I. Reading: What Does an Auditor Do?
*Teacher’s Copy*
The goal of a financial statement audit is for you (the auditor) to form an opinion regarding whether those statements are or aren’t free from error. To do so, you use your best professional judgment when assessing your client’s information and assertions. Although every company is different, and each audit you work on will vary, you can follow some common procedures. Here are a few of the tasks you want to accomplish while conducting your audits.
Evaluate relevance and reliability
You can’t issue an audit opinion unless you have sufficient, competent evidential matter. Relevance and reliability are two hallmarks of good evidence:
- Relevance means the evidence directly relates to the facts you’re trying to substantiate. For example, valuation of a checking account in U.S. dollars isn’t relevant, because the worth of a dollar is so straightforward. However, valuation is critical in determining what the correct ending inventory figure should be.
- Reliability means you can depend on the evidence to steer you in the right direction. For example, evidence is more reliable if it’s in written rather than oral form, or if a knowledgeable independent source from outside your audit client substantiates something the client told you.
Test management assertions
Your client’s management assertions must be presented on the financial statements using generally accepted accounting principles, or GAAP. Because you can’t prepare the financial statements under audit, you need to know GAAP. It’s your responsibility to realize when GAAP aren’t being uniformly applied and to inform the client of that fact so it can correct the error.
To help you get your feet wet, here are generic descriptions for various management assertions:
- Occurrence: The transactions management shows on the financial statements actually took place. For example, if the client records a sale of $5,000, you make sure a delivery of a good or service to a real-live customer actually happened.
- Completeness: Whatever event took place is recorded in its entirety. For example, the $5,000 sale is booked as revenue for the whole $5,000 and not for a lesser amount (because management doesn’t want to pay taxes on the entire sale amount).
- Classification: Management takes the transaction to the correct account. For example, the company records the $5,000 sale as revenue and not a loan from a shareholder.
- Cutoff: Transactions are on the financial statements for the correct period. For example, if the audit client has a calendar year-end of December 31, only sales taking place prior to close of business on December 31 are recorded on the current financial statements.
- Rights and obligations: The client owns or holds the rights to assets and is indeed responsible for the liabilities shown on the balance sheet. Examples of assets are cars, buildings, computers, and machinery. Examples of liabilities are accounts payables and loans taken out to buy the assets.
Issue an opinion
Well, after all the hard work you do during the auditing process, your firm is the expert that gives its professional opinion about how much reliance users can place on the audit topic at hand.
II. Vocabulary & Definitions
the state of affairs that a plan is intended to achieve and that (when achieved) terminates behavior intended to achieve it
EXAMPLE SENTENCE:
The goal of a financial statement audit is for the auditor to form an opinion regarding whether those statements are or aren’t free from error.
2. opinion
a personal belief or judgment that is not founded on proof or certainty
EXAMPLE SENTENCE:
It was the auditor's opinion that the accounting records showed assets that, in fact, did not exist.
3. judgment
the act of judging or assessing a person or situation or event
EXAMPLE SENTENCE:
To do so, you use your best professional judgment when assessing your client’s information and assertions.
4. assertion
a declaration that is made emphatically (as if no supporting evidence were necessary)
EXAMPLE SENTENCE:
It was the company's assertion that the assets in question where indeed real.
5. vary
become different in some particular way, without permanently losing one's or its former characteristics or essence
EXAMPLE SENTENCE:
Although every company is different, and each audit you work on will vary, you can follow some common procedures.
6. procedure
a particular course of action intended to achieve a result
EXAMPLE SENTENCE:
Recording sales that were, in fact, only internal trades within the same corporation had become a common procedure.
7. accomplish
to gain with effort
EXAMPLE SENTENCE:
Here are a few of the tasks you want to accomplish while conducting your audits.
8. relevance
the relation of something to the matter at hand
EXAMPLE SENTENCE:
Evaluate relevance and reliability.
9. reliability
the quality of being dependable or reliable
EXAMPLE SENTENCE:
The reliability of that accounting company is known the world over.
10. competent
properly or sufficiently qualified or capable or efficient
EXAMPLE SENTENCE:
You can’t issue an audit opinion unless you have sufficient, competent evidential matter.
