A-3 Engagement Acceptance, Planning, and Risk Assessment Flashcards
To vouch is to test for what?
- Existence
- Support
- Occurrence
To trace is to test for what?
- Completeness
2. Coverage
What are the required contents of an engagement letter?
- Objective & Scope
- Responsibilities of auditor
- Responsibilities of management
- Statement regarding inherent limitations of audit and risk that some material misstatements may not be detected
- Identify applicable financial reporting framework
- Reference to expected form and content
Information to be communicated with the predecessor auditor includes what?
- Information on management integrity
- Disagreements with management
- Reason for change in auditor
- Communication of predecessor auditor to management/those charged with governance regarding fraud, noncompliance, and internal control
What is the engagement partner responsible for in an audit?
- Planning the audit
- Supervising the work of engagement team members
- Compliance with relevant auditing standards
What steps are included in developing the audit strategy?
- Overall audit strategy
- Scope of audit
- Reporting objectives, timing and required communication
- Factors determining focus of audit
- Materiality and tolerable misstatement
- Small entities
- Communication with those charged with governance
What are the six main financial statement assertions? (non PCAOB)
COVER U
- Completeness
- cutOff
- Valuation, allocation, and accuracy
- Existence and occurrence
- Rights and obligations
- Understandability and classification
What are the financial statement assertions for PCAOB standards?
CEO APROVED
- Completeness
- Existence
- Occurrence
- Allocation
- Presentation
- Rights
- Obligations
- Valuation
- E
- Disclosure
What is the formula for risk of material misstatement?
RMM = Inherent Risk x Control Risk
What is the formula for audit risk?
AR = RMM x Detection Risk
What are the three characteristics of fraud?
- Incentives/Pressure
- Opportunity
- Rationalization/Attitude
What are the two risks that are presumed to exist in every audit and should be addressed by the auditor in evaluating overall fraud risk?
- Improper revenue recognition
2. Management override of controls
The auditor is required to respond to the results of the fraud risk assessment on what three levels?
- Overall, general response
- Response encompassing specific audit procedures (“NET”)
- Response addressing risks related to management override
When does a duty to disclose fraud information to outside parties exist?
- To comply with legal and regulatory requirements
- To a successor auditor (with permission from client)
- In response to a subpoena
- To a funding agency or specified agency with requirements for entities that receive governmental financial assistance
- In some circumstances, authorities
What are the steps taken by the auditor to assess the risk of material misstatement and responding appropriately?
IM A CPA
- obtain understanding of entity environment, including Internal control.
- assess risks of Material misstatement (ID types of potential misstatement).
- respond to Assessed level of risk by designing further audit procedures based on this assessment.
- test internal Controls to evaluate their operating effectiveness.
- Perform substantive procedures.
- evaluate sufficiency and appropriateness of Audit evidence obtained.
What are the five components of internal control?
CRIME
- Control environment (tone at the top)
- Risk assessment
- Information and communication
- Monitoring
- Existing control activities (policies and procedures)
What are the seven factors of the control environment?
- Integrity and ethical values
- Commitment to competence
- Participation of those charged with governance
- Management’s philosophy and operating style
- Organizational structure
- Assignment of authority and responsibility
- Human resources policies and practices
What three circumstances would raise concerns regarding management’s philosophy and operating style?
- Management consumed with meeting the budget
- Management dominated by one person
3 Management compensation contingent upon the entity’s financial performance
What are control activities that exist in a strong internal control system?
PAID TIPS
- Prenumbering documents
- Authorization of transactions
- Independent checks
- Documentation
- Timely and appropriate performance reviews
- Information processing controls
- Physical controls for safeguarding assets
- Segregation of duties
What three duties should be segregated in internal controls?
ARC
- Authorization
- Record keeping
- Custody of related assets
What are the four types of documentation made by an auditor?
FIND
- Flowchart
- Internal control questionnaire or check list
- Narrative
- Documentation from the client, including copies of procedures manuals and organizational charts
What are the five functions that need to be segregated in an IT system?
COPAL
- Control group
- Operators
- Programmers
- Analyst (system)
- Librarian
What are the three elements of further audit procedures that can be varied by the auditor?
NET
- Nature
- Extent
- Timing
What is the audit evidence hierarchy? (More reliable to least reliable)
AEIOU
- Auditor knowledge
- External evidence
- Internal evidence
- Oral evidence
- U
What are the three substantive procedures?
- Dollar balances
- Analytical procedures
- Ratios
