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AUD > 8 - II: Planning activities > Flashcards

8 - II: Planning activities Flashcards

1
Q

What are two elements of a firm’s control system under AICPA’s SQCS (stmt on quality control stds) that apply for pre-engagement?

A

Acceptance and continuance of clients and engagements.

Relevant ethical requirements (emphasis on independence).

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2
Q

Term of engagement: What is the objective?

A

To accept an audit for a new or existing audit client only when: the “preconditions” for an audit are established and the auditor, management (charged w/governance) have a common understanding of the terms.

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3
Q

How is the objective of the term of engagement established?

A

By the required audit engagement letter in writing.

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4
Q

What are two keys for “preconditions”?

A

The use by management of an acceptable financial reporting framework in preparation of F/S.
Agreement of management to the premise on which an audit is conducted.

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5
Q

Where does this “premise” come from?

A

Principle framework of audit std set by AICPA:
“An audit in accordance w/ GAAS is conducted on the premise that management have responsibility for the preparation/fair presentation of F/S.”
“To provide the auditor all info relevant (and unrestricted access)”

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6
Q

What are auditor’s responsibilities?

A

To determine the framework adapted by management is acceptable.
Obtain management’s agreement regarding responsibility for: (1) preparation and fair presentation of the F/S, (2) design, implementation, and maintenance of I/C related to F/S, (3) provide the auditor access to all relevant info/unrestricted access.

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7
Q

Should the auditor request that management authorizes the predecessor to respond to auditor’s inquiries? Is the word “predecessor” and “successor” still used currently?

A

Yes.
Yes.
No.

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8
Q

What should the auditor do if the management refuses or limits the predecessor’s ability to respond?

A

Recognize the risk involved being the auditor for the firm.

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9
Q

What are 5 matters that must be addressed with the predecessor?

A
  1. Info about integrity of management.
  2. Disagreements w/ management about accounting or auditing issues.
  3. Communications to those charged w/ governance about fraud/non-conpliance w/ laws or regulations.
  4. Any communications to management/charged w/governance about significant deficiencies in I/C.
  5. Predecessor’s understanding about reason for the change in auditors.
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10
Q

What does “initial audit” refer to?

A

The prior year F/S was audited by a different auditor

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11
Q

What is the acceptable method of communication between the auditor and predecessor?

A

Oral or written.

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12
Q

What are reasonable basis for a change in the engagement terms?

A

Change in circumstances.

Misunderstanding.

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13
Q

Who should the engagement letter be addressed to?

A

Whoever engaged the CPA firm.

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14
Q

Can the auditor be permitted to review the predecessor’s working papers?

A

Yes.

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15
Q

When must the prospective client’s signature on the engagement letter be obtained?

A

Before or after

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16
Q

What are 7 items refer to in an engagement letter?

A
  1. the objective of the audit.
  2. management responsibilities for the F/S, internal control over financial reporting, and for compliance with laws and regulations.
  3. availability of financial records.
  4. representation letter.
  5. auditor’s responsibilities.
  6. components of an audit.
  7. correction of misstatements.
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17
Q

Is “planning memo” a requirement?

A

No.

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18
Q

What are two basic planning responsibility?

A

Develop over all “audit strategy”

Develop written “audit plan” (ex: consideration of the entity and its environment, including internal control)

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19
Q

What are 3 different types of audit procedures?

A
  1. Risk assessment procedures.
  2. Test of control
  3. Substantive procedures.
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20
Q

What are other planning considerations?

A

Determine the need for specialized skills.

Communication w/ those charged w/ governance.

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21
Q

What are 3 audit documentation requirements?

A

The overall audit strategy.
The audit plan.
Any significant changes made to those.

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22
Q

What is the definition of materiality?

A

The magnitude of an omission or misstatement of accounting info that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the info would have been changed or influenced by the omission or misstatement.

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23
Q

What does determination of materiality involve?

A

Quantitative and qualitative judgment.

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24
Q

What should an audit planning focus under clarified auditing stds?

A 
Performance materiality.
The amount(s) set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole; if applicable, it is also the amount(s) set by the auditor at less than the materiality level(s) for particular classes of transactions, account balances, or disclosures.
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25
Q

What is tolerable misstatement?

