A2 "QC, Engagement Acceptance, Planning, and IC" Flashcards
All CPA firms must adhere to a sound system of ___ no matter what level of service it provides.
quality control
What is the acronym to help remember the six interrelated elements of quality control?
HELP ME
What does HELP ME stand for? What is the acronym for?
“HELP ME” maintain quality control in my audit practice:
• HR - hiring competency, staffing, development, and advancement.
• Engagement acceptance & continuance - look for management integrity, evaluate audit firm’s capability of completing engagement, and consider potential conflicts of interest.
• Leadership responsibilities - “tone at the top” influences attitudes throughout firm
• Performance - (of the engagement) policies/procedures in place to ensure a good work, good supervision, and good reviews (people and engagements).
• Monitoring - such as second partner review and peer review
• Ethical requirements - independence, integrity, and objectivity (SOX)
= aka “wrap up review” where a partner otherwise not involved in the audit reviews the audit documentation before the report can be issued.
- Required by SOX for every public company audit report.
second partner review
= when one CPA firm reviews another CPA firm’s compliance with its quality control system
(make sure they have developed adequate policies/procedures and actually using them).
- Required every 3 years (minimum)
peer review
= ongoing consideration and evaluation of design and effectiveness of your quality control system.
- Partners bear the this responsibility
monitoring
The nature and extent of a firm’s quality control policies and procedures will vary based on its…
size, structure, complexity, and cost-benefit considerations.
You must understand the difference between _____ (which apply to all the professional activities of a firm’s practice) and ____ (which apply to individual audit engagements). These are not synonymous terms
quality control standards
generally accepted auditing standards
(Failed quality control ≠ Failed GAAP or GAAS)
All work performed on the audit should be reviewed by the ___ or have some of the review responsibility delegated to other members of the audit team with the ___ having final responsibility for the audit.
partner
auditor’s implement quality control procedures to provide reasonable assurance that…
- ) audits comply with professional standards and
- ) audits comply with legal/regulatory requirements
- ) audit reports are appropriate
[standards, laws, quality]
Although the engagement ___ is responsible for the overall quality of the engagement, he or she may delegate responsibility for certain procedures to other members of the engagement team.
partner
Who can perform engagement quality control reviews?
partner, another internal or external party, or a team of such individuals (unaffiliated with the engagement) if required by the firm’s policies and procedures.
> only performed when required by the firm’s policy and procedures
needs to be completed BEFORE the partner releases the audit report!
includes:
- discussion of significant findings
- reading the FS
- review of audit documentation
- eval of conclusions
quality control review
TorF: PCAOB requires all audits of issuers to have an engagement quality review and concurring approval of audit report issuance
True
Note: For nonissuers. quality reviews are required by firm policy, while for issuers, quality reviews are required by the PCAOB.
what serves as the primary record of the work performed and provides support for the audit opinion rendered on the financial statements?
audit documentation
What is audit documentation supposed to support?
OUR work and OUR opinion.
Not the client’s financials - THIER records support THEIR financials.
The purpose of ___ is to provide evidence supporting the basis for conclusions reached in the audit report and achievement of the auditor’s overall audit objectives, and to provide evidence that the audit was conducted in accordance with GAAS and applicable legal and regulatory requirements.
audit documentation
Who does audit documentation belong to?
the auditor
however, the auditor may not disclose workpapers without client permission or court order
Audit documentation should be detailed enough so that an experienced auditor, with no previous affiliation with the audit, can understand…
a. the NET of audit procedures performed;
b. the audit results and evidence obtained;
c. any significant findings or issues
d. the conclusions reached
[procedures, results, conclusion, issues]
Audit documentation should ___ their accounting records support their FS.
verify
AD should show that accounting records reconcile with the FS
- provide record of accumulated evidence, showing the procedures performed, evidence examined, and conclusions reached (TW)
- enable external quality control inspections
- assist successor auditors
- show who performed the work, who reviewed the work, and when
- include copies of significant contracts or agreements
the roles audit documentation plays
= the date on which the auditor grants the client permission to use the report.
