Lesson 6: The Audit Process

Summary

This lesson offers an introductory overview of the audit process, using Lakeview Hotels as a case study. It emphasizes that while management prepares financial statements, auditors independently assess their fairness, gathering sufficient evidence to support every figure and disclosure. The process is streamlined through a risk-based approach, focusing on areas most prone to material misstatements that could sway user decisions, rather than examining every piece of evidence.

Takeaways

• 🏢 The client, Lakeview Hotels, is a small-cap public company with a portfolio of hotels, facing economic challenges and property age issues.
• 👔 Lakeview's management structure includes a seasoned CEO and a CFO with three years of tenure but no hotel industry background.
• 💼 Early and Youth Public Accountants are responsible for auditing Lakeview, focusing on the fairness of financial statement presentation.
• 📊 The audit's primary goal is to validate the accuracy of every number and disclosure in the financial statements, ensuring their validity and support.
• 💼 Management is responsible for preparing the financial statements, while auditors provide an independent opinion based on the evidence they gather.
• 📑 Evidence for financial statement assertions includes bank reconciliations, statements, confirmations, and physical cash counts.
• 🔍 Auditors use a risk-based approach, focusing on areas with the highest risk of material misstatement to ensure financial integrity.
• 📈 The term 'material misstatement' refers to errors significant enough to potentially alter a user's decisions based on the financial statements.
• 🔑 The audit process is iterative, with a continuous validation of financial statement items until all are supported by sufficient and appropriate evidence.
• 📚 The script hints at a deeper dive into these concepts in subsequent lessons, promising a more detailed exploration of audit procedures and risk assessment.

Q & A

What is the primary objective of an audit?

The primary objective of an audit is to express an independent opinion on the fairness of the presentation of financial statements prepared by management.

Who is responsible for the preparation of financial statements?

Management is responsible for the preparation of the financial statements, not the auditors.

What is the auditor's role in the audit process?

The auditor's role is to form an opinion based on the evaluation of the audit evidence they gather to ensure the validity and support of every number and disclosure within the financial statements.

What is the Statement of Financial Position also known as?

The Statement of Financial Position is also known as the Balance Sheet.

How much cash does Lakeview Hotels claim to have as of December 31st?

Lakeview Hotels claims to have $1.4 million of cash as of December 31st.

What types of evidence might an auditor request to support the cash amount stated by Lakeview Hotels?

An auditor might request a bank reconciliation, a bank statement, confirmation with the bank, or a physical cash count as evidence to support the stated cash amount.

What does the term 'sufficient appropriate audit evidence' refer to?

Sufficient appropriate audit evidence refers to the quantity and quality of evidence needed to support management's representations in the financial statements.

What is a 'risk-based approach' to auditing?

A risk-based approach to auditing involves identifying the areas with the greatest risks for material misstatements and focusing audit procedures to ensure these misstatements do not exist.

Why can't auditors practically examine every piece of evidence?

Examining every piece of evidence would be cost prohibitive and unnecessary for the users, so auditors use a risk-based approach to prioritize their efforts.

What is the significance of the term 'material' in the context of misstatements?

A 'material' misstatement refers to an error significant enough to change a user's decision when using the financial statements, indicating its importance in the context of the audit.

What is the background of Lakeview Hotels' CFO?

The CFO of Lakeview Hotels has been with the company for the past three years and does not have a background in the hotel industry.