AUD 1 Audit Standards & Engagement Planning Flashcards

Question 1

Q

What are the types of audits that may be performed in relation to an entity?

Answer

A

Compliance Audits
Compliance audits are performed to determine if an entity is complying with applicable laws and regulations. They are often performed by governmental or regulatory organizations on entities that may be chosen on a random basis or may be selected due to some indication that there may be one or more incidents of noncompliance, such as a tax return with unusual deductions.
Operational Audits
Operational audits are generally performed by internal auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with internal controls.
Financial Statement Audits
Financial statement audits are performed exclusively by CPAs, and are designed to determine if financial statements are fairly presented in accordance with the applicable financial reporting framework. Standards for the performance of financial statement audits are established by the Auditing Standards Board (ASB) of the AICPA for audits of nonpublic entities; by the PCAOB for audits of public entities; and by the IAASB for audits performed under international standards.

Question 2

Q

What are the types of audits that may be performed in relation to an entity?

Answer

A

Compliance Audits
- often performed by governmental or regulatory organizations to determine if the entity is complying with appropriate laws and regulations
Operational Audits
- often performed by internal auditors
Financial Statement Audits
- may only be performed by CPAs

Question 3

Q

What is a financial reporting framework?

Answer

A

A financial reporting framework is a set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements.

It determines the form and content of the financial statements.

Question 4

Q

What are two examples of applicable financial reporting frameworks?

Answer

A

General purpose framework

2. Special purpose framework.

Question 5

Q

A general purpose framework is designed to meet the common financial information objectives of a wide range of users.

General purpose frameworks include:

Answer

A

General purpose frameworks include:

GAAP, issued by the Financial Accounting Standards Board (FASB)
International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB)
Statements of Federal Financial Accounting Standards (SFFAS), issued by the Federal Accounting Standards Advisory Board (FASAB) for U.S. federal governmental entities
Statements of Governmental Accounting Standards issued by the Governmental Accounting Standards Board (GASB) for U.S. state and local governmental entities

Question 6

Q

General purpose frameworks include:

Answer

A

General purpose frameworks include:

GAAP, issued by FASB
IFRS, issued by IASB
SFFAS, issued by the FASAB
Statements of Governmental Accounting Standards, issued by GASB

Question 7

Q

What is a special purpose framework (OCBOA)?

Answer

A

A special purpose framework (OCBOA) is a framework other than GAAP that could include the cash basis (modified cash), tax basis, regulatory agency basis, contractual basis or an “other basis of accounting.”

Question 8

Q

A special purpose framework (OCBOA) is a framework other than GAAP that could include the cash basis (modified cash), tax basis, regulatory agency basis, contractual basis or an “other basis of accounting.”

The auditor:

Answer

A

The auditor:

Possesses the appropriate qualifications to perform the audit.
Applies professional skepticism, an attitude that includes a questioning mind and a critical assessment of audit evidence.
Complies with relevant ethical requirements.
Exercises professional judgment throughout the engagement.

Question 9

Q

To express an opinion on the financial statements, the auditor obtains __________ assurance as to whether the financial statements are free from material misstatement.

Answer

A

To express an opinion on the financial statements, the auditor obtains reasonable assurance as to whether the financial statements are free from material misstatement.

Question 10

Q

Reasonable Assurance =

Answer

A

Reasonable Assurance =
A high level of assurance, although not equivalent to absolute assurance

o The scope of the audit is limited to items that are considered material.
o The auditor cannot look at evidence supporting all information in the financial statements.

Question 11

Q

To obtain reasonable assurance, the auditor:

Answer

A

To obtain reasonable assurance, the auditor:

Plans the work
Properly supervises assistants
Determine and apply appropriate materiality levels

• Identify and assess risks of material misstatement
o May be due to error or fraud
o Based on auditor’s understanding of entity and environment

• Obtain sufficient appropriate audit evidence
Scope is between 100% and materiality

Question 12

Q

The 7 Steps in an Audit:

Answer

A

The 7 Steps in an Audit

Prepare for the audit
Obtain Understanding of client, its Environment, including Internal Control
Assess Risks of Material Misstatement and Determine Nature, Timing, and Extent of Further Procedures
Perform Tests of Controls
Perform Substantive Procedures
Formulate an opinion
Issue Audit Report

Question 13

Q

The Generally Accepted Auditing Standards (GAAS) measures ___________

Answer

A

GAAS are considered measures the quality of the auditor’s performance.

Question 14

Q

10 GAAS - Generally Accepted Auditing Standards

Answer

A

10 GAAS - Generally Accepted Auditing Standards

3 General Standards - Qualification of auditor and quality of work.

Training and Proficiency
Independence
Due Professional Care

3 Standards of Fieldwork - How audit is planned and how audit evidence is accumulated and evaluated.

Planning and Supervision
Internal Controls
Corroborative Audit Evidence

4 Standards of Reporting - Preparation and content of the audit report [ GAAS audit to check for GAAP. ]

Accounting Principles in Conformity with U.S. GAAP
No new Accounting Principles applied – Consistency
Omitted Informative Disclosures – None
Expression of an Opinion

Question 15

Q

The 10 Generally Accepted Auditing Standards (GAAS) include (TIPPICANOE):

Answer

A

The 10 Generally Accepted Auditing Standards (GAAS) include (TIPPICANOE):

General Standards

Training and Proficiency
Independence
Professional Care

Standards of Fieldwork

Planning and supervision
Internal Controls
Corroborative Appropriate Audit Evidence

Reporting Standards

Accounting Principles in Accordance with GAAP
No New Principles – Consistency
Omitted Disclosures – None
Express an Opinion

Question 16

Q

What are GAAS 3 General Standards for qualification of auditor and quality of work?

Answer

A

GAAS 3 General Standards

Qualification of auditor and quality of work.