(defines the beginning of the retention period too)
report release date
= the date by which final documentation must be assembled
documentation completion date
Note: Documentation must not be deleted after this date!
Ex. say you found a mistake and want to fix it - DONT
Any additions to the WP must be documented as such Ex. "The following notes were added after the release date..."
Nonissuers:
Documentation completion date = Report release date + __ days
60
Issuers:
Documentation completion date = Report release date + __ days
45
Documentation retention requirements:
• ___ years for audits of nonissuers.
• ___ years for audits of issuers.
Five
Seven
= includes audit documentation that has a continuing interest from year to year.
Ex. contracts, pension plans, leases, stock options, bylaws, articles of incorporation, meeting minutes, bond indentures and internal info.
- Carry forward from year to year
permanant file (continuous file)
= contains all audit documentation applicable (relevant) to the year under audit.
- See paperclip with list of whats generally included
current file
- audit plan
- FS and audit report
- TB, adjusting JEs, and reclassification entries
- Letters of representation
- Confirmations
- copies of entity documents (contracts, agreements, significant transactions)
- significant audit findings
- test of controls records
- substantive test records
current file contents
- matters related to the selection and application of acct principles (especially complex or unusual transactions/estimates/uncertainties)
- high risk issues
- possible MMs
- matters causing significant difficulty in applying audit procedures
- matters that might result in modification of the opinion or inclusion of an emphasis-of matter paragraph.
significant audit matters
= symbols indicating the work has been performed. Audit documentation should include a key explaining the tickmarks used.
tick marks
What are the 3 Types of Fraud?
- FS fraud (Lie)
- Asset misappropriation (Steal)
- Corruption (Cheat)
who is responsible the selection and appointment of the external auditor?
audit committee
The auditor should consider:
- firm’s quality control
- firm’s ability to meet reporting deadlines*
- ability to staff the engagement
- firm’s independence, the integrity, and whether to do a group audit
(*affected by factors like the timing and complexity of engagement and availability of staff)
pre-acceptance checklist
Before accepting an engagement, the auditor should make sure the following preconditions are met:
- FRF used by the client is acceptable
- obtain mngt agreement acknowledging their responsibilities (FS + IC +access to info)
The auditor should not accept an engagement if there will be a ___ imposed by management prior to engagement acceptance, that will result in the auditor ___ an opinion on the financial statements.
scope limitation
disclaiming
(note: a lack of records = scope limitation)
= agreement on audit engagement terms
- should be accepted (signed and dated) by client and included in audit documentation.
engagement letter
An ___ is a presumptively mandatory audit requirement.
The auditor must establish an understanding with the client regarding the services to be performed
engagement letter
Required Contents:
a. Objective and scope of the audit b. MR (mngt responsibility) c. AR (auditor's responsibility) d. Inherent risk statement* e. ID applicable FRF f. Reference the expected form and content of any reports (audit report)
engagement letter contents
Statement that due to inherent limits of an audit and IC, an unavoidable risk exists that some MM may not be detected (even though the audit is properly planned and performed in accordance with GAAS).
Inherent risk statement
required to be included in the engagement letter
For recurring audits, the auditor should assess whether circumstances require the terms of the engagement to be ___.
revised
What are examples of situations in which the engagement letter might need to be revised?
change in senior management
change in ownership
changed in nature or size of the business
change in legal or regulatory requirements
change in FRF
special engagement terms
indication that management misunderstands the objective of the audit
Is it mandatory for intital audit, that the auditor make inquiries of the predecessor auditor (with the client’s permission)?
Yes; inquiries such as
- whats mngt’s integrity like?
2 what disagreements did you have with mngt over acct principles, auditing procedures, etc. - whats your understanding of the reason for the change in auditors?
- communication to mngt and AC regarding fraud, noncompliance with laws, and IC matters?
