A3 Engagement Acceptantce, Planning and Understanding PT 1

Question 1

After accepting the engagement, what communications between the auditor and the predecessor can be made?

Answer 1

The auditor may:

1. make specific inquiries regarding matters that may affect the conduct of the audit (audit problems)
2. Review the predecessor’s audit documentation related to matters of continuing accounting and auditing significance.

Note that the auditor should not make reference to the work of the predecessor as the basis for the opinion.

Question 2

What should the auditor assess when considering the firm’s client acceptance and continuance policies?

Answer 2

1. The firm’s ability to meet reporting deadlines.
2. The firm’s ability to staff the engagement.
3. Independence
4. Integrity of client management
5. The group engagement’s team ability to obtain sufficient appropriate audit evidence.

Question 3

What topics should be included in the agreement to audit engagement terms?

Answer 3

An understanding should include:

1. Objectives and the scope of the audit
2. Management’s responsibilities
3. Auditor’s responsibilities
4. The inherent limitations of the engagement
5. Identification of the applicable financial reporting framework
6. Reference to the expected form and content of any report

An engagement letter may also refer to other matters, such as timing client assistance, fees and billing, etc.

Question 4

Name the 6 main F/S assertions for nonissuers and issuers.

COVERU and CEO APROVED

Answer 4

Nonissuer (COVERU): 
Completeness
cutOff
Valuation, allocation, and accuracy
Existence and occurrence
Rights and obligation
Understandability and classification

Issuer (CEO APPROVED):

Completeness; 
Existence;
Occurrence;
Allocation;
Presentation; 
Rights;
Obligation;
Valuation;
E
Disclosure

Question 5

Name the relevant assertions for “transactions and events”

5 Items

Answer 5

1. Completeness
2. (Proper Period) Cutoff
3. Accuracy
4. Classification
5. Occurrence

Question 6

Name the relevant assertions for “account balances”

4 Items

Answer 6

1. Completeness
2. Allocation and Valuation
3. Rights and Obligations
4. Existence

Question 7

Name the relevant assertions for “presentation and disclosure”

Answer 7

1. Completeness
2. Understandability and Classification
3. Rights and Obligations, and Occurrence
4. Valuation and Accuracy

Question 8

What is the audit strategy?

Answer 8

The audit strategy outlines the scope of the audit engagement, the reporting objectives, timing of the audit, and required communications, and the factors that determine the focus of the audit.

Also, includes a preliminary assessment of materiality and tolerable misstatement.

Question 9

Define Tolerable Misstatement:

Answer 9

Is the maximum error in a population that the auditor is willing to accept. Tolerable misstatement is the application of performance materiality to a particular sampling procedure.

Question 10

What is an audit plan?

Answer 10

A written audit plan (required for every audit) is a listing of audit procedures that the auditor believes are necessary to accomplish the objectives of the audit. The audit plan typically follows development of the audit strategy.

Question 11

What should be included in each step of the audit plan?

Answer 11

N-E-T

Each step of the audit plan should set out the procedures in detail, specifying the nature, extent, and timing of the work to be performed and including a reference to the assertion under consideration.

Question 12

List the 3 types of audit procedures and tell why each is used.

Answer 12

1. Risk Assessment Procedures - To obtain an understanding of the entity and its environment, including its internal controls.
2. Test of Controls - To evaluation the operating effectiveness of internal controls in preventing or detecting materiel misstatement.
3. Substantive procedures - To detect material misstatement in the F/S

Question 13

For which decisions must the external auditor NOT share responsibilities with the internal auditor? Examples

Answer 13

1. Assessing the risk of MM
2. Evaluating the sufficiency of test performed
3. Evaluating significant accounting estimates.
4. Determining materiality
5. Determining the type of audit opinion.

Question 14

Under PCAOB standards, what factors affect the nature and extent of necessary planning activities?

Answer 14

1. The size and complexity of the company
2. The auditor’s previous experience with the company
3. Changes in circumstances that occur during the audit

Question 15

What factors determine the nature, extent, and timing of supervision?

Answer 15

1. The size and complexity of the entity.
2. The nature of the work assigned to each engagement team member.
3. The assessed risk of material misstatement
4. The qualifications of the assistants