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Audit > A2 - Engagement Quality and Acceptance, Planning, and Internal Control > Flashcards

A2 - Engagement Quality and Acceptance, Planning, and Internal Control Flashcards

1
Q

A2,M1 - Engagement Acceptance and Terms

Who are those “Charged with Governance”

A

Those who bear the responsibility of overseeing the obligations and strategic direction of an entity

Typically, the Board of Directors and Audit Committee

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2
Q

A2,M1 - Engagement Acceptance and Terms

What is an audit committee? What is their purpose?

A

An audit committee is an independent group outside the board of directors.

They serve as a direct form of communication between the outside directors and the independent auditor

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3
Q

A2,M1 - Engagement Acceptance and Terms

What are the pre-conditions for accepting a proposed engagement?

A
  • Entity using an applicable financial reporting framework
  • Entity having management responsibilities
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4
Q

A2,M1 - Engagement Acceptance and Terms

In the case where there is a management-imposed scope limitation, what should the auditor do?

A
  1. Not accept the engagement
  2. Consider accepting only if limitation is beyond management’s control
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5
Q

A2,M1 - Engagement Acceptance and Terms

What’s the contents of a typical engagement letter?

A
  • Objective and scope of the audit
  • Responsibiliites of the auditor
  • Responsibiliites of management
  • Inherent limitations
  • Identification of applicable financial reporting framework
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6
Q

A2,M1 - Engagement Acceptance and Terms

True or False: With recurring audits, management is allowed to use the same engagement letter

A

True, only if nothing has changed. If revision is not needed, then auditor should remind management about previous agreement.

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7
Q

A2,M1 - Engagement Acceptance and Terms

When is a change in scope (audit ->review/compilation) not allowed?

A
  1. When client refuses to allow correspondence w/legal counsel
  2. Client refuses to provide representation letter
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8
Q

A2,M2 - Engagement Quality

What are the Elements of Quality Control?

Hint: “HELP ME”

A
  • Human Resources
  • Engagement/Client Acceptance and continuance
  • Leadership Responsibilities
  • Performance
  • Monitoring
  • Ethical Requirements
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9
Q

A2,M2 - Engagement Quality

What’s the difference between GAAS and QC?

A

GAAS focuses on the conduct of the individual audit

QC incorporates all professional activities of the entity

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10
Q

A2,M3 - Documentation

What are “working papers”/”work papers”?

A

The principal record of audit procedures performed, evidence obtained, and conclusions reached

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11
Q

A2,M3 - Documentation

What are the document retention requirements for issuers and non-issuers?

A

Issuers (PCAOB requirements): at least 7 years from the report release date

Non-Issuers (SAS Requirements): at least 5 years from the report release date

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12
Q

A2,M3 - Documentation

What is the final document completion date for issuers and non-issuers?

A

Non-Issuers: 60 days past the report release date

Issuers: 14 days following report release date, along w/an engagement completion document

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13
Q

A2,M3 - Documentation

Give examples of the type of content included in the permanent file of audit documentation.

A
  • Pension plans
  • Contracts
  • Leases
  • Articles of incorporation, etc
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14
Q

A2,M3 - Documentation

Give examples of the type of content included in the current file of audit documentation.

A
  • Audit Plan
  • Financial statements and audit report
  • Trial balance
  • Letters of representation
  • Letters of confirmation
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15
Q

A2,M4 - COSO Internal Control Framework

What are the objectives of COSO’s internal control framework?

A
  1. Reliability of financial reporting
  2. Effectiveness and efficiency of operations
  3. Coompliance w/applicable laws and regulations
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16
Q

A2,M4 - COSO Internal Control Framework

What are the components of the COSO Framework?

*Hint: CRIME

A
  1. Control Environment
  2. Risk Assessment
  3. Intervention and Communication
  4. Monitoring Activities
  5. Existing Control Activities
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17
Q

A2,M4 - COSO Internal Control Framework

What are the control activities relevant to an audit

*Hint: PAID TIPS

A
  • Pre-numbering of documents
  • Authorization & approval of transactions
  • Independent checks to maintain asset accountability
  • Documentation
  • Timely and appropriate financial performance reviews
  • Information processing controls
  • Physical or logical controls for safeguarding assets
  • Segregation of duties
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18
Q

A2,M4 - COSO Internal Control Framework

What are the 3 components of Segregation of Duties

*Hint: ARC

A
  • Authorization of Tasks
  • Reporting transactions
  • Custody of Related Assets
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19
Q

A2,M5 - Planning

What are the 4 main requirements during the planning phase of an audit?

A
  1. Obtain knowledge of the client’s business & industry
  2. Develop audit strategy
  3. Develop the audit plan
  4. Perform risk assessment and procedures
20
Q

A2,M5 - Planning

True or False: Knowledge of the client’s industry is required before accepting an engagement

A

False: Prior experience is not required before an engagement. However, once an engagement is accepted, knowledge of industry is needed to plan the audit accordingly

21
Q

A2,M5 - Planning

What is outlined in the audit strategy?