A

The application of performance materiality to a particular sampling procedure.

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26
Q

What are 4 matters that should be documented re: materiality?

A
  1. Materiality for the financial statements as a whole
  2. Materiality level(s) for particular classes of transactions, account balances, or disclosures, as applicable
  3. Performance materiality (something less than materiality)
  4. Any revision of those considerations during the audit engagement
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27
Q

What is audit risk?

A

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

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28
Q

What are 2 functions of audit risk?

A

the risks of material misstatement and detection risk

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29
Q

What is the auditor’s basic responsibility?

A

Plan and perform the audit to obtain reasonable assurance (high, but not absolute) that material misstatements, whether caused by fraud or error, are detected.

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30
Q

What level is audit risk model applicable to?

A

At individual audit level. NOT F/S level.

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31
Q

What is audit risk model formula?

A

AR=IR(inherent risk) x CR(control risk) x DR (detection risk: related to auditor’s substantive audit procedures).

32
Q

What is inherent risk?

A

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures

33
Q

What is control risk?

A

The probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls that are applicable

34
Q

What is detection risk?

A

The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditor’s substantive audit procedures

35
Q

Who is responsible for IR, CR, DR?

A

Management: IR, CR.
Auditor: DR.

36
Q

What is RMM?

A

Risk of material misstatement: IR and CR.

37
Q

Can IR, CR, DR be assessed in non-quantitative way?

A

Yes.

38
Q

What are 2 component of DR?

A

TD (test of detail risk) x AP (substantive analytical procedures risk).

39
Q

What is analytical procedures (test of reasonableness)?

A

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data

40
Q

What are 3 broad purposes the analytical procedures used for?

A

Required in planning for risk assessment.
Useful as a substantive procedure (not required).
Required as a final review.

41
Q

Plausible relationships: What kind of stmt would present most likely trend of being predictable?

A

Income stmt.

42
Q

What are 4 factors that determine the effectiveness/efficiency of analytical procedures?

A

(1) the nature of the assertion, (2) the plausibility and predictability of the relationship, (3) the availability and reliability of the data used to develop the expectation, and (4) the precision of the expectation.

43
Q

What are 2 types of F/S related fraud?

A

From fraudulent financial reporting.

From misappropriation of assets.

44
Q

What are the 3 risk factors of fraud triangle?

A

Opportunities. Incentives/Pressure/. Attitudes/Rationalizations.

45
Q

What are procedures that could address management override of internal control?

A

Examine adjusting JEs.
Especially non-std entries.
Especially those near the end of the year.
Evaluate estimates for bias (perform retrospective review).
Examine authorization for unusual transactions.

46
Q

What are 3 responses to the risk of material misstatements due to fraud?

A

(1) assigning personnel with particular skills relating to the area and considering the necessary extent of supervision to the audit, (2) increasing the consideration of management’s selection and application of accounting principles, and (3) making audit procedures less predictable.

47
Q

What are 3 steps the auditor should take if the misstatement may be a result of fraud.

A

Discuss w/ appropriate level of management.
Consider implications to management integrity/audit.
Gather additional evidence as to the fact.

48
Q

What are 7 matter that are required to be documented regarding fraud?

A
  1. Discussion among engagement personnel.
  2. Procedures performed as a basis for assessing risk of material fraud.
  3. Specific risk of fraud identified (and the auditor’s response).
  4. Basis for auditor’s conclusion if improper revenue recognition is not identified as a fraud risk.
  5. Results of procedures performed to address risk of management override of internal control.
  6. Other conditions/analytics that caused the auditor to perform additional procedures.
  7. Nature of communication to management, those charged w/ governance, and/or others.
49
Q

Who must the auditor communicate with when senior management is involved or when the misstatement is material?

A

Those charged with governance.

50
Q

Who must the auditor communicate with when the misstatement is not material?

A

Appropriate level of management (at least one level above where the fraud is suspected).

51
Q

What are the 4 situations the auditor is allowed to communicate with outside authorities?

A
  1. When a valid subpoena has been issued.
  2. Must comply w/ SEC (ex: auditor change).
  3. When authorized to communicate with the successor auditor.
  4. As required by Government Auditing Stds.
52
Q

What action should the auditor take regarding illegal acts?

