[Anonymous]

Hey Guys,

I am studying for AUD right now and just finished A1 to A3 in Becker. I also have the Ninja notes that I plan to use once I am done with Becker to enforce the topics before my exam. I am trying to piece all of the details together to get a better understanding of the audit process. Could you please let me know if im on the right track/offer any corrections? I think this may benefit others who are currently studying, so sorry for such a long post.

Step 1: When CPA is faced with a potential engagement opportunity, the CPA firm must consider its own quality controls to see if they can handle the engagement.

Step 2: If so, the CPA will must learn about the industry and business of the client (not necessary to know this before accepting the engagement, but must learn about the client during/after accepting the engagement). The CPA must also determine the materiality level they are comfortable with (which is a combination of detected immaterial details and those that are not detected). The CPA does this by using analytical procedures when looking over prior financial statements/financial details.

Step 3: The CPA must then assess the level of risk of material misstatement. (Inherent Risk and Control Risk). This will determine the level of Detection Risk and the Nature, Extent and Timing of the audit. To do this, the CPA must learn about its clients internal control environment by running various Test of Controls on those internal controls that are important to the overall daily operations of the client. This will indicate if the controls are operating effectively. If so, the CPA may choose to lower the number of Substantive Tests (Test of Details / Analytical Procedures) they will run since they are comfortable with the lower assessment of Control/Inherent Risk. If the internal controls are weak, the CPA will increase the number of Test of Controls, or even eliminate it due to time constraints and increase the number of Substantive Tests (Test of Details / Analytical Procedures). The Substantive Tests are used to test the assertions made by Management at the transaction, account balance and disclosure level.

This is what I have so far. Any thoughts?

[FearTheBeard]

Yes — you wrote too damn much. No way in hell I'ma read that. But you seem like a reasonably smart dude/chick, having passed 3 sections of the exam, so I'ma say it's a wonderful summary of the audit process. Tim Gearty would be proud.

[jenuno01]

Lol

Class of 2012

[Mjs157]

Expand a tad on the materiality threshold in step 2. Like what percent of sales is typically allowable as an aggregate number( eg. % of sales, % of assets, etc.)? Individual account balances?

Overall, more than I could write down without looking at my notes.

[Anonymous]

@ Mjs157 – ok thanks – i dont think I got up to that point yet.. maybe ill edit this later on so others who are having the same issues as me can look at it.

I think what was confusing for me were the terms Test of Controls and Test of Details/Substantive Testing. I think I am getting those two mixed up…

[Anonymous]

. If the internal controls are weak, the CPA will increase the number of Test of Controls, or even eliminate it due to time constraints and increase the number of Substantive Tests (Test of Details / Analytical Procedures).

Did you mean the CPA will decrease the number of tests of controls?

The CPA will not increase the test of controls if they're determined to be weak. Going in, you think “Their controls are garbage.” You're not going to waste time testing that garbage. You're going to go with more tests of details.

Right?

[Anonymous]

Yes thank you for pointing that out. I will make the edit now to avoid any confusion. [update: I cant seem to edit my original post – sorry]

Is there any circumstance where you would actually test more controls if you determine the client internal control system is weak? An auditor would probably not want to waste their time.

[runhomejack]

Hey, just wondering if you finished this little writeup of yours and if you are willing to post it. It's really good

BEC - Pass
FAR - Pass
REG - Pass
AUD - Pass

[Author]

Replies