10/7 Class

Question 1

reasons for planning

Answer 1

required by GAAS 
obtain sufficient evidence
reduce costs
avoid misunderstandings with client
staff communication
avoid lawsuits
develop a map

Question 2

audit risk

Answer 2

how willing the auditor is willing to accept the risk that the f/s are wrong
reduced by gathering evidence

Question 3

we aren’t going to use quantities

Answer 3

it will be assessed as a low medium or high, no calculations yes

Question 4

inherent risk

Answer 4

material mistatement without consideration of internal control
indicated by characteristics:
nature of industry
operating results sensitive to economic factors
going concern problems
large know & likely misstatements - prior audits

Question 5

initial audit planning

Answer 5

accept or continue
understand need for audit
engagement terms
staff and specialists

Question 6

client acceptance

Answer 6

continuing client assessment

new client investigation

Question 7

client evaluation

Answer 7

conclusion of audit
integrity of management
disagreements
business or industry risk
profitable

Question 8

obtaining a new engagement

Answer 8

pre-proposal investigation:
   major concerns
proposal:
   experience of professionals
   fee range
   quality of firm resources

Question 9

new client acceptance

Answer 9

reason for audit and/or change of auditor
investigate
   history of firm
   officers
   management
   prior auditor - SAS 84
Reputation (objectivity and integrity)
   officers
   directors
   major shareholders

Question 10

engagement letter

Answer 10

contract
confirm understanding of engagement
auditor's responsibility
management's responsibility 
timing
other services - tax
fees

Question 11

select staff

Answer 11

team
   partner
   manager
   senior
   staff
experience
   continuity
   business and industry
   specialists
planning meeting

Question 12

understand the client’s business & industry

Answer 12

auditor must understand client's :
   industry
   business
   strategy and issues
helps auditor assess
   inherent risk
   controls and processes
   explanations to analytic view

Question 13

understanding the client’s business & industry

Answer 13

methods and sources:
   board minutes
   historical financial data
   prior work papers
   trade magazines and news
   AICPA Industry Guides
   Internet research
   company homepages
   tour of plant
   meet employees 
   related parties

Question 14

audit planning

Answer 14

read legal documents
   corporate charter & bylaws
   minutes
   contracts & agreements
   stock option plans
   compensation & pension plans

Question 15

analytical procedures required

Answer 15

current period financials vs prior, industry, etc
required to plan the audit
understand internal controls
consideration of fraud
first year client
issues: they could have done something wrong
procedures: ….

Question 16

audit planning memo

Answer 16

contents:
description of company
audit of objectives
nature and extent of procedures
timing, scheduling of audit work
staffing requirements
target dates of completion
audit risks/issues - key audit areas of focus
materiality assessments
consideration of fraud

Question 17

materiality

Answer 17

preliminary judgment about materiality, has to be in documentation
max misstatement allowed
plan evidence accumulation
professional judgement required

Question 18

materiality tolerable misstatement

Answer 18

SAS 107 - allocated to specific account
allocate planning materiality 
   segments of the audit
   accounts to be tested 
   adjust for risk
plan specific procedures (sampling)
consider effect to assets vs liabilities

Question 19

materiality in testing

Answer 19

misstatements estimated / found
   projected error(sampling)
   actual error
compare to planning materiality
three options
   accept(misstatementplanning M)
   Dig    ...further(misstatement>planning M)

Question 20

audit risk model

Answer 20

determines the amount misstated
key components
   planned detection risk(PDR)
   acceptable audit risk(AAR)
   inherent risk(IR)
   control risk(CR)

Question 21

planned detection risk (PDR)

Answer 21

Accept audit risk (AAR)/(inherent risk(IR)*Control risk(CR))
Hi PDR less testing/evidence
Low PDR more testing/evidence

Question 22

acceptable audit risk (AAR)

Answer 22

IRCRPDR

Question 23

inherent risk

Answer 23

likelihood of material errors before internal controls
things that tell about this are
   complex calculations
   difficult accounting issues
   significant judgment
   susceptibility to misappropriation

Question 24

control risk

Answer 24

material misstatement not prevented or detected by internal controls
gain an understanding of IC

Question 25

problems to do

Answer 25

9-34 and 9-35

Question 26

obtain understanding of internal controls

Answer 26

required by GAAS

Question 27

types of audit tests

Answer 27

risk assessment procedures
test controls
substantive tests of transactions
analytic review
tests of detail of balances

Question 28

test of controls

Answer 28

procedures:
   inquiries
   inspection
   observation
   reperformance

Question 29

substantive tests

Answer 29

look for monetary misstatements
types: 
   tests of transactions
   analytical procedures
   tests of detail balances

Question 30

types of evidence pg 406

Answer 30

physical examination 
confirmation
inspection
observation
inquiries of client
reperformance/recalculation
analytical review