A

Inquire of management about compliance w/ laws and regulations and document in management representation letter.

53
Q

What is legal and regulatory framework?

A

The auditor’s responsibility to consider laws and regulations applicable to F/S audit.

54
Q

What are 2 categories of illegal acts?

A

Direct and indirect.

55
Q

What is the auditor’s responsibility regarding indirect effect?

A

Inquiry of management (and those charged w/ governance).

Inspect correspondence w/ relevant authorities, including regulators.

56
Q

What should the auditor do when noncompliance is identified or suspected?

A

Gather additional evidence to ascertain the facts.
Discuss matter w/ appropriate level of management and those charged w/ governance.
Consider consulting w/ auditor’s attorney.
Evaluate the implications to other audit areas.

57
Q

Who must the auditor report the noncompliance or suspect to?

A

Those charged with governance unless clearly inconsequential.

58
Q

How should the auditor report on F/S when noncompliance or suspect is present?

A

If material effect has not been adjusted - issue a qualified or adverse opinion.
If unable to obtain sufficient appropriate audit evidence - issue a qualified opinion or disclaimer of opinion.

59
Q

When the auditor discovers an illegal act that have material effect and the company refuses to take corrective actions, what should he/she do?

A

Must report to SEC within one business day.

60
Q

What is the definition of auditor’s specialists?

A

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence.

61
Q

What is the distinguish of specialists?

A

Internal and external.

62
Q

What are the examples of specialists?

A

actuaries, appraisers, gemologists, engineers, geologists, attorneys.

63
Q

What are the factors when selecting a specialist?

A

The professional credentials, reputation, any relationship the specialist has with the entity.

64
Q

Who is responsible for evaluating the adequacy of the specialist’s work?

A

The auditor.

65
Q

When should the auditor refer to the use of the specialist?

A

When issuing modified report.

66
Q

What is the definition of those charged with governance?

A

The person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity (encompasses the term “board of directors” or “audit committee” used elsewhere in the auditing standards).

67
Q

What kind of information must the auditor communicate to those charged with governance?

A

Significant and relevant.

68
Q

What are 4 matters that the auditor should communicate to TCG?

A

Management responsibilities.
Auditor’s responsibilities under GAAS.
Planned scope and timing of the audit w/ emphasis on audit strategy (higher level).
Significant findings from the audit.

69
Q

What are the significant findings from the audit?

A
  • Significant issues discussed w/management in connection w/ the auditor’s retention or appointment.
  • Independence issues.
  • Qualitative aspect of accounting policies (quality info).
  • Significant difficulties encountered.
  • Disagreements w/ management over accounting and auditing issues (even if resolved).
  • Management consultations w/ other accountants.
  • Uncorrected misstatements identified.
70
Q

What are 4 objectives of communication under PCAOB?

A
  1. Communicate responsibilities/establish understanding.
  2. Obtain info relevant to the audit.
  3. Comunicate audit strategy and timing.
  4. Communicate significant audit matters.
71
Q

What is the definition of critical accounting estimate?

A

An accounting estimate where (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material.

72
Q

What is the definition of critical accounting policies and practices?

A

A company’s accounting policies and practices that are both most important to the portrayal of the company’s financial condition and results, and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

73
Q

PCAOB: What are matters to be communicated?

A

Appointment and retention: issues discussed w/ management. Establish an understanding of terms of audit.
Obtaining info and communicating strategy: Inquire about relevant matters. Communicate strategy/significant risks.
Results of audit.

74
Q

PCAOB: what are the results of audit that must be communicated? (12)

A
  1. Critical accounting policies estimates, unusual transactions.
  2. Evaluation of the quality of reporting.
  3. Auditor’s responsibility of other info.
  4. Difficult or contentious matters.
  5. Management’s consultation w/ other CPAs.
  6. Going concern issues.
  7. Corrected/uncorrected misstatements.
  8. Material written communications.
  9. Departures from usual report.
  10. Disagreements w/ management.
  11. Difficulties encountered.
  12. Other significant matters.
75
Q

PCAOB: What is the timing of communication?

A

Timely. Before the issuance of the auditor’s report.

AUD (24 decks)

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