Training and Proficiency
Independence
Due Professional Care

Question 17

Q

What are GAAS 3 Standards of Fieldwork on How audit is planned and how audit evidence is accumulated and evaluated?

Answer

A

GAAS 3 Standards of Fieldwork

How audit is planned and how audit evidence is accumulated and evaluated

Planning and Supervision
Internal Controls
Corroborative Audit Evidence

Question 18

Q

What are GAAS 4 Standards of Reporting on Preparation and content of the audit report?

Answer

A

GAAS 4 Standards of Reporting

Preparation and content of the audit report

Accounting Principles in Conformity with U.S. GAAP
No new Accounting Principles applied – Consistency
Omitted Informative Disclosures – None
Expression of an Opinion

Question 19

Q

Statements on Auditing Standards (SAS) are interpretations of GAAS issued by the _________ .

Answer

A

Statements on Auditing Standards (SAS) are interpretations of GAAS issued by the Auditing Standards Board of the AICPA.

Question 20

Q

To perform an audit, the auditor is responsible for:

Answer

A

To perform an audit, the auditor is responsible for:

Having appropriate competence and capabilities in the form of adequate technical training and proficiency as an auditor.
Complying with relevant ethical requirements, including remaining independent from the audit client.
Maintaining professional skepticism and exercising professional judgment.

Question 21

Q

Auditors are responsible for having appropriate competence and capabilities to perform the audit.

This is obtained through:

Answer

A

Auditors are responsible for having appropriate competence and capabilities to perform the audit.

This is obtained through:
• Proper Education in accounting
• Knowledge of industry and business
• Practical experience
• Continuing professional education (CPE)

Question 22

Q

The Accountant must maintain independence for attestation engagements
E \_\_\_\_\_\_\_
R \_\_\_\_\_\_\_
A \_\_\_\_\_\_\_
S \_\_\_\_\_\_\_

Answer

A

The Accountant must maintain independence for attestation engagements (ERAS)

Examinations (Audits)
Reviews
Agreed-upon procedure engagements and other engagements covered by the attestation standards leading to findings
Special reports

Question 23

Q

Independent is not needed for

Answer

A

Need not be independent for:
• Compilations (when a lack of independence is indicated)
• Taxes
• Consultations
• Financial Statement Preparation Engagement
• Other non-attest services such as bookkeeping or payroll

Question 24

Q

Independence required for:
• Audit  ?
• Review ?
   o Compilation ?
   o Taxes ?
   o Consultation ?
   o F/S Preparation Engagement ?

Answer

A

Attest Function = Must be Independent

Independence required for:
• Audit – Yes
• Review – Yes
   o Compilation – No
   o Taxes – No
   o Consultation – No
   o F/S Preparation Engagement

Question 25

Q

An auditor is also required to comply with those other ethical requirements that are relevant to financial statement audit engagements.

The standards cite the fundamental principles of professional ethics, which are:

Answer

A

The standards cite the fundamental principles of professional ethics, which are:

Responsibilities (ET 0.300.020)
The public interest (ET 0.300.030)
Integrity (ET 0.300.040)
Objectivity and independence (ET 0.300.050)
Due care (ET 0.300.060)
Scope and nature of services (ET 0.300.070)

Question 26

Q

All engagements should be planned and performed with professional skepticism.

Applying professional skepticism means ________.

Answer

A

Applying professional skepticism means:
• Being alert to information from different sources being contradictory;
• to the possibility that documentary evidence may not be reliable;
• to indications of fraud.
• Alerts the accountant that procedures beyond those required for an engagement may be necessary.

Question 27

Q

Auditing standards indicate that applying professional skepticism reduces the risks associated with:

Answer

A

Auditing standards indicate that applying professional skepticism reduces the risks associated with:

Overlooking unusual circumstances;
Drawing conclusions from audit procedures that are over-generalized; and
Making decisions regarding the nature, timing, and extent of audit procedures and evaluating the results of procedures, using inappropriate assumptions.

Question 28

Q

Professional skepticism and judgment

The auditor is aware of the possibility that the financial statements might be materially misstated and will be alert to indications, including:

Answer

A

Alert indications:

Some audit evidence may contradict other audit evidence.
Information may raise questions as to the reliability of documentary evidence and responses to auditor inquiries.
Conditions may indicate the possibility of fraud.
There may be a need to apply audit procedures in addition to those required by GAAS.

Question 29

Q

The auditor will apply professional judgment when making decisions related to:

Answer

A

Materiality;
Audit risk;
The nature, timing, and extent of audit procedures to be applied;
Evaluations as to whether audit evidence is appropriate and sufficient;
The evaluation of management’s judgments; and
Drawing conclusions from the evidence obtained.

Question 30

Q

The auditor applies professional judgment throughout the audit, which should be adequately documented such that ____________________ will understand significant judgments made in reaching conclusions.

Answer

A

The auditor applies professional judgment throughout the audit, which should be adequately documented such that an experienced auditor will understand significant judgments made in reaching conclusions.

Question 31

Q

Auditing standards differ from auditing procedures in that auditing procedures relate to acts to be performed, whereas standards deal with _________________ of the auditor’s performance of those acts.

Answer

A

Auditing standards differ from auditing procedures in that auditing procedures relate to acts to be performed, whereas standards deal with measures of the quality of the auditor’s performance of those acts.

Materiality and relative risk underlie the application of all the standards.

Question 32

Q

Assurance services =

Answer

A

Assurance services =
“Independent professional services that improve the quality of information, or its context, for decision makers.”

(defined by the AICPA Special Committee on Assurance Services)

Question 33

Q

To decide whether to accept an engagement, one of the two key considerations is obtaining management’s agreement that it understands and accepts certain responsibilities:

What are the management’s responsibilities?

