A2 - Quality Control, Engagement Acceptance, Planning, and Internal Control Flashcards
The elements of a CPA firm’s quality control are:
- Human resources
- Engagement/client acceptance & continuance
- Leadership responsibilities
- Performance of the engagement
- Monitoring
- Ethical requirements
When assigning personnel to an engagement, the firm should consider the following factors:
- Engagement size & complexity
- Personnel availability
- Special expertise required
- Timing of the work to be performed
- Continuity & periodic rotation of personnel
- Opportunities for on-the-job training
Maximum number of days in which an auditor should complete the assembly of the final audit file following the report release date:
- Nonissuer: 60 days
- Issuer: 45 days
Audit document retention (how long?):
- Nonissuer: 5 years
- Issuer: 7 years
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s:
- Working papers
- It is not appropriate for the auditor to request a review of the predecessor’s engagement letter
An auditor’s engagement letter should include:
- The objective and scope of the audit
- The responsibilities of the auditor
- The responsibilities of management (FS & IC)
- A statement that because of inherent limitations, material misstatements may not be detected
- Identification of the applicable financial reporting framework
- Expected form and content of any reports
- Arrangements for the timing of the audit
- Management will provide written representations
- Use of specialists
- Fees and billing arrangements
When an auditor is requested to change the engagement from an auditor to another report (i.e. compilation), the auditor must consider:
- The effort needed to complete the audit
- Cost of completing the audit
- The reasons for the client’s request
If management disregards its responsibility to maintain an adequate internal control environment, an auditor would:
- Decide NOT to accept a new engagement
Communications with the predecessor auditor MUST occur:
- BEFORE the successor auditor accepts the engagement, but CAN ALSO occur AFTER accepting the engagement
If the predecessor auditor refuses the give the current auditor of a nonissuer access to the documentation:
- The current auditor should review the risk assessment of the opening balances of the FS
- Factors in determining the extent of supervision needed for the staff:
- Nature of the company
- Nature of the work assigned
- Risk of material misstatement
- Knowledge, skill & ability of each team member
Financial statement assertions include:
- Completeness
- CutOff
- Valuation, allocation & accuracy
- Existence or occurrence
- Rights & obligations
- Understandability of Presentation & Classification
- Primary internal control planning objectives:
- Identify types of potential material misstatements
- Consider factors that affect the risk of material misstatements
- Design effective substantive tests
When audit procedures are performed before year end, the auditor must assess:
- The incremental risk involved
- Determine whether sufficient alternative procedures exist to extend the interim conclusions to year end
- In order to detect material misstatements in the creation of an audit plan, the auditor would use:
- Substantive procedures (i.e. test of details and analytical procedures)
In testing a client’s FS assertions at the account, transaction or disclosure level, an auditor would use:
- Substantive procedures and test of controls
The audit strategy outlines the:
- Scope of the engagement
- Reporting objectives
- Timing of the audit
- Required communications
- Factors that determine the focus of the audit
- *Includes a preliminary assessment of materiality and tolerable misstatement
- The independent external auditor cannot share responsibility with the internal auditor for:
- Audit decisions
- Judgments
- Assessments (i.e. materiality, estimates, inherent & control risk)
-* Can share responsibility for test of controls and substantive tests
An independent auditor should consider the following when assessing an internal auditor’s objectivity:
- Info obtained from previous experience
- Discussions with management
- External quality reviews
- Professional internal auditing standards (i.e The Institute of Internal Auditors)
Compared to an independent CPAs audit plan, an audit client’s comprehensive internal audit program is:
- More detailed and covers areas that would not normally be covered by the CPA
- The internal auditors’ work may affect the nature, timing & extent of the audit, including:
- Procedures performed in obtaining an understanding of IC
- Procedures performed in assessing the risk of material misstatement
- Substantive procedures performed in gathering direct evidence
The concept of materiality involves information that:
- Is likely to be viewed by a reasonable investor as altering the mix of available information
- Influences the judgements of a reasonable investor
- Determined using BOTH quantitative and qualitative thresholds
- Influences judgements about any of the financial statements
What would an auditor most likely use in determining the auditor’s preliminary judgement about materiality?
- The entity’s financial statements of the prior year
What are analytical procedures?
- Evaluations of financial info made by a study of plausible relationships among data, and they include the comparisons between current and prior year financial info
- Often use financial and nonfinancial data aggregated at a high level
An understanding of internal control relevant to WHAT is a necessary FS audit?
- An entity’s financial reporting objective
5 components of internal control:
- Control environment
- Risk assessment
- Information & communication systems
- Monitoring
- Existing control activities
CRIME
Factors of the control environment (tone at the top)
- Communication & enforcement of integrity and ethical values
- Participation of those charged with government
- Management’s philosophy and operating style
- Assignment of authority & responsibility over IT operations
- Organizational structure
- Human resource policies
- An auditor’s primary consideration regarding an entity’s internal control is whether the controls:
- Affect the financial statement assertions
What is a walkthrough?
- Following a transaction from its origination until its reflected in the FS
- Inspection-> observation -> inspection of relevant documentation -> reperformance of controls
Why does an auditor evaluate an entity’s risk assessment?
- To understand how management addresses risks relevant tot financial reporting
Internal control over safeguarding assets includes:
- Financial reporting
- Operations objectives
Internal control over safeguarding assets includes:
- Financial reporting
- Use of a lockbox system for collecting cash
- Passwords for limiting access to accounts receivable data files - Operations objectives
- Controls to prevent the excess use of materials in production
In planning an audit, the auditor’s knowledge about the design of relevant internal controls should be used to:
- Identify the types of potential misstatement that could occur
The three inherent limitations of internal control:
- Management override
- Human error
- Deliberate circumvention of controls by collusion of two or more people
Objectives of an entity include:
- Financial reporting
- Operations
- Compliance
Proper segregation of duties includes assigning different people the responsibilities of:
- Authorizing transactions
- Record keeping
- Custody of related assets
ARC
Existing control activities include:
- Prenumbering of documents
- Authorization of transactions
- Independent checks to maintain asset accountability
- Documentation
- Timely and appropriate financial performance reviews
- Information processing controls
- Physical controls for safeguarding assets
- Segregation of duties
PAID TIPS
In obtaining an understanding of an entity’s internal control, an auditor is required to obtain knowledge about the:
- Design of controls
- Whether they have been implemented
