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AUD: Risk, Evidence, and Sampling: Financial Statement and Assertion Level Risks - YouTube
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Hey, folks. What we wanna do now is take
a look at assertion level risk and how
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that impacts us. So what we're gonna do
is we're gonna take a look at this
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exercise. Nathan should assess the risk
of material misstatement at two levels:
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the financial statement level and the
assertion level. Let's move on to the
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next page or the next item here. It says
identification of the level of risk helps
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the auditor determine the appropriate
response, right. If there's a lot of
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risk, we gotta do a lot of work. If
there's less risk, less work. Let's move
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on to the next item. So the definition
here. Financial statement level risks
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are risks that relate pervasively to the
financial statements as a whole and
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potentially impact many relevant
assertions. Some examples: a weak
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control environment, lack of qualified
people that do the work and do the
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reporting. So as you can see we have two
financial statements here that we may be
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looking at to make some assessments.
Let's go on to our next item. The
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following are appropriate responses when
risks are identified at the financial
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statement level. One, we communicate to
the audit team an increased need for
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professional skepticism, an objective
mind that looks at assertions and
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questions them. And of course, the
increased level of supervision at each
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level 'cause the more experienced people
may see something that a less experienced
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person missed and didn't see. Let's move
on to our next items. Oh, look at this!
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There you go. There's some of our
people. Let's move on to our next item.
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We have our partner talking to the staff.
We have the managers talking. We have
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the managers talking to the staff. The
partner talking to them, everybody's
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talking. We're making sure that the
pre-audit meeting emphasizes this. Let's
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move on to our next item. The following
are appropriate responses when risks are
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identified at the financial statement
level. Communicate to the audit team an
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increased need for professional
skepticism, an increased level of
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supervision, assigned staff that are more
experienced, incorporate a greater level
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of unpredictability. Unpredictability
means you might catch something that
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nobody anticipated. And, of course, make
pervasive changes to the nature, the
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extent, and the timing, the net you're
gonna throw over the items such as
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shifting procedures closer to the
year-end rather than the interim. Let's
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move on to our next item. Here's another
definition. Assertion level risks are
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risks that relate to a specific
transaction or a specific account balance
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or a specific disclosure, all right, at
the relevant assertion level. For
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assertion level risks with high risks of
material misstatement an appropriate
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response to change what? Well, you can
see the net. The nature, the extent, and
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the timing. I'm sitting there and I'm
just having a wonderful time here. I'm
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ready to do a song like with Peter
Olinto, Sugar Bear. Notice, remember
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also the type of evidence you're gonna
want. You're gonna want A, E, I, O. Did
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you forget that easy memory tool? A,
actual knowledge, highest level. A, E,
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external information, the best, the
second best. Internal, and then of
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course, oral information. Let's move on
to our next item. Examples of assertion
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level risks at Creative CPA Clothing,
cash held in the stores, maybe stolen.
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Inventory may not be properly valued.
You can see existence in valuation issues
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there. Some examples of appropriate
response, observed cash counts,
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especially at year-end. That's the
nature, extent, and timing of the work.
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Select additional inventory items from
the inventory report listing and review
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the related vendor invoices. That's the
extent. More work. Nature, extent, and
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timing. Let's move on to our next item.
During the planning phase Nathan obtained
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an understanding of controls related to
the expenditure cycle. He received the
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following narrative and observed the
accounts payable clerk performing these
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procedures. Notice a copy of the
receiving report is sent to the
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accounting department. The receiving
report is compared to the purchase order
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and requisition to verify quantity. Now
think about that one. Stand back for a
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moment. We order something, paperwork.
Then, we give a copy of that to our
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receiving department in the warehouse.
When the items come in, we verify that
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what we're receiving is what we ordered.
We wanna make sure that those two
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compare. Then we take those two and we
give it to accounts payable. When the
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bill comes in we double check to make
sure what we ordered is what we received
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and what we ordered and what we received
is what we were billed for. And then
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when it's paid, accounting double checks
to make sure that what we ordered is what
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we received and is what we're billed for
and what we finally paid, right. Very
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logical stuff that we're doing her. So
it says when the invoice arrives the
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accounting department employee compares
the invoice by matching the invoice to
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the purchase order to the receiving
report. So what we ordered is what we
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received and what we received is what we
were billed for. Upon proper
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verification the accounting department
employee will create a voucher, cover
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page indicating approval, as well as the
amount to pay the vendor. The voucher
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cover page is signed by the accounts
payable employee. There's
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accountability. And this voucher page is
then submitted to treasury for the
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issuance of the payment. Let's move on.
Notice right here, based on this
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narrative, as well as observation, Nathan
made an initial assessment of control
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risk related to accounts payable is low.
Low risk, low amount of work, right.
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Less risk, less work, all right. And
plan to decrease substantive testing of
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accounts payable pending the results of
our test of controls. It sounded great.
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We wanna make sure it's really working
that way. So below is an excerpt.
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Control testing. We selected 10 checks,
disbursed, and we traced them back to the
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whole package. The package of approval
which was the approval of the bill
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because the bill matched what we received
and what we received matched what we
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ordered. Testing will be performed at an
interim period and then rolled forward to
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the end of the year. We selected 15
checks substantive to issue after year
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end and trace those supporting documents
to verify that they were not actually
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supposed to be back in December, but they
were truly stuff received in January of
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the next year and are reported as such in
the following year. Let's go on to our
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next item. Based on Becker CPA firm's
guidance, the sample size for control,
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for controls that are performed many
times per day is 10. Since Nathan
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assessed risk of material misstatement as
low, low risk, low amount of work, then
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Nathan can perform tests at interim and
then perform rollforwards. Remember the
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nature, the extent, and the timing, the
timing at interim when we believe
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controls work. So, let's go on to our
next item. So, we're gonna test sometime
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in the area of October. We're going to
take some items and then eventually we'll
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do some rollforward. Let's move on to
our next area. Ultimately we will take
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some stuff that was paid in February and
make sure that those items weren't
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received back in December and should've
been reported back then as opposed to
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they were received in January and they're
part of the following year. Next item.
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Nathan will sample 7 selections, 75% of
the 10, during the period January through
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the end of September, Year 2, and right
in to October. He will perform a
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rollforward of the procedures, all right,
testing for the remainder of the year 3
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other selections. Let's move on. Well,
when he looked at the 7 items, he found
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some problems. Unfortunately, 6 of the 7
packages lacked the signature of
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approval. Uh-oh. What's happening here?
The control is not present and
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functioning, right. We have a weakness
here. We cannot rely on this system, all
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right. There's the problem. So now even
though we thought the system was going to
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be strong, less risk, less work, we're
not gonna be able to say there's less
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risk. We're gonna have to say they may
not have been doing the right job.
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Higher risk, more risk, more work. Let's
go on to our next slide. The results, we
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have to reassess the control risk.
Higher. Nathan will no longer test and
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work controls. We're not gonna rely on
them. They're not working. The increase
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in risk of material misstatement results
in a decrease in the detection risk.
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Very hard way to understand it, but since
we're gonna say more risk that the client
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made mistakes, we'll have to do more
work, because by doing more work, we
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lower the risk that we'll miss something.
And to support the lower level of
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detection risk we've decided to change
the extent, a lot more work, and the
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timing, more year-end work, into
substantive testing. That's the nature
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of it. And, by the way, we're gonna
select 20 items after year-end to trace
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into the package. Next item. So ladies
and gentlemen, that takes care of all the
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items you need to know before we're ready
to try an exercise. So, good luck.
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