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Auditing a Business

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How Stock Exchanges Work

After a company decides to go public, it has some important decisions to make about how to market its shares to the public: Should it register to sell the shares on a stock exchange? If so, which exchange [more…]

Post–Sarbanes-Oxley Act (SOX) Reports

Registration with the SEC is a milestone for companies going public, but it's only the beginning of the reporting relationship. After a company is registered as an issuer of securities, it's subject to [more…]

Prevent Loss with Internal Controls

The procedures and processes that a business uses to prevent cash losses from embezzlement, fraud, and other kinds of dishonesty go under the general term [more…]

The Dual Purpose of Internal Accounting Controls

Many internal accounting controls consist of forms to submit and procedures to follow in authorizing and executing transactions and operations. A business's accounting department records the financial [more…]

Accounting Fraud Committed by a Business

Fraud comes in two forms: fraud against a business and fraud by a business. The first type of fraud can be classified by who does it, and unfortunately, a business is vulnerable to all kinds of fraud attacks [more…]

Internal Controls Guidelines for Small Businesses

The lament of many small business owners/managers is, “We're too small for internal controls.” But even a relatively small business can enforce certain internal controls that are very effective. Here are [more…]

Limitations of Internal Accounting Controls

Managers need to maintain management control over internal controls and need ways of finding fraud that's not detected by the internal controls of the business. [more…]

Inherent Risk: Recognizing the Nature of a Client’s Business

One component of audit risk is inherent risk. The term refers to the likelihood that you’ll arrive at an inaccurate audit conclusion based on the nature of the client’s business. While assessing this level [more…]

Control Risk: Assessing a Client’s Ability to Detect and Correct Problems

Control risk is the risk that the company’s internal controls won’t prevent or detect mistakes. Company management is ultimately responsible for the financial statements. The internal controls set in place [more…]

Detection Risk: Figuring Out Your Chances of Overlooking Inaccuracies

Detection risk is the risk that you won’t detect material errors, whether they’re intentional or not. Detection risk occurs when you don’t perform the right audit procedures. [more…]

Risk Assessment: Recognizing the Nature of the Company

You can make some preliminary judgments about the nature of the company as part of your pre-planning activities (getting ready for your first meet-and-greet with the client). Checking out the company in [more…]

Risk Assessment: Examining the Quality of Company Management

Management sets the tone in any organization. Inept management that’s lackadaisical about following or enforcing company policies and procedures can be a big issue. Management’s attitude influences all [more…]

Risk Assessment: Asking Employees for Information

To effectively assess the risks associated with an audit client, you need to be assessing more than just the numbers. People run businesses, so talking to employees about the company is important. [more…]

Risk Assessment: Analyzing Processes and Paperwork

For this part of risk assessment, you use analytical procedures to evaluate audit risk. Put simply, analytical procedurestest to see whether plausible and expected relationships exist in both financial [more…]

Risk Assessment: Observing the Client at Work

One common type of observation is to watch the staff take a count of physical inventory. Visiting the company’s business locations is another. Doing so gives you the opportunity to view the company’s operations [more…]

How to Distinguish Errors from Fraud

When you find misstatements, you’re responsible for making a fraud-versus-error assessment. Errors aren’t deliberate; fraud is. Specifically, fraud is defined as willful intent to deceive. [more…]

What Is the Triangle of Fraud?

You’ll hear auditors referring to the triangle of fraud. That’s because in most fraudulent acts, three circumstances lead to the commission of fraud: the incentive to commit fraud, the opportunity to carry [more…]

Tailor the Audit to a Low-Risk Situation

After looking at major financial statement accounts or classes of transactions, if you decide the risk of material misstatement is relatively low, you design your audit procedures accordingly. Here are [more…]

How to Respond to a High-Risk Assessment

If an audit engagement is high-risk, you have to sit back, evaluate how the company does business, and think about how material misstatements may slip through the cracks. You then design a more extensive [more…]

Management Assertions: Financial Statement Presentation and Disclosure

The first category of management assertions is the financial statement presentation and disclosure. The financial statements (income statement, balance sheet, and statement of cash flows) and notes to [more…]

Management Assertions: Classes of Transactions

Transactions are day-to-day accounting events that happen within a company. For example, the company receives a bill from the telephone company and posts it to accounts payable — that's a transaction. [more…]

Management Assertions: Account Balances

This category of management assertions addresses the correctness of balance sheet account balances at year-end. These account balances include the company's assets, liabilities, and equity. Here's a refresher [more…]

The Nature of the Audit Evidence

The nature of audit evidence refers to the form of the evidence you're looking at during the audit. It should include all accounting documents and may include other available information, such as the minutes [more…]

The Competence of the Audit Evidence

Competence refers to the quality of the audit evidence, regardless of whether the evidence is written, oral, or observed. Written evidence includes the client's books, records, and other information such [more…]

The Sufficiency of the Audit Evidence

The sufficiency of audit evidence is the amount or quantity of audit evidence. You determine the amount of audit evidence you need by considering the risk of material misstatement and the overall quality [more…]

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