A4 Specific Areas of Engagement Risk

Question 1

Potential Affect on Inherent Limits

Answer 1

Potential effect of inherent limitations on an auditors ability to detect material misstatements is greater > for MM due to non compliance

Question 2

Responsibilities regarding compliance

Answer 2

Noncompliance is an act of omission, Understanding the legal and regulatory framework.

Question 3

Testing Compliance

Answer 3

Identifying applicable laws & regulations, legal letter of inquiry, inquiry & discussion, review of documentation, observation, analytical procedures, consultation with experts.

Question 4

Accounting Estimates

Answer 4

Approximations of a monetary amount in the absence of a precise means of measurement. Examples include provisions for expected credit losses, employee retirement benefits, warranty obligations, loss related to pending litigation, FV assets (Goodwill)

Question 5

Related Party Transactions

Answer 5

These involve affiliates of the entity (immediate family, owner’s etc) entities with joint control or significant influence & key mgmt. Transactions usually include transfer of resources, services, or obligations between related parties.

Question 6

Arm’s Length Transactions

Answer 6

Those between unrelated parties

Question 7

Testing Accounting Estimates

Answer 7

This includes obtaining evidence from events occurring up to the date of the auditor’s report & company to the value of estimate, testing how mgmt made the estimate, & to develop the auditors point estimate or range.

Question 8

Identifying Related Party Transactions

Answer 8

Auditor should be aware of compensating balance arrangements, loan guarantees, transactions based on terms that differ significantly for market terms.

Question 9

GAAP Rules for Losses

Answer 9

GAAP require mgmt to accrue or disclose losses based on the probability of loss & whether the loss can be estimated.

Question 10

Disclosure for Going Concern

Answer 10

GAAP requires a disclosure when there are conditions that raise doubt about the entity’s ability to continue as a going concern. GAAS however, requires the auditor to evaluate whether substantial doubt exists about the entity’s ability to continue as a going concern.

Question 11

Period of Going Concern

Answer 11

One year after the date of the FS are issued is usually the period considered for going concern.

Question 12

FINE

Answer 12

Factors that may indicate substantial doubt include:
Financial Difficulties (eg. Loan defaults)
Internal Matters (eg. Labor difficulties)
Negative Trends (eg. recurrent losses)
External Matters (Legal Proceedings)

Question 13

Curing Going Concern

Answer 13

The auditor should consider mgmt’s plan for dealing with events of going concern (increase cash, reduce cash outflow).

Question 14

Substantial Doubt for Nonissuers

Answer 14

If substantial doubt remains for nonissuers the auditor should include a separate section in the report with the heading “Substantial Doubt About The Entity’s Ability To Continue As a Going Concern”

Question 15

Substantial Doubt for Issuers

Answer 15

If substantial doubt remains for issuers the auditor should include an Explanatory Paragraph in the report with the terms “Substantial Doubt” & “Going Concern”. A disclaimer opinion may be used in this instance (rare)