A
  • Scope of the audit engagement
  • Reporting objectives
  • Timing of the audit
  • Required communications
  • Factors that determine the focus of the audit
22
Q

A2,M5 - Planning

What are risk assessment procedures?

A

Procedures used to obtain an understanding of the client’s internal control environment

23
Q

A2,M5 - Planning

Name the 2 types of risk assessment procedures

A
  • Test of controls - used when substantive procedures are insufficient
  • Substantive Procedures - Used to detect material misstatements
24
Q

A2,M5 - Planning

What are financial statements?

A

Financial statements are not statements of fact.

Financial statements are claims and assertions made by management about the recognition, measurement, presentation, and disclosure of information in the financials

25
Q

A2,M5 - Planning

What are the 6 main financial statement assertions?

A
  1. Completeness
  2. Cutoff
  3. Valuation, allocation, and accuracy
  4. Existence and Occurance
  5. Rights and Obligations
  6. Understandability of presentation and classification
26
Q

A2,M5 - Planning

Financial Statement Assertions: Define Completeness

A

All account balances, transactions, and disclosures should have been recorded and included in the financials

27
Q

A2,M5 - Planning

Financial Statement Assertions: Define Cuttoff

A

Transactions have been recorded in the proper accounting period

28
Q

A2,M5 - Planning

Financial Statement Assertions: Define Valuation, Allocation, & Accuracy

A

Accounting balances, transactions, & disclosures are recorded & fairly described and measured at appropriate amounts

29
Q

A2,M5 - Planning

Financial Statement Assertions: Define Existence and Occurance

A

Account balances exist & transactions recorded actually occured

30
Q

A2,M5 - Planning

Financial Statement Assertions: Define Rights and Obligations

A

Entity holds/controls the rights to assets; liabilities are the obligations of the entity

31
Q

A2,M5 - Planning

Financial Statement Assertions: Define Understandibility of Presentation and Classification

A

Transactions have been recorded in proper accounts and appropriately aggregated or disaggregated

32
Q

A2,M5 - Planning

True or False: A written audit plan is required for every audit

33
Q

A2, M6 - Using the Work of Others

What can/can’t the client’s internal auditors do?

A
  • They can aid in exploring internal controles, assessing risk, and performing substantive procedures
  • They cannot aid in giving an opinon or the other activities related to the auditor’s own
34
Q

A2,M7 - Materiality

What is Performance Materiality (Issuers) /Tolerable Misstatement (Non-Issuers)?

A

The maximum error in a population that the auditor is willing to accept

35
Q

A2,M7 - Materiality

True or False: Total Materiality should be greater than performance materiality

36
Q

A2,M8 - Audit Risk

What is audit risk?

A

The risk that the auditor may unknowingly fail to appropriately modify the opinon on financials that are materially misstated

37
Q

A2,M8 - Audit Risk

Name the 3 types of misstatements

A

Factual - no doubt about mistatement
Judgemental - Differences arising from judgement of management
Projected - Auditor’s best estimate of misstatements in populations

38
Q

A2,M8 - Audit Risk

What is the audit risk model

hint: AR =

A

Audit Risk = Risk of Material Misstatement x Detection Risk

Audit Risk = (Inherent Risk x Control Risk) x Detection Risk

RMM = Inherent Risk x Control Risk

39
Q

A2,M8 - Audit Risk

What are the 2 sub categories of RMM?

A

Inherent Risk and Control Risk

40
Q

A2,M8 - Audit Risk

What are some items that are typically of high inherent risk? (name at least 3)

A
  • High volume, unique or specific transactions
  • Complex or subjective calculations
  • Amounts derived from estimates
  • Cash
  • Decline in overall industry
  • Lack of working capital
  • Technology that renders a product obselete
41
Q

A2,M8 - Audit Risk

What are some items that are typically of high control risk? (name at least 3)

A
  • No effective controls related to specific assumptions
  • implemented controls are not operating effectively
  • Risk for particular assertion may be addressed by perfomring only substantitive procedures
42
Q

A2,M8 - Audit Risk

What is inherent risk?

A

The susceptibility of a class of transactions, account balances or disclosues to material misstatements before considering related controls

43
Q

A2,M8 - Audit Risk

What is control risk?

A

The risk that a material misstatement could occur in an assertion that could not be prevented or detected by the system’s internal controls

44
Q

A2,M8 - Audit Risk

What is detection risk?

A

The risk that an auditor will not detect a material misstatement in an assertion

45
Q

A2,M8 - Audit Risk

What is the relationship between RMM and Detection Risk?

A

Inverse;

When RMM increases, Detection Risk (allowed) should decrease

visa versa

46
Q

A2,M9 - Fraud Risk

What are the 3 risk factors of fraud?

A
  • Incentives/Pressures
  • Opportunity
  • Rationalization/Attitude
47
Q

A2,M9 - Fraud Risk

What are the 2 types of fraud risk that presumptively exists in every audit?

A

Improper revenue recognition & Management Override of Controls

Audit (2 decks)

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