Answer

A

Management’s Responsibilities Agreement :

Preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework
- Including all appropriate informative disclosures related to a special purpose framework when used to prepare the financial statements
Design, implementation, and maintenance (DIM) of internal control relevant to reliable financial reporting that is free from material misstatement, whether due to fraud or error; and
Providing the auditor with access to all relevant information of which management is aware; additional information requested by the auditor; and unrestricted access to entity personnel (no client-imposed scope limit).

Question 34

Q

The first step in planning an engagement is to decide whether to accept the engagement, which will depend on whether the preconditions for an audit have been met.

There are two key considerations in making this decision:

Answer

A

There are two key considerations:

Determining the acceptability of the applicable financial reporting framework being applied.
Obtaining management’s agreement that it understands and accepts certain responsibilities.

Question 35

Q

The auditor will also want to make certain that the financial statements are ______.

If the accounting records are inadequate, the auditor may not have the ability to gather sufficient appropriate audit evidence, and will have to refuse the engagement.

Answer

A

The auditor will also want to make certain that the financial statements are auditable.

Question 36

Q

An auditor will not wish to associate with an entity that has management that lacks _______ .

Answer

A

An auditor will not wish to associate with an entity that has management that lacks integrity.

If the auditor cannot trust the key officers of the business, all evidence related to the financial statements will be subject to serious doubt.

Question 37

Q

One of the required steps toward the end of an audit is to obtain a _____________________ from management on certain key items.

Answer

A

One of the required steps toward the end of an audit is to obtain a client representation letter from management on certain key items.

If the auditor does not trust management, it will be impossible to place reliance on the representations, so the auditor will have to refuse the engagement.

Question 38

Q

When an auditor accepts an engagement for an initial audit AU-C Section 510 requires the auditor to pay special attention to __________.

Answer

A

When an auditor accepts an engagement for an initial audit, AU-C Section 510 [Opening Balances – Initial Audit Engagements, Including Reaudit Engagements]

requires the auditor to pay special attention to beginning balances.

Question 39

Q

Beginning balances are significant for a variety of reasons.

Beginning balance sheet amounts affect:

Answer

A

Beginning balances are significant for a variety of reasons.

• Beginning balance sheet amounts affect items reported on the current period’s income statement, statement of cash flows, and statement of changes in stockholders’ equity.
A misstatement in beginning inventory, for example, will result in a misstatement in the current period’s cost of goods sold.

The auditor is required to determine if accounting principles have been applied on a basis that is consistent with the prior period.
Opening balances for certain items, such as contingencies and commitments may have ongoing implications that affect the current period’s disclosures.

Question 40

Q

An auditor accepts an engagement for an initial audit:

What are some examples for the auditor to obtain sufficient appropriate audit evidence regarding opening balances?

Answer

A

Examples for an auditor to obtain sufficient appropriate audit evidence regarding opening balances:

• The auditor will read the entity’s most recent financial statements and the predecessor’s report for:
o Opening balances and disclosures (contingencies and commitments)
o Consistency in the application of the applicable financial reporting framework

• If the prior statements were audited, the auditor should request that management authorize the predecessor to:
o Allow the successor to review the predecessor’s documentation
(i.e., read most recent financial statements and the predecessor’s report; if modified opinion, evaluate effect on current period financial statements)
o Respond fully to inquiries by the successor

Question 41

Q

Once the client has authorized communication, the successor auditor will generally make inquiries of the predecessor auditor about several key issues:

Answer

A

Communication with predecessor auditor about several key issues (RID-C):

Reasons for change – The successor needs to know why the predecessor understands that they are no longer the continuing auditor of the client.
Integrity of management – The predecessor should inform the successor whether they believe management can be trusted.
Disagreements during audit – If any conflicts arose regarding the application of accounting principles or the performance of auditing procedures during the time the predecessor was the auditor of the client, the predecessor should provide necessary details for the successor to understand the nature of the disagreements and how they were resolved.
Communication with Management or those charged with Governance, such as the audit committee, regarding fraud and noncompliance with applicable laws and regulations, including illegal acts, and significant deficiencies and material weaknesses in internal control.

Any one of these may cause the successor to get rid of the prospective new client and C (see) you later!!

Question 42

Q

What are the key issues that successor auditor will communicate with predecessor auditor?

Answer

A

Communication with predecessor auditor (RID-C):

Reasons for change
Integrity of management
Disagreements during audit
Communication with Management or those charged with Governance (the audit committee) regarding fraud and noncompliance with applicable laws and regulations, including illegal acts, and significant deficiencies and material weaknesses in internal control.

Question 43

Q

If financial statements audited by a predecessor auditor are found to require substantial revision, it is the responsibility of the _______ auditor to request that the client arrange a meeting among the three parties to discuss and attempt to resolve the matter.

Answer

A

If financial statements audited by a predecessor auditor are found to require substantial revision, it is the responsibility of the successor auditor to request that the client arrange a meeting among the three parties to discuss and attempt to resolve the matter.

Question 44

Q

If the predecessor auditor’s report on the previous period’s financial statements included a modified opinion, the ________ auditor should evaluate the effect on the current period’s financial statements.

Answer

A

If the predecessor’s report on the previous period’s financial statements included a modified opinion, the successor should evaluate the effect on the current period’s financial statements.

During the course of the engagement, the successor may become aware of misstatements contained in opening balances that could materially affect the current period’s financial statements.

If the auditor concludes that the misstatements also affect the current period’s financial statements, the auditor should communicate the misstatements to management and those charged with governance.

Question 45

Q

If the auditor determines that, because of the misstatements, the previous period’s audited financial statements may require restatement, the auditor should ________________ allow communication between the successor and predecessor regarding the matter.

Answer

A

If the auditor determines that, because of the misstatements, the previous period’s audited financial statements may require restatement, the auditor should request that management allow communication between the successor and predecessor regarding the matter.

