AT - AUDIT PROCESS: ACCEPTING AN ENGAGEMENT

Question 1

What are the three categories of assertions?

Answer 1

1. Assertions about TRANSACTIONS AND EVENTS FOR THE PERIOD UNDER AUDIT
2. Assertions about ACCOUNT BALANCES AT PERIOD END
3. Assertions about PRESENTATION AND DISCLOSURE

Question 2

What are the assertions under transactions and events? Explain each.

Answer 2

1. Completeness - what should have been recorded are recorded: U
2. Occurrence - occurred and pertain to the entity: O
3. Cutoff - recorded in correct accounting period: O/U
4. Accuracy - amount and other data have been recorded appropriately: O/U
5. Classification - data have been recorded in their proper accounts: O/U

Question 3

What are the assertions under account balances? Explain each.

Answer 3

1. Rights and obligations - entity holds/controls rights to assets, and liabilities are the obligations of the entity: O
2. Completeness - all assets/liabilities/equity that should have been recorded are recorded: U
3. Existence - Assets/liabilities/equity exist: O
4. Valuation and allocation - Assets/liabilities/equity interests are included in the FS at appropriate amounts and any resulting valuation or allocation adjustments are properly recorded: O/U

Question 4

What are the assertions under presentation and disclosure? Explain each.

Answer 4

1. Completeness - all disclosures that should have been recorded are recorded
2. Occurrence and rights and obligations - disclosed events/transactions/other matters have occurred and pertain to the entity
3. Classification and understandability - financial information is appropriately presented and described and disclosures are clearly expressed
4. Accuracy and valuation - financial and other information are disclosed fairly and at appropriate amounts.

Question 5

What are the uses of assertions?

Answer 5

The auditor uses assertions:
1. To form a basis for the ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENTS by considering the different types of POTENTIAL MISSTATEMENTS

2. To form a basis for the DESIGN AND PERFORMANCE OF FURTHER AUDIT PROCEDURES. The procedures selected should enable the auditor to GATHER SUFFICIENT APPROPRIATE EVIDENCE ABOUT A PARTICULAR ASSERTION.

Question 6

What are some of the audit procedures used to gather sufficient appropriate evidence?

Answer 6

1. Inspection
2. Observation
3. Inquiry
4. Confirmation
5. Computation
6. Analytical Procedures

Question 7

What are audit procedures?

Answer 7

Audit procedures are the means used by the auditor to OBTAIN SUFFICIENT APPROPRIATE EVIDENCE(SAE).

Question 8

What is audit evidence?

Answer 8

Audit evidence refers to the INFORMATION OBTAINED IN ARRIVING AT THE CONCLUSIONS ON WHICH THE AUDIT OPINION IS BASED.

Question 9

What are the steps in the audit process?

Answer 9

1. Accepting an Engagement
2. Audit Planning
3. Considering Internal Control
4. Performing Substantive Tests
5. Completing the Audit
6. Issuing a Report

Question 10

Explain the Acceptance of an Engagement in the audit process.

Answer 10

1. The firm decides whether to ACCEPT OR REJECT THE ENGAGEMENT, which requires EVALUATION OF
2. Firm’s competence
3. Its independence
4. Ability to serve client properly
5. Integrity of prospective client’s management
6. Performance of PRELIMINARY PLANNING ACTIVITIES
   a. Performing procedures regarding continuance of
   client relationship
   b. Evaluating compliance with ethical requirements
   c. Establishing understanding of terms with client.

Question 11

Explain Audit Planning in the audit process.

Answer 11

In planning the audit, the auditor OBTAINS MORE DETAILED KNOWLEDGE ABOUT THE CLIENT’S BUSINESS AND INDUSTRY in order to:

1. UNDERSTAND THE TRANSACTIONS AND EVENTS AFFECTING THE FINANCIAL STATEMENTS
2. IDENTIFY POTENTIAL PROBLEMS THAT MIGHT BE ENCOUNTERED DURING THE AUDIT

A preliminary assessment of risk and materiality is also made to develop an overall audit strategy.

Question 12

Explain the Consideration of Internal Control of the audit process.

Answer 12

The auditor assesses the internal control because it directly affects the reliability of the FS. Assessment of IC involves:

1. Obtaining understanding of the internal control systems
2. Assessing the level of control risk
3. If control risk is low, SAE that proves internal control is functioning effectively must be obtained by performing ToC.

Question 13

Explain performance of substantive tests in the audit process.

Answer 13

Auditor performs substantive tests to determine whether the FS are presented fairly in accordance with the standards.

The extent of the substantive tests is HIGHLY DEPENDENT ON THE RESULTS OF THE AUDITOR’S CONSIDERATION OF INTERNAL CONTROL.

Question 14

Explain the completion of an audit in the audit process.

Answer 14

The auditor must have SAE in order to reach a conclusion on the fairness of the FS. Procedures involved in this phase include:

1. Review of subsequent events and contingencies
2. Assessment of Going Concern Assumption
3. Performing overall analytical review procedures
4. Obtaining written representations from client’s management

Question 15

Explain the Issuance of the report in the audit process

Answer 15

The auditor forms a conclusion about the FS in the form of an opinion, and is communicated to the various users of FS through the audit report.

