#3 Audit engagements

Question 1

Responsibilities of management and auditor

Answer 1

Management:
>Prepare financial statements
>Comply with laws and regulations
>Establish and monitor internal controls
>Provide auditor with relevant information

Auditor:
>Provide reasonable assurance
>Adhere to auditing standards
>Understand regulatory environment
>Assess internal controls

!!GAAS overall objectives of independent auditor is to form an opinion on the financial statement derived on sufficient and appropriate evidence. Opinion needs to express in the written audit report.

Question 2

Top-down approach to evaluating internal controls over financial reporting (ICFR)

Answer 2

Upside down pyramid chart:
1. Start at the top with risk assessment at financial statement level (ie entity-level controls)
2. Direct attention to significant classes of transactions, accounts, disclosures etc.
3. Evaluate operating effectiveness of key controls.

!! Integrated audit issue an opinion on financial statement and internal control.
!! Examining internal control by top-down approach:
>#1 Look at I/C at financial statement level (macro level) to understand overall the risk of material misstatement.
>#2 Hone in on significant classes (micro level) of transactions (eg inventory), accounts, disclosures to develop a plan to test on controls (TOC)
>#3 Perform test of controls and examine results.

!!First 2 steps are performed during the planning phase of engagement.

Question 3

Organizations governing CPA

Answer 3

*American Institute of Certified Public Accountants (AICPA):
Provides auditing standards, accounting education, and CPA exam

*State societies of certified public accountants:
Provide accounting education at the state level

*State boards of public accountancy:
License CPAs, enforce rules of conduct, set continuing education requirements

*Public Company Accounting Oversight Board (PCAOB):
Oversees CPAs who audit publicly traded companies

*National Association of State Boards of Accountancy(NASBA):
Oversees state boards of accountancy

*Internal Revenue Service (IRS):
Oversees CPAs who practice before the IRS

*Financial Accounting Standards Board(FASB):
Provides accounting standards and principles

Question 4

Engagements by level of assurance

Answer 4

Reasonable assurance:
*Audit
*Examination

Limited Assurance:
*Review

No Assurance:
*Compilation
*Preparation
*Agreed-upon procedures