The successor should provide the predecessor auditor with whatever information the successor deems appropriate to assist the predecessor in resolving the matter.
If the client refuses permission or if the circumstances are otherwise not resolved to the satisfaction of the successor, the successor should consider the implications in relation to the current period’s audit, including whether the auditor should withdraw from the engagement.

Question 46

Q

During the course of the engagement, the successor may become aware of misstatements contained in opening balances that could materially affect the current period’s financial statements.

If the auditor concludes that the misstatements also affect the current period’s financial statements, the auditor should communicate the misstatements to ________ and _________________ .

Answer

A

If the auditor concludes that the misstatements also affect the current period’s financial statements, the auditor should communicate the misstatements to management and those charged with governance.

Question 47

Q

Evidence regarding opening balances may affect the auditor’s report on the current period’s financial statements.

If the auditor is unable to obtain sufficient appropriate audit evidence regarding opening balances, or if the auditor determines that the opening balances contain a material misstatement that is not appropriately accounted for or disclosed, the auditor will modify the report, expressing a ________ opinion or issuing a _______ .

Answer

A

If the auditor is unable to obtain sufficient appropriate audit evidence regarding opening balances, or if the auditor determines that the opening balances contain a material misstatement that is not appropriately accounted for or disclosed, the auditor will modify the report, expressing a qualified opinion or issuing a disclaimer.

The auditor will also issue a qualified or adverse opinion if accounting policies have not been consistently applied or if changes in accounting principles have not been appropriately accounted for and adequately disclosed.

Question 48

Q

The auditor will issue a ________ or ________ opinion if accounting policies have not been consistently applied or if changes in accounting principles have not been appropriately accounted for and adequately disclosed.

Answer

A

The auditor will also issue a qualified or adverse opinion if accounting policies have not been consistently applied or if changes in accounting principles have not been appropriately accounted for and adequately disclosed.

Question 49

Q

When the auditor is engaged for recurring audits, the auditor may determine that the terms of the preceding engagement may or may not need ______.

If the terms do not need revision, the auditor should remind the client of the terms of the engagement, which may be done in ______ or orally, but should be ________.

Answer

A

When the auditor is engaged for recurring audits, the auditor may determine that the terms of the preceding engagement may or may not need revision.

If the terms do not need revision, the auditor should remind the client of the terms of the engagement, which may be done in writing or orally, but should be documented.

Question 50

Q

If the terms of the preceding engagement do not need revision, the auditor should remind the client of the terms of the engagement.

Indications that the terms of the preceding engagement may need to be revised include:

Answer

A

Indications that the terms of the preceding engagement may need to be revised include:

Indications that management does not understand the objective and scope of the engagement
Revised or special terms
Changes to senior management or a significant change in ownership
A significant change in the entity’s size or the nature of its business
Changes to legal or regulatory requirements
A change in the applicable financial reporting framework
A change in other reporting requirements.

Question 51

Q

During the conduct of an audit, there are several items that the auditor is required to communicate regarding the entity.

In such cases, the auditor will communicate with those charged with governance, which may include management.

Examples:

Answer

A

The auditor will communicate with those charged with governance, which may include management.

Members of management may serve as executive members of the board of directors.
In owner-managed entities, management and governance are the same.

Those charged with governance may also include:
• Members of the entity’s legal structure, such as company directors.
• Parties external to the entity, such as certain government agencies.
• A collective group of people, such as a Board of Directors.

Question 52

Q

Management includes those with _______________ for the conduct of the entity’s organization.

Answer

A

Management includes those with executive responsibility for the conduct of the entity’s organization.

Question 53

Q

Those charged with governance are responsible for overseeing the ________ direction of the entity and the obligations related to __________ .

Answer

A

Those charged with governance are responsible for overseeing the strategic direction of the entity and the obligations related to accountability.

Question 54

Q

For entities with formal structures, the outside auditor meets with the audit committee of the board of directors, which is a sub-committee made up of board members who are not officers or employees of the company.

They must be ________.

Answer

A

For entities with formal structures, the outside auditor meets with the audit committee of the board of directors, which is a sub-committee made up of board members who are not officers or employees of the company

The audit committee members must be independent.

Question 55

Q

The audit committee members:

Answer

A

The audit committee members will have no special interest in supporting the financial representations of management, and this provides them with the objectivity necessary to:

Serve as members of the board of directors that are disinterested in the day-to-day operations (must be Independent).
Hire and fire the outside auditors.
Receive their reports and communications.
Oversee the internal audit function of the company.

Question 56

Q

The audit committee members:

Answer

A

Serve as members of the board of directors that are disinterested in the day-to-day operations (must be Independent).
Hire and fire the outside auditors.
Receive their reports and communications.
Oversee the internal audit function of the company.

Question 57

Q

_______ , entities that are not subject to the provisions of Sarbanes-Oxley, may not have an audit committee.

Answer

A

Nonissuers, entities that are not subject to the provisions of Sarbanes-Oxley, may not have an audit committee.

When that is the case, the individuals who oversee the accounting and financial reporting processes for the entity as well as the audit are considered to be the audit committee.

In some cases, this may be only one person.

Question 58

Q

The prospective auditor negotiates with the ___________ to enter the audit engagement and establish an understanding, which is required to be documented in the form of a written engagement letter or a comparable document, and may be sent to the audit committee for the client’s signature.

Answer

A

The prospective auditor negotiates with the audit committee to enter the audit engagement and establish an understanding, which is required to be documented in the form of a written engagement letter or a comparable document, and may be sent to the audit committee for the client’s signature.

Question 59

Q

Certain matters should be communicated to those charged with governance.

These communications may be ____ or in _______ , and may be communicated during the audit or after the audit report is issued.

