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Chapter 6  Important points about an integrated audit: 1.

Implement a top-down, risk based approach to identify significant accounts, relevant assertions and the risk of misstatement. 2. Reasonable possibility that a material misstatement could occur 3. Recognizes that the external auditor can rely on some of the companu;s evaluation and/or testing of controls, particulary work performed by a competent and independent internal audit function. 4. Emphasizes the need to document the auditor’s reasonin process 5. Increases audit efficiency by getting auditors to think through areas where they can place greater reliance on effective internal controls in reducing the amout of substantive tests of account balance The work is integrated to promote audit efficieny00 integrated because both the tests of control and the substantive tests of account balances provide evidence related to each other. Unqualified report contains the following elements o The internal control report is contained in the same report that contains the opinion on the financial statements o The auditor provides an opiion on the effectiveness of internal control in the context of agreed-upon criteria o Recognizes and conveys to users that there are limitations of internal control. Adverse report is issued when the auditor finds one or more material weaknesses in the client’s internal control over financial reporting. The challenge in an integrated audit is to find the most cost-effective manner in which to develop sufficient evidence to render an opinion in the financial statements and the effectiveness of a company’s internal control. Top-down risk based approach to an integrated audit requires auditors to focus on accounts, disclosures and assertions that have a reasonable possiblit of material misstatement to the financial statement and relate disclosure. Phase ! and II o Update information about various risks  The auditor should continually gather and update information on business risk including the identification of any fraud risk factors noted during preliminary audit planning.  Ultimately, the starting point of the integrated audit shoud be to understand:  The risks that the business faes in meeting its objectives  Incentive that may motivate management or other employees to misstate the financial statements  The isks inherenet in important business processes. o Consider the possibility of account misstatements

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The auditor should analyze the potenaial management motivations to misstate account balanes, as well as the existence of other fraud indicatos and determine the most lilely method for misstating account balances.  The area of accounting judments and estimates is almost always considered high risk. o Complete preliminary analytical procedures  The auditor is required to perform preliminary analytical procedures.  These procedures help the auditor to determine whether unexpected relationships exist in the accounts o Understand the client’s internal controls  The auditor will develop an understanding of the client’s internal ocntrosl that are deisgned to address the risk identified in the three previous steps, including relevant entity-level controls and fraud0related controls.  The amount of wok performed by the independent auditor is dependent on the design, thoroughness and independence of management’s assessment process. Phase III and IV o Identify controls to test  The auditor determines the important ontrols that need to be tested for the purposes of  Formulating an opinion on the entity’s internal controls  Forming a bsis for desgning substantive tests of account balances  Overall, risks associated with significant accounts, disclosures and their relevant assertions should lead to the identification of important controls that need to be tested.  The auditor needs to explicitly link controls and assertions when determining which controls to select for testin. o Make a plan to test the controls and execute that plan  For non-integrated audits, the auditor can choose to not test controls, but the auditor must determine where material misstatement could occur if controls are not present or may not be working.  In an integrated audit, the auditor has to understand and test controls that are important to preventing or detecting significant misstatements.  The auditor will test the design effectiveness of controls by determining whether the company’s controls, as designed and implemented, can effectively prevent o detect material misstatements in the financial statements.  Design effectiveness- inquiry, observation, inspection (walkthrough may be the most efficient way to evaluate design effectiveness)  Operating effectiveness- inquiry, observation, inspection and reporeformance. o Consider the results of control testing  If deficiencies are identified, assess those deficiencies to determine whether they are significant deficiencies or material weaknesses

If control deficiencies are identified assess whether the preliminary control risk assessment is still appropriate, determine the extent that cntrols can provide evidence on the correctness of account balances and determine planned substantive audit procedures. o Conduct substantive audit tests  The auditor plans substantive procedures based on the potential for misstatement and the information gathered about the effectiveness of internal controls Residual risk- the probability that the account balance might be misstated after processing and the application of internal controls.