerns to Contingent Liabilities
Pending litigation for patent infringement, product liability, or other actions
Income tax disputes
Product warranties
Notes receivable discounted
Guarantees of obligations of others
Unused balances of outstanding letters of credit
Audit Procedures for Finding Contingencies
Inquire of management about the possibility of unrecorded contingencies.
Review current and previous years’ internal revenue reports for income tax settlements.
Review the minutes of directors’ and
stockholders’ meetings for indications of lawsuits or other contingencies.
Audit Procedures for Finding Contingencies
Analyze legal expenses and review invoices and statements from legal counsel.
Obtain a letter from each major attorney of the client as to the status of pending litigation.
Review audit documentation for any information that may indicate a potential contingency.
Inquiry of Client ’ s Attorneys
A list including:
(1)pending threatened litigation and
(2)asserted or unasserted claims or assessments with which the attorney has had involvement.
A request that the attorney furnish information
or comment about the progress of each item listed.
Subsequent Events Review
Client’s ending balance sheet
date
31-12-2015
Date client issues financial
statements
26-03-2016
Audit report
date
11-03-2016
Period to which review for
subsequent events applies Period for processing the financial
statements
Types of Subsequent Events
Those that have a direct effect on the financial statements
and require adjustment
Those that have do not have a direct effect on the financial statements
but for which disclosure is required
SE: Advisability of Disclosure
Decline in the market value of securities held for temporary investment or resale
Issuance of bonds or equity securities
Decline in the market value of inventory as a consequence of government action barring further sale of a product
Uninsured loss of inventories as a result of fire
A merger or an acquisition
SE : Requiring Adjustment
Declaration of bankruptcy by a customer with an accounts receivable balance
Settlement of a litigation at an amount different from the amount recorded
on the books
Disposal of equipment not being used in operations at a price below the current book value
Sale of investments at a price below
Inquire of management
Correspond with attorneys
Review internal statements prepared subsequent to the balance sheet date
Review records prepared subsequent to the balance sheet date
Examine minutes issued subsequent to the balance sheet date
Obtain a letter of representation
SE : Audit Tests
1. Perform final analytical procedures.
2. Evaluate the going-concern assumption.
3. Obtain a management representation letter.
4. Consider information accompanying the basic financial statements.
5. Read other information in the annual report.
Final Evidence
Accumulation
Substantial Doubt About Going Concern
1. Significant recurring operating losses or working capital deficiencies.
2. Inability of the company to pay its obligations as they come due.
3. Loss of major customers, the occurrence of uninsured catastrophes.
4. Legal proceedings, legislation that might jeopardize the entity’s ability to operate.
1. Financial statements
2. Completeness of information
3. Recognition, measurement, and disclosure 4. Subsequent events
Four Categories in
Management Representation
Letter
Communicate fraud and illegal acts
Communicate internal control deficiencies
Other communication with audit committee
Management letters