Matters communicated orally should be documented by the auditor.

Answer

A

Certain matters should be communicated to those charged with governance.

These communications may be oral or in writing, and may be communicated during the audit or after the audit report is issued.

Matters communicated orally should be documented by the auditor.

Question 60

Q

Matters communicated orally to those charged with governance should be documented by the auditor.

Among the matters the auditor should communicate are:

[ mnemonic DISAPPROVE ]

Answer

A

Matters communicated orally should be documented by the auditor. Among the matters the auditor should communicate are:

Disagreements with management about accounting policies or audit procedures
Noncompliance with laws and regulations
Significant accounting policies adopted or changed by management
Adjustments proposed by the auditor with a significant impact on the financial statements
Prior discussions with management before acceptance of the engagement.
Problems or significant difficulties arising during the audit
Responsibilities of the auditor under GAAS
Other information discussed or dealt with by management when those charged with governance are not all involved in management
Views of the accountant regarding the qualitative aspects of the entity’s significant accounting policies, estimates, and disclosures
Estimates in the accounting records and the process used to obtain them

The mnemonic DISAPPROVE reminds us that audit committees would disapprove of an auditor who failed to inform them about these matters.

Question 61

Q

Also, the auditor should not discuss the __________ or specific_____________ with the audit committee or management, since it might reduce the effectiveness of the audit.

Answer

A

Also, the auditor should not discuss the detailed audit plan or specific audit procedures with the audit committee or management, since it might reduce the effectiveness of the audit.

Question 62

Q

Under Sarbanes-Oxley (SOX), the audit committee of an issuer is required to be made up of independent directors, and at least one member of the audit committee is required to be a ____________ .

If there is not a ___________ on the audit committee, the reasons must be disclosed.

Answer

A

“Financial Export”

Under Sarbanes-Oxley (SOX), the audit committee of an issuer is required to be made up of independent directors, and at least one member of the audit committee is required to be a financial expert.

If there is not a financial expert on the audit committee, the reasons must be disclosed.

Question 63

Q

A financial expert has:

Answer

A

A financial expert has:

An understanding of GAAP and financial statements
Experience preparing or auditing comparable financial statements and experience in applying financial statement or audit knowledge to the accounting for estimates, accruals, and reserves
Experience with internal accounting controls

• An understanding of the functions of the audit committee
o Need not be a CPA

Question 64

Q

The PCAOB established requirements for matters to be communicated to those charged with governance when performing an audit of the financial statements of an entity that is subject to Sarbanes-Oxley.

The auditor should discuss with the audit committee any significant issues discussed with management regarding ________ or retention of the auditor.

Answer

A

The auditor should discuss with the audit committee any significant issues discussed with management regarding appointment or retention of the auditor.

Answer 65

A

the auditor should establish an understanding of the terms of the engagement with the audit committee, which should be documented in an engagement letter and executed by the appropriate party on behalf of the entity.

The understanding will include the objectives of the engagement, the responsibilities of the auditor, and the responsibilities of management.

Answer 66

A

In regard to the engagement itself, the auditor should inquire as to whether the audit committee is aware of relevant matters, which may include violations or possible violations of applicable laws or regulations.

Answer 67

A

The auditor will also communicate with the audit committee regarding an overview of the overall audit strategy and timing, as well as significant risks identified during the performance of risk assessment procedures performed in obtaining an understanding of the entity and its environment.

Answer 68

A

Communication with the audit committee regarding the overall strategy will include:

Specialized skill or knowledge needed to perform risk assessments, plan or perform the engagement, or evaluate results.
The extent to which internal auditors will be used in the engagement and to which internal auditors and other personnel will be used under the supervision of the audit committee in the audit of internal control over financial reporting.
Information about other accounting firms expected to perform audit procedures.
The basis for concluding that the auditor can serve as principal auditor when parts of the audit are performed by other auditors.

Answer 69

A

The auditor will also communicate with the audit committee the results of the audit the following:

Significant accounting policies and practices
Critical accounting policies and practices – those most significant to the entity’s financial position and results, and requiring management’s most difficult, subjective, or complex judgments
Critical accounting estimates
Significant unusual transactions

Communicate auditor’s evaluation of:
• The financial statement presentation and related disclosures
• New accounting pronouncements with a potential future effect on the entity’s financial statements
• Alternative accounting treatments discussed with management

Answer 70

A

Other matters to be communicated with the audit committee include:

The auditor’s responsibilities for other information in documents containing the audited financial statements
Difficult or contentious matters for which the auditor sought outside consultation
Going concern issues
Uncorrected and corrected mistakes
Material written communications provided to management
Modifications to the audit report
Disagreements with management
Difficulties in performing the audit

Unlike the communication under GAAS, the auditor is required to submit the communication to those charged with governance prior to issuance of the auditor’s report.

Answer 71

A

The auditor is required to submit the communication to those charged with governance prior to issuance of the auditor’s report.

Answer 72

A

The auditor is required to agree upon the terms of the engagement with the client.

The agreement may be with management or with those charged with governance, whichever is appropriate based on the structure of the entity.

The auditor is required to obtain management’s agreement that it understands and acknowledges its responsibilities, regardless of whether the auditor contracts with management, exclusively with those charged with governance, or exclusively with a third party.

Answer 73

A

The engagement agreement may be with management or with those charged with governance, whichever is appropriate based on the structure of the entity.

The auditor is required to obtain management’s agreement that it understands and acknowledges its responsibilities, regardless of whether the auditor contracts with management, exclusively with those charged with governance, or exclusively with a third party.

Answer 74

A

The auditor is required to obtain management’s agreement that it understands and acknowledges its responsibilities, regardless of whether the auditor contracts with management, exclusively with those charged with governance, or exclusively with a third party.

