A3: Engagement Acceptance, Planning, & Risk Assessment Flashcards
Client Acceptance
Ensure integrity of client management
If scope limitation imposed by management (eg, lack of records) will result in disclaimer of opinion, do not accept engagement
If limit will result in qualified opinion or limit beyond management’s control, okay to accept
Engagement Letter
-audit scope and objective, auditor and management responsibilities, inherent limitations of audit/risks that misstatements won’t be found, audit timing/client assistance/ document availability/fee arrangements
New Client
- must speak to old CPA before accepting (w/ client permission)
- management integrity, disagreements, reasons for change, communications on fraud/ illegal acts/internal control issues
- review old CPA’s workpapers/evidence
Discover issue with old CPA report
Request meeting with client and old CPA to resolve
Planning Process
- obtain knowledge of business/industry
- audit strategy
- audit plan
- risk assessment
Audit Strategy
-scope of audit, reporting objectives, timing, required communications, factors determining focus of nature (preliminary views of materiality, audit risk, internet control; areas of higher risk of material misstatement)
Materiality
- smaller level of misstatement that could be material to any one of F/S
- both qualitative and quantitative judgment
- preliminary assessment revised during audit
Audit Plan
- outlines Nature, Extent, Timing (“NET”) of specific procedures to be performed
- must be in writing
- risk assessment procedures, tests of controls, and substantive tests
Assertions
C – Completeness O - cutOff V – Valuation, allocation and accuracy E – Existence and occurrence R – Rights and obligations U – Understandability and classification
Transaction Assertions
-completeness, cutoff, accuracy, classification, occurrence
Balance Assertions
-completeness, allocation and valuation, rights and obligations, existence
Presentation and Disclosure Assertions
-completeness, understandability and classification, rights and obligations, valuation and accuracy
Client’s Internal Auditors
- not independent
- consider objectivity (who report to) and competence (reputation, workpapers)
- can’t share responsibility for decisions, judgments or assessments
- I/As can assist with testing
- CPA must test areas of high risk/subjectivity
Use of Specialist
- CPA must understand specialist’s work and evaluate adequacy of work for audit purposes
- evaluate competence and objectivity
- client’s specialist may be acceptable
- audit report may refer to specialist if modified opinion b/c of their work
Audit Risk
-risk of issuing unmodified opinion when there are material misstatements
AR = Risk of Material Misstatement * Detection Risk
Misstatement Types
- Factual: known misstatements
- Judgmental: management estimates the CPA considers unreasonable or application of accounting policies CPA considers inappropriate
- Projected: estimate of misstatements in population, projected from those in audit sample
Risk of Material Misstatement
-risk that F/S are materially misstated
-exists independently of F/S audit
RMM = Inherent Risk * Control Risk
Inherent Risk
-risk of material misstatement, in absence of controls
Control Risk
-risk that controls will not timely prevent/ detect material misstatement
Detection Risk
- risk that CPA will not detect material misstatement
- CPA controls Detection Risk
Impact of Risk on Audit
- higher RMM, need lower DR
- higher RMM, more audit work required
- even if low RMM, must always do substantive tests on all assertions
Fraud Types
- fraudulent financial reporting (lying)
- misappropriation of assets (stealing)
- corruption (cheating)
Fraud Characteristics/Triangle
- Incentives/Pressures: reason to commit
- Opportunity: no effective controls
- Rationalization/Attitude: justify behavior (ethics/integrity)
*existence of all factors doesn’t indicate there is fraud; their absence doesn’t indicate lack of fraud
Responsibilities concerning fraud
- MR: design/implement programs & controls to prevent/deter/detect fraud
- AR: design audit to obtain reasonable assurance whether F/S are free of misstatements due to error or fraud; must assess risk due to fraud during planning
Auditor Fraud Procedures
- team must discuss fraud risk, brainstorm how it could be committed
- make inquiries regarding fraud risk (issuers: ask about response to whistleblowers)
- consider results of analytical tests (required relating to revenue)
- must document fraud risk assessment and response (include support if improper revenue recognition not identified as fraud risk)