11. evidence
your basis for belief or disbelief; knowledge on which to base belief
EXAMPLE SENTENCE:
Relevance and reliability are two hallmarks of good evidence.
12. substantiate
establish or strengthen as with new evidence or facts
EXAMPLE SENTENCE:
When questioned, the company substantiated its claims with 3,500 pages of documents.
13. responsibility
the social force that binds you to the courses of action demanded by that force
EXAMPLE SENTENCE:
It’s your responsibility to realize when GAAP aren’t being uniformly applied and to inform the client of that fact so it can correct the error.
14. inform
impart knowledge of some fact, state or affairs, or event to
EXAMPLE SENTENCE:
It’s your responsibility to realize when GAAP aren’t being uniformly applied and to inform the client of that fact so it can correct the error.
15. generic
applicable to an entire class or group
EXAMPLE SENTENCE:
To help you get your feet wet, here are generic descriptions for various management assertions.
16. delivery
the act of delivering or distributing something (as goods or mail)
EXAMPLE SENTENCE:
For example, if the client records a sale of $5,000, you make sure a delivery of a good or service to a real-live customer actually happened.
17. current
occurring in or belonging to the present time
EXAMPLE SENTENCE:
For example, if the audit client has a calendar year-end of December 31, only sales taking place prior to close of business on December 31 are recorded on the current financial statements.
18. obligation
the state of being obligated to do or pay something
EXAMPLE SENTENCE:
It is the company's obligation to provide the government with five years' worth of accounting records.
19. process
a particular course of action intended to achieve a result
EXAMPLE SENTENCE:
After all the hard work you do during the auditing process, your firm is the expert that gives its professional opinion about how much reliance users can place on the audit topic at hand.
20. reliance
the state of relying on something
EXAMPLE SENTENCE:
The client's trust in and reliance on KPMG paid dividends down the road.
III. Exercise: Match the Definitions
Use: accomplishment, current, evidence, opinion & procedure
1. ________________: your basis for belief or disbelief; knowledge on which to base belief
(evidence)
2. ________________: a personal belief or judgment that is not founded on proof or certainty
(opinion)
3. ________________: to gain with effort
(accomplish)
4. __________________: a particular course of action intended to achieve a result
(procedure)
5. ________________: occurring in or belonging to the present time
(current)
IV. Exercise: Fill in the Gaps/Blanks
Use the following words: assertion, delivery, goal, judgment, obligation, responsibility, substantiate & vary
1. It’s your to realize when GAAP aren’t being
uniformly applied and to inform the client of that fact so it can correct the error.
(responsibility)
2. For example, if the client records a sale of $5,000, you make sure a
_____________________ of a good or service to a real-live customer actually happened.
(delivery)
3. It is the company's ___________________ to provide the government with five years' worth of accounting records.
(obligation)
4. The ________________ of a financial statement audit is for the auditor to
form an opinion regarding whether those statements are or aren’t free from error.
(goal)
5. When questioned, the company _______________ its claims with 3,500 pages of documents.
(substantiate)
6. It was the company's ____________________ that the assets in question where indeed real.
(assertion)
7. Although every company is different, and each audit you work on will ________________, you can follow some common procedures.
(vary)
8. To do so, you use your best professional _________________ when assessing your client’s information and assertions.
(judgment)
V. Exercise: Match the Picture
Use: delivery, error, independent, inventory & management
_______________________
(management)
__________________________
(independent)
________________________
(delivery)
__________________________
(inventory)
___________________
(error)
VI. Listening: What Does an Auditor Do?
The Difference Between Accountants and Auditors
http://www.youtube.com/watch?v=kjlvq_1ahXs
(1:39)
Accountants and Auditors
http://www.youtube.com/watch?v=ww5d2yvmJOQ&feature=related
(1:09)
Career: Auditor
http://www.youtube.com/watch?v=nBqCyMBETN4&feature=related
(1:42)
VII. Just for Fun
Monty Python – The Audit
http://www.youtube.com/watch?v=mkAfl2RmAZc
(2:38)
The Fun Audit
http://www.youtube.com/watch?v=9WwoUzgSyvY
(1:46)