Answer 75

A

Once the auditor has made the decision to accept the engagement, the auditor is required to send a written engagement letter or a comparable written agreement to the client.

In it, the auditor will confirm the scope and nature of the engagement and the responsibilities of the various parties.

The engagement letter is signed by both the client and the auditor.

Answer 76

A

The auditor’s responsibilities include:

• Conducting an audit in accordance with GAAS
(this doesn’t guarantee that errors and fraud will be detected)

• Informing the client of improvements in control
or economy of operations that come to the auditor’s attention during the engagement

Answer 77

A

The client’s responsibilities include:

Making available all records
Not limiting the scope of the auditor’s work
Paying the fee based on the agreed-upon method

Answer 78

A

The written understanding with the client will also include:

A statement that, due to the inherent limitations of an audit and internal control, material misstatements may not be detected
Identification of the applicable financial reporting framework (AFRF)
Reference to the expected form and content of the report with an indication that the actual report may differ

Answer 79

A

This communication is required as this reduces the risk of miscommunications between the parties. The understanding includes:

Objective and scope of the audit
Responsibilities of the Auditor
Responsibilities of management

• An indication that, even though the audit is properly planned and performed in accordance with GAAS, there is an unavoidable risk that some material misstatements may not be detected due to the inherent limitations of an audit and the inherent limitations of internal control

The identification of the applicable financial reporting framework
The expected form and content of any report expected to be issued, accompanied by an indication that circumstances may require the report to differ in form and content
Other relevant information
Reporting – expected form and content

Answer 80

A

Other matters may be referred to in the engagement letter, such as:

Further elaboration of the scope of the audit
Communication of the results of the engagement in addition to the audit report
Matters related to the planning and performance of the engagement, such as the composition of the engagement team
The anticipation that management will provide written representations
Management’s agreement to provide information on a timely basis to enable the timely completion of the engagement
Management’s agreement to inform the auditor of subsequent events and subsequently discovered facts relevant to the financial statements
Fees and billing arrangements
A request for management’s acknowledgment, evidenced by their signature on the engagement letter, of receipt of the engagement letter and agreement to its terms

Answer 81

A

When appropriate, the engagement letter may also include reference to:

The involvement of other auditors and specialists
The involvement of internal auditors and other entity staff
In an initial audit, arrangements to be made with the predecessor
Restrictions on the auditor’s liability
The auditor’s obligations to provide audit documentation to other parties
Additional services to be provided by the auditor
Any further agreements between the auditor and the entity

Answer 82

A

The mnemonic FACSIMILE can be used to illustrate the elements of the engagement letter.

F = Fees
A = Auditor’s responsibility (GAAS)
C = Confirmation of Engagement

S = Scope and Objective of Engagement
(Stmts auditing and obj is an opinion on F/S)
I = Internal Control
(Comm. significant deficiencies and Material weaknesses in I/C)

M = Management’s Responsibility
(Prep and fair pres of F/S, Design, Implementation and Maintenance (DIM) of I/C and access to info)
I = Irregularities - Fraud
L = iLLegal acts
(Noncompliance with applicable laws and regulations)
E = Errors

Answer 83

A

The mnemonic FACSIMILE can be used to illustrate the elements of the engagement letter.

F = Fees
A = Auditor’s responsibility (GAAS)
C = Confirmation of Engagement

S = Scope and Objective of Engagement 
I = Internal Control 
M = Management’s Responsibility 
I = Irregularities - Fraud
L = iLLegal acts 
E = Errors

Answer 84

A

The auditor should not discuss in detail the audit procedures that will be performed, partly because

(1) these procedures will vary depending on the evidence obtained during the engagement, and partly because
(2) the effectiveness of many procedures depends on the client not knowing in advance what specific evidence will be examined.

Answer 85

A

The engagement partner and other key members of the engagement team should be involved in the planning of the audit.

Answer 86

A

The engagement team (engagement partner and other key members) plans the audit to be responsive to the assessment of the risk of material misstatement.

Answer 87

A

The engagement team plans the audit to be responsive to the assessment of the risk of material misstatement based on the auditor’s understanding of the entity and its environment, including its internal control.

Answer 88

A

The (N) nature, (E) extent and (T) timing of planning will vary with:

The size and complexity of the entity
The auditor’s experience with the entity
Knowledge of the entity’s business and industry
Knowledge of the entity and its environment, including internal control

Answer 89

A

Early appointment of the auditor is preferred and advantageous
as it allows the auditor to plan the audit prior to the balance-sheet date; however, an auditor may be appointed at or near year-end as well.

Answer 90

A

Preliminary engagement activities:

Procedures regarding acceptance and continuance of the client relationship and the engagement;
Evaluation of compliance with relevant ethical requirements; and
Establishing an understanding with the client, documented in the form of an engagement letter.

Answer 91

A

The auditor’s planning activities:

Identifying characteristics of the engagement that affect the scope of the audit;
Determining the reporting objectives to plan the nature and timing of communications;
Considering other factors that the auditor deems significant to the direction of the audit;
Considering the preliminary activities and relevant knowledge gained from other engagements; and
Ascertaining the nature, timing, and extent of resources needed to perform the engagement.

Answer 92

A

The development of a detailed audit plan, including audit programs, is required in order to achieve the objectives of the audit.

Answer 93

A

The audit program ensures that the auditor applies the necessary procedures to verify the financial statement assertions for account balances, classes of transactions, and presentation and disclosure, and to provide support for the auditor’s opinion.

Answer 94

A

The audit plan will include a description of:

The nature and extent of the risk assessment procedures that are planned to be performed in obtaining an understanding of the entity and its environment and assessing the risks of material misstatement;
The nature, timing, and extent of further audit procedures determined to be required at the assertion level in response to assessed risks and to the evaluation of audit evidence obtained; and
Other procedures that are planned to be carried out in order for the engagement to be in compliance with GAAS.

