Modern Auditing:

Assurance Services and the Integrity

of Financial Reporting, 8th Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 5 – Overview of the Financial Statement Audit

Chapter 5 Overview
Overview of the Audit Process
Overview of the Audit Process
(cont.)
 Phase I - Perform Risk
Assessment Procedures
• Identify Relevant Financial Statement
Assertions
– Existence or Occurrence

– Completeness

– Rights and Obligations

– Valuation or Allocation

– Presentation and Disclosure

 Phase I - Perform Risk
Assessment Procedures
• Understand the Entity and its
Environment
– Industry, Regulatory Environment, and Other
External Factors

– Nature of Entity, Including Accounting

Policies

– Objectives, Strategies, and Business Risks

– Management and Review of Financial

Performance
 Phase I - Perform Risk
Assessment Procedures
• Make Decisions About Materiality
– Based on professional judgment
– Guides auditor in evaluation

• Perform Preliminary Analytical

Procedures
– Study of plausible relationships
– Identification of potential
misstatements
 Phase I - Perform Risk
Assessment Procedures
• Identify Risks – Audit Risk Model
 Phase I - Perform Risk
Assessment Procedures
• Identify Risk – Risk of Fraud
 Phase I - Perform Risk
Assessment Procedures
• Develop Preliminary Audit
Strategies

• Understand Internal Control

– Identify types of potential
misstatements
– Consider factors that affect risk of
material misstatement
– Design audit procedures
 Phase II – Assess the Risk of
Material Misstatement
• Relate Risk to Potential Misstatements
– Assertion Level Risks
– Financial Statement Level Risks

• Determining the Magnitude of Potential

Misstatements

• Considering the Likelihood of Material

Misstatements

• Significant Inherent Risks

 Phase III – Respond to Assessed
Risks
• Staffing and Supervision

• Nature of Audit Tests

– Risk Assessment Procedures
– Tests of Control
– Substantive Tests
 Substantive Tests
• Initial Procedures

• Substantive Analytic Procedures

• Tests of Details of Transactions

• Tests of Details of Balances

• Tests of Details of Accounting Estimates

• Tests of Details of Disclosures

 Phase III – Respond to Assessed
Risks
• Timing of Audit Tests

• Extent of Audit Tests

• Responding to Significant Inherent

Risks
Phase IV – Perform Further Audit
Procedures
• Further Risk Assessment Procedures

• Tests of Controls

• Substantive Tests
 Phase V – Evaluate Evidence
• Reevaluate Risk Assessment
Procedures

• Determine the Significance of

Findings

• Form and Document Conclusions

 Phase VI – Communicate Audit
Findings
• The Auditor’s Opinion

• Other Required Communications

• Other Assurance Service Findings