Question 16

How is the integrity of client management ascertained?

Answer 16

Background checks on the client is required as per PSA 220, which involves:

1. Making inquiries of appropriate parties in the business community
2. Communication with predecessor auditor
   a. permission of prospective client is required
   b. inquiry as to the reasons for change in auditor
   c. any disagreement between client and predecessor
   d. any facts that might have a bearing on integrity
3. Evaluation of retained existing clients
   a. evaluated at least annually or upon occurrence of
   major events (change in management, directors,
   ownership structure, others)

Question 17

What is an engagement letter?

Answer 17

An engagement letter serves as the WRITTEN CONTRACT BETWEEN THE CLIENT AND THE AUDITOR. It helps avoid misunderstandings with the client and documents and confirms the auditor’s appointment.

An engagement letter is not usually sent every year, but new one might be sent when:

1. Misunderstanding with the client
2. Revision of terms
3. Recent change in management/BoD/ownership
4. Significant change in nature/size of the client’s business
5. Legal requirements

Question 18

Differentiate tracing and vouching.

Answer 18

Tracing - source documents to ledger/FS, tests COMPLETENESS.

Vouching - FS/ledger to source documents, tests EXISTENCE and OCCURRENCE.

Question 19

In what form must be the authorization of the incoming auditor be in to communicate with the predecessor auditor?

Answer 19

The authorization may be oral or written.

Question 20

An incoming auditor should request the new client to authorize the predecessor auditor to allow review of the predecessor’s

Engagement letter - Yes or No?

Working Paper - Yes or No?

Answer 20

Engagement letter - no

Working paper - yes

The successor auditor should request that the client authorize the predecessor auditor to allow a review of the predecessor auditor’s working papers.
The predecessor auditor may wish to request a consent and acknowledgment letter from the client to document this authorization in an effort to reduce misunderstandings about the scope of the communications being authorized. It is customary in such circumstances for the predecessor auditor to make himself or herself available to the successor auditor and make available for review certain
of the working papers.

Question 21

Explain the audit of components.

Answer 21

When the auditor of a parent entity is also the auditor of its subsidiary/branch/division, the auditor should consider the following factors in making a decision of whether to send a separate letter to the component:

a. Who appoints the auditor of the component
b. Whether a separate audit report is to be issued on the component
c. Legal requirements
d. Extent of work performed by other auditor
e. Degree of ownership by parent
f. Degree of independence of the component’s management

Question 22

When the auditor of a parent entity is also the auditor of its subsidiary/branch/division, what factors should the auditor consider in making a decision as to whether to send a separate letter to the component?

Answer 22

1. Who appoints the auditor of the component
2. Whether a separate audit report is to be issued on the component
3. Legal requirements
4. Extent of any work performed by other auditor
5. Degree of ownership by parent
6. Degree of independence of the component’s management

Question 23

For continuing clients, how often must client management’s integrity be assessed?

Answer 23

1. ) evaluated at least annually or
2. ) upon occurrence of major events (change in management, directors, ownership structure, others)

Question 24

Who among the following normally signs the engagement letter for an audit of a private company?

a. Management
b. Board of Directors representative
c. Audit committee representative
d. Corporate treasurer

Answer 24

B. BoD representative

Question 25

Which of the following statement is not correct?

a. There are many ways an auditor can accumulate evidence to meet the overall audit objectives
b. SAE must be accumulated to meet the auditor’s professional responsibility
c. The cost of accumulating evidence should be minimized
d. Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects

Answer 25

d. Gathering evidence and minimizing costs are equally important considerations that affect the approach the auditor selects

Question 26

Which audit procedure is used extensively and often is complementary to performing other audit procedures?

a. Inspection
b. Observation
c. Inquiry
d. Confirmation

Answer 26

c. Inquiry

Question 27

Even with the most effectively designed internal control, the auditor must obtain audit evidence beyond testing controls for every:

a. transaction
b. FS account
c. material FS account
d. FS account that will be relied upon by 3rd parties.

Answer 27

c. material FS account

Question 28

The sequence of steps in gathering evidence for the auditor’s opinion is:

a. Substantive tests, documentation of control structure, and TOC
b. Documentation of control structure, TOC, Substantive tests
c. Documentation of control structure, Substantive Tests and TOC
d. TOC, documentation of control structure, Substantive Tests

Answer 28

b. Documentation of control structure, TOC, Substantive tests

Question 29

T or F
An incoming auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s engagement letter

Answer 29

False

Question 30

T or F
An incoming auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s working papers

Answer 30

True.

Question 31

After preliminary audit, arrangements have been made, an engagement confirmation letter should be sent to the client. The letter usually would not include

a. reference to the auditor’s responsibility for the detection of errors or irregularities
b. estimate of the time to be spent on the audit work by audit staff and management
c. statement that management advisory services would be made available upon request
d. statement that a management letter will be issued outlining comments and suggestions as to any procedure requiring the client’s attention

Answer 31

c. statement that management advisory services would be made available upon request