Answer 95

A

When developing audit programs from those of the prior period:

The auditor will consider which procedures are required by GAAS to be performed on every engagement.
The auditor will identify areas that represent more or less risk than in the prior period based on information gathered about the client and its industry during the period.
The auditor will make certain that the programs are dissimilar enough to avoid the approach being predictable, allowing the client to negate the effectiveness of some aspects of the audit.

Answer 96

A

Audit programs are often designed using information from prior engagements or templates, including checklist systems developed by commercial providers, or some combination of the two.

Answer 97

A

When audit programs are developed using templates, the process generally involves the elimination of procedures from the template.

Answer 98

A

The audit program prepared during early planning should include a list of substantive tests that are planned to be performed later in the engagement;

therefore, it is necessary for the auditor to estimate the level at which they’ll be assessing RMM.

Answer 99

A

The preliminary assessment of RMM is usually based on prior experience with the client or the audits of predecessors.

Answer 100

A

The final assessment of RMM won’t take place until the auditor gains an understanding of the client and its environment, including its internal control structure.

Answer 101

A

If assessment of RMM is different from the preliminary assessment, the audit program will have to be modified to increase or decrease the amount of substantive testing to be performed.

Answer 102

A

As the auditor performs risk assessment procedures, used in obtaining an understanding of the entity and its environment, including its internal controls, the auditor may decide to place a higher or lower reliance on internal controls.

Answer 103

A

A higher reliance on internal controls
= Lower the amount of substantive testing

A higher reliance will involve performing tests of controls and, if controls prove to be effective, a reduction in the nature, timing, and extent of further audit procedures to be performed.

Answer 104

A

A lower reliance on internal controls
= Higher the amount of substantive testing

A lower reliance will mean that the auditor will not perform tests of controls and will enhance the nature, timing, and extent of further audit procedures to be performed.

Answer 105

A

The auditor will also prepare a time budget for the engagement.

This is accomplished by estimating the amount of time each step in the audit program is expected to require, including time for review and for the engagement team to respond to review comments.

The time budget is one means the auditor has of communicating to staff the areas that are perceived to represent the highest risk as these are areas that will generally have the most extensive procedures and will be allocated the most time.

Answer 106

A

An audit program is a step-by-step list of audit procedures, which is required for every GAAS audit.

Answer 107

A

An audit program is designed so that:

The procedures will achieve specific audit objectives, which relate to management’s assertions.
It supports the auditor’s conclusion.

• It describes the (N) nature, (T) timing, and (E) extent of:
o Risk assessment procedures sufficient to assess the risks of material misstatement (RMM).
o Further audit procedures at the relevant assertion level for each material class of transactions, account balance, and disclosure.
o Other procedures to be performed to comply with GAAS.

Answer 108

A

There are several key considerations in the development of the audit program:

Materiality
Risk of Material Misstatement (RMM)
Business and Industry considerations

Answer 109

A

When the auditor expresses an opinion regarding the fair presentation of the financial statements in accordance with the applicable financial reporting framework,

it is based on whether the financial statements contain a material misstatement that will influence users, or the financial statements are materially misstated as a whole.

Answer 110

A

Misstatements and omissions are considered material if they are expected to, individually or in the aggregate, influence the decisions a user will make based on the financial statements.

AU-C 320

Answer 111

A

The auditor’s measurement of materiality is a matter of professional judgment, taking into account the anticipated needs of financial statement users.

It is applied in the planning of the engagement as well as its performance.

Answer 112

A

The auditor will apply the concept of materiality in:

Deciding upon the risk assessment procedures to be performed in obtaining an understanding of the entity, its environment, and its internal control;
Assessing the risks of material misstatement;
Determining the nature, timing, and extent of further audit procedures; and
Evaluating identified misstatements in the performance of the engagement and the effects of uncorrected misstatements on the financial statements.

Answer 113

A

In planning the engagement, the auditor determines materiality in relation to the financial statements, which will be used to determine if the financial statements, taken as a whole, are materially misstated.

Answer 114

A

In addition, separate lower materiality levels may be established for specific classes of transactions, account balances, or disclosures.

This would be the case when a misstatement to one of those items that is lower than the materiality level designated for the financial statements, taken as a whole, would influence users of the financial statements

Answer 115

A

Materiality is often measured by applying a percentage to some benchmark.

Common benchmarks include categories of income, including profit before tax, total revenue, gross profit, or total expenses; total equity; or assets.

Answer 116

A

The selection of an appropriate benchmark will be influenced by a variety of factors:

The make-up of the elements of the financial statements;
Items on the financial statements that are expected to be of particular interest to the users;
The nature of the entity, including its level of maturity, its industry, and the economic environment in which it operates;
The entity’s ownership and organizational structure;
How the entity is financed; and
The volatility of the benchmark.

Answer 117

A

When the materiality level is different for the various financial statements, the smallest aggregate dollar amount will be selected.

For example, if the materiality level is identified as $10 million on the balance sheet and $3 million on the income statement, the auditor will consider items in the audit to be material if they individually or collectively could result in a misstatement of $3 million or more.

Answer 118

A

Materiality is based on Auditor’s judgment.

Materiality judgments involve both Quantitative and Qualitative considerations.

Answer 119

A

There is an inverse relationship between audit risk and the materiality consideration.

Assessment of Audit Risk as Low = Set High materiality level

Assessment of Audit Risk as High = Set Low materiality levell.

Answer 120

A

The auditor also determines performance materiality or tolerable misstatement, which takes into account that a misstatement that is not material when considered in relation to the financial statements taken as a whole may reach that level of materiality when combined with other identified misstatements.

As a result, Performance materiality or the tolerable misstatement is lower than materiality at the financial statement level.

