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The Integrated Audit Process

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Auditing, Assurance Services, and Forensics

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Abstract

In an integrated audit of internal control over financial reporting and the financial statements, the auditor should design his or her testing of controls to accomplish the objectives of both audits simultaneously. The auditor’s evaluation of entity-level controls can result in increasing or decreasing the testing that the auditor otherwise would have performed on other controls. The purpose of the audit of a company’s financial documents is to determine whether the financial statements are recorded and reported in accordance with the applicable financial reporting framework.

PCAOB Standard No. 5.

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Notes

  1. 1.

    The GAAP do not apply to local, state, or federal government entities.

  2. 2.

    Competence means the attainment and maintenance of a level of understanding and knowledge that enables that person to perform ably the tasks assigned to them. To assess competence, the auditor should evaluate factors about the person’s qualifications and ability to perform the work the auditor plans to use.

  3. 3.

    Objectivity means the ability to perform those tasks impartially and with intellectual honesty. To assess objectivity, the auditor should evaluate whether factors are present that either inhibit or promote a person’s ability to perform with the necessary degree of objectivity the work the auditor plans to use.

  4. 4.

    As part of evaluating the period-end financial reporting process, the auditor should assess:

    • Inputs, procedures performed, and outputs of the processes the company uses to produce its annual and quarterly financial statements;

    • The extent of information technology (“IT”) involvement in the period-end financial reporting process;

    • Who participates in management;

    • The locations involved in the period-end financial reporting process;

    • The types of adjusting and consolidating entries; and

  5. 5.

    Risk factors relevant to the identification of significant accounts and disclosures and their relevant assertions include:

    • Size and composition of the account;

    • Susceptibility to misstatement due to errors or fraud;

    • Volume of activity, complexity, and homogeneity of the individual transactions processed through the account or reflected in the disclosure;

    • Nature of the account or disclosure;

    • Accounting and reporting complexities associated with the account or disclosure;

    • Exposure to losses in the account;

    • Possibility of significant contingent liabilities arising from the activities reflected in the account or disclosure;

    • Existence of related party transactions in the account; and

    • Changes from the prior period in account or disclosure characteristics.

  6. 6.

    SAS no. 122. Effective for audits of financial statements for periods ending on or after December 15, 2012.

  7. 7.

    Ray Whittington (2012): Principles of Auditing & Other Assurances Services, McGraw Hill, 18 Edition, p. 47.

  8. 8.

    AU Section 341 does not apply to an audit of financial statements based on the assumption of liquidation.

Author information

Authors and Affiliations

  1. School of Business, Central Connecticut State University, New Britain, CT, USA

    Felix I. Lessambo

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  1. Felix I. Lessambo
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Correspondence to Felix I. Lessambo .

Practice

Practice

Question 1

Frazier LLC is an audit firm. In 2017, Frazier audited the financial statements of Charlie Corp. (FY 2017). At the closing of the audit, two issues remained pending: (i) Charlie Corp. has changed its inventory method in the midst of the fiscal year, and (ii) the management of Charlie Corp. refused to disclose the method used to value their financial investments. Under these circumstances, what type of audit opinion shall Frazier LLC express?

  1. (a)

    A qualified opinion with an Emphasis of Matter paragraph

  2. (b)

    An unqualified opinion

  3. (c)

    A disclaimer

  4. (d)

    An unqualified opinion with an Emphasis of Matter paragraph Answer

Question 2

Soriano LLP is an audit firm based in Connecticut. Soriano has been hired to perform external audit for Rigolo Inc. At the closing of the audit, Soriano LLP found that there is a material inconsistency in the MD&A attached to the audited financial statements. The financial statements do not contain any mistake or misstatement. If the auditor concludes that the financial statements do not require revision, but requires that Rigolo Inc. eliminate the inconsistent paragraph in the MD&A. Rigolo Inc. refused do so. Under these circumstances, the auditor may:

  1. (a)

    Issue a qualified opinion after discussing the matter with the board of directors of Rigolo Inc.

  2. (b)

    Issue an unqualified opinion since the other information is not part of the audited financial statements

  3. (c)

    Revise the auditor’s report to include an emphasis of matter paragraph

  4. (d)

    Issue an unqualified opinion

Question 3

When the auditor includes an emphasis-of-matter paragraph in the auditor’s report, the auditor should do the following, except:

  1. (a)

    Include it immediately after the opinion paragraph in the auditor’s report

  2. (b)

    Use the heading “Emphasis of Matter” or other appropriate heading

  3. (c)

    Include in the paragraph a clear reference to the matter being emphasized and to where relevant disclosures that fully describe the matter can be found in the financial statements

  4. (d)

    Indicate that the auditor’s opinion is not modified with respect to the matter emphasized

  5. (e)

    Add it as a footnote to its core opinion

Question 4

  1. (a)

    The auditor can only add an “Emphasis of Matter Paragraph” if:

  2. (b)

    The matter has been appropriately presented or disclosed in the financial statements

  3. (c)

    In the auditor’s professional judgment, the matter is fundamental to users’ understanding of the financial statements

  4. (d)

    The auditor has obtained sufficient appropriate audit evidence that the matter is not materially misstated in the financial statements

  5. (e)

    The matter has not been appropriately presented or disclosed in the financial statements

Question 5

The following are circumstances when the auditor may consider it necessary to include an emphasis-of-matter paragraph, except:

  1. (a)

    An uncertainty relating to the future outcome of unusually important litigation or regulatory action

  2. (b)

    A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position

  3. (c)

    Significant transactions with related parties

  4. (d)

    Unusually important subsequent events

  5. (e)

    None

Question 6

If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements, the auditor should:

  1. (a)

    The auditor should do so in a paragraph in his/her report with the heading “Other Matter” or other appropriate heading

  2. (b)

    The auditor should include this paragraph immediately after the opinion paragraph and any emphasis-of-matter paragraph

  3. (c)

    The auditor should include this paragraph elsewhere in the auditor’s report if the content of the other-matter paragraph is relevant to the “Other Reporting Responsibilities” section

  4. (d)

    The auditor should include it in the management report of audit

Question 7

The content of the other-matter paragraph does not include the following information, except:

  1. (a)

    Information required to be presented and disclosed in the financial statements

  2. (b)

    Information that the auditor is prohibited from providing by law, regulation, or other professional standards

  3. (c)

    Confidential information received through the audit process

  4. (d)

    Information required to be provided by management

Question 8

The auditor’s evaluation about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited is based on:

  1. (a)

    The auditor’s knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report

  2. (b)

    The auditor information obtained from the application of auditing procedures planned and performed to achieve audit objectives that are related to management’s assertions embodied in the financial statements being audited

  3. (c)

    The management assertions concerning its ability to maintain the firm for a foreseeable period of time

  4. (d)

    The auditor conclusion after assessing the management assertions that there is a substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time

Question 9

The following are factors that an auditor should consider in reaching the conclusion as to the ability of an entity to continue as a going concern, except:

  1. (a)

    Negative trends

  2. (b)

    Default on loan or similar agreements

  3. (c)

    Substantial dependence on the success of a particular project

  4. (d)

    Legal proceedings, legislation, or similar matters that might jeopardize an entity’s ability to operate

  5. (e)

    None

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Lessambo, F.I. (2018). The Integrated Audit Process. In: Auditing, Assurance Services, and Forensics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-90521-1_19

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  • DOI: https://doi.org/10.1007/978-3-319-90521-1_19

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  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-319-90520-4

  • Online ISBN: 978-3-319-90521-1

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