You can also review the prior auditors workpapers too.
What happens if the client does not give permission to speak to the predecessor auditor?
That is a big scope limitation and the auditor should consider whether to accept the engagement.
During the course of an engagement, a client may ask the accountant to change an audit to a compilation or review, or a review to a compilation. Before agreeing to a change, what should the auditor consider?
[reason, effort, cost]
a. consider if there is an acceptable reason for a change
b. the effort required and estimated additional cost to complete the engagement
A client may ask the accountant to change an audit to a compilation or review, or a review to a compilation. What are acceptable reasons for change? What are unacceptable reasons for change?
acceptable reasons
- change in client requirement
- misunderstanding as to the nature of the service rendered
unacceptable reasons
- the engagement would uncover errors or fraud
- the client is attempting to create misleading or deceptive FS
What should the auditor do if the client:
- refuses to allow correspondence with legal counsel or
- refuses to provide a signed representation letter
consider withdrawing
An accountant is generally precluded from issuing a report when either of those things occur
What factors determine the nature and extent of planning?
size + complexity + auditors prior experience.
> less complex operations/processes, > fewer business lines, > more centralized accounting, and > more involvement of senior management in day-to-day = less extensive planning needed for the audit
What are the four main tasks during the planning stage of an audit
industry knowledge
audit strategy
audit plan
risk assessment
Who has primary responsibility for audit planning?
engagement partner
as well as supervision of ee and compliance with auditing standards
What helps to highlight practices unique to that industry that may affect the client’s FS and provides information regarding events and transactions that may impact the client’s FS?
Obtaining understanding / knowledge of the client’s industry
TorF: Auditors are required to have prior experience with a client’s business/industry before accepting the engagement.
False
The auditor is not required to have prior experience with a client’s business/industry before accepting the engagement. As long as they obtain an understanding of their industry after acceptance.
How do you gain knowledge about the clients business?
> Tour client facilities
Review client’s financial history
Understand the client’s accounting
Inquire client personnel
= outlines the scope of the audit engagement, the reporting objectives, timing of the audit, required communications, and the factors that determine the focus of the audit.
[scope, objectives, timing, communication, focus]
audit strategy
- basis of reporting, currency, locations.
- industry-specific or regulatory requirements
- size and complexity of the entity (parent-sub relationships)
- prior experience
- recent changes in the company
- type/extent of evidence on the IC
Characteristics defining scope (extent “NET”) of an audit:
What are matters to consider when determining the timing of an audit (T in NET)
- deadlines for interim/final reporting
- key dates for meetings with mngt
- timing of audit team communications/meetings/reviews
[deadlines, BOD meetings, reviews, communications]
- prelim evals of materiality, audit risk, and IC
- material locations and account balances
- areas of higher risk of MM
- significant acct changes
- significant developments
Factors that determine the focus (nature “NET”) of the audit:
___ IC = more interim work
___ IC = more YE work
Strong
Weak
= list of audit procedures. Is based on the audit strategy and outlines the nature, timing, and extent of the procedures to be performed during the audit. Including:
- risk assessment procedures
- planned further procedures (TOE and substantive procedures)
(a written one is required)
audit plan
= assess the risk of MM and determine the NET of further audit procedures.
risk assessment procedures
= or “test of controls”, auditors test IC in order to (a) understand them and (b) rely on them.
- We test their effectiveness at preventing or detecting MM.
test of operating effectiveness (TOE)
= Auditor tests account balances. Trying to confirm dollar $ balances.
substantive procedures
$ubstantive
Audit procedures can be categorized as either ___ procedures or___ procedures.
risk assessment
further audit
- completeness
- cutoff
- accuracy
- classification
- occurrence
transactions & events assertions
- completeness
- allocation & valuation
- rights & obligations
- existence
account balances assertions
- completeness
- understandability & classification
- rights & obligation
- valuation & accuracy
presentation and disclosure assertions