Answer 121

A

Tolerable Misstatement < Materiality

Performance materiality or the tolerable misstatement is lower than materiality at the financial statement level.

It is estimated at an amount such that the aggregate of uncorrected and undetected misstatements will not reach the level of financial statement materiality, causing the financial statements to be materially misstated as a whole.

Answer 122

A

Whenever the auditor proposes an adjustment to reduce the balance used as the basis for materiality, misstatements that were originally considered immaterial should be re-evaluated to make certain they are still immaterial considering the reduced measurement.

During the engagement, the auditor may become aware of issues that will change the measurement of materiality.

If, for example, materiality was measured as a % of sales and, as a result of audit procedures applied, the auditor determines that sales were overstated, the auditor will propose an adjustment to materiality accordingly.

Example:
If materiality was to be measured at 5% of sales, and the client’s trial balance indicated sales of $5,000,000, a misstatement under $250,000 would not be considered material.
A proposed adjustment reducing sales to $4,500,000 as a result of the overstatement detected by the audit procedure would reduce the measurement of materiality to $225,000.
As a result, a misstatement between $225,000 and $250,000, which would previously have been considered immaterial, would now be considered material.

Answer 123

A

Materiality
The auditor is required to document:

Materiality for the financial statements taken as a whole;
Materiality for specific classes of transactions, account balances, or disclosures, if appropriate;
Performance materiality; and
Revisions to any of the materiality measurements occurring during the engagement.

Answer 124

A

The auditor is required to establish materiality levels for the financial statements as a whole and for particular accounts or disclosures, as well as determining the tolerable misstatement.

Auditors of issuers are required to perform their engagements in accordance with auditing standards issued by the PCAOB, which include requirements as to how materiality affects the audits of issuers.

In addition, similar to GAAS, the auditor is required to reevaluate materiality levels as the audit progresses.

Answer 125

A

Inherent risk (IR) is the risk of a material misstatement due to the nature of an element of the financial statements.
Control risk (CR) is the risk that a material misstatement will not be prevented or detected and corrected on a timely basis due to a lack of effective internal controls.

The auditor must make a preliminary assessment of the Risk of Material Misstatement (RMM)

Risk of Material Misstatement = Inherent Risk x Control Risk

RMM = IR x CR

Answer 126

A

Inherent risk (IR) is the risk of a material misstatement due to the nature of an element of the financial statements.

Answer 127

A

Control risk (CR) is the risk that a material misstatement will not be prevented or detected and corrected on a timely basis due to a lack of effective internal controls.

Answer 128

A

Detection risk (DR) is the risk that a material misstatement will not be detected by the auditor.

Detection risk is used to determine the amount and types of substantive testing performed by the auditor with the goal of reducing detection risk to an acceptable level.

The higher the RMM, the lower the auditor will wish to reduce detection risk.

Answer 129

A

Detection risk is used to determine the amount and types of substantive testing performed by the auditor with the goal of reducing detection risk to an acceptable level.

The higher the RMM, the lower the auditor will wish to reduce detection risk.

Answer 130

A

Risk of Material Misstatement (RMM) is considered at the financial statement level as well as at the account balance, class of transaction, and disclosure levels.

It is assessed in order to determine the acceptable level of detection risk (DR),
which is the risk that a material misstatement will not be detected by the auditor.

Answer 131

A

Assessing the Risk of Material Misstatement (RMM)

This preliminary assessment of RMM is usually based on prior experience with the client or the audits of predecessors.
The final assessment of RMM won’t take place until the auditor gains an understanding of the client and its environment, including its internal control structure.

If this is different from the preliminary assessment, the audit program will have to be modified to increase or decrease the amount of substantive testing to be performed.

The audit program prepared during early planning should include a list of substantive tests that are planned to be performed later in the engagement. Therefore, it is necessary for the auditor to estimate the level at which they’ll be assessing RMM.

Answer 132

A

In planning the audit, the auditor should consider:

The entity’s accounting policies and procedures;
Materiality levels;
Audit risk and, specifically, the planned assessed level of Risk of Material Misstatements (RMM);
Matters relating to the entity’s business and the industry in which it operates to understand the events and transactions that may have an effect on the client’s financial statements;
The methods used to process accounting information, which influences the design of internal control;
Financial statement items likely to require adjustment;
Conditions that may require extension or modification of audit tests; and
The nature of reports expected to be issued.

Answer 133

A

The steps in Planning an audit (Planning Procedures) include:

B = Basic discussions with the client
about the nature of the engagement and the client’s business and industry
R = Review of audit documentation from previous audits
A = Ask about recent developments in the company
I = Interim financial statements
N = Non-audit personnel
S = Staffing for the audit
T = Timing of the audit procedures
O = Outside assistance
P = Pronouncements
reflecting changes in accounting principles
S = Scheduling with the client

The mnemonic BRAINSTOPS reminds you that an auditor’s brain stops if they don’t plan out the audit carefully before beginning the detailed testing of client records.

Answer 134

A

Supervision

The auditor with final responsibility for the audit is responsible for planning the (N) nature, (E) extent and (T) timing of direction and the supervision of assistants

Answer 135

A

Supervision includes:
• Instructing assistants.
• Reviewing the work performed.
• Dealing with differences of opinion among firm personnel.
o Differences may not be resolved to the satisfaction of all parties.
o Dissenting parties should document the difference and ask to be disassociated from the matter’s resolution.

Answer 136

A

Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated.

Answer 137

A

Audit Risk

This is the risk that material errors, fraud, or acts of noncompliance with laws and regulations, including Illegal acts, may cause the financial statements to be materially misstated, and that the auditor will not detect or properly understand them, resulting in the issuance of an inappropriate report.

Answer 138

A

Audit risk (AR) is a function of the risk that relevant assertions in the financial statements are materially misstated (RMM) and the risk that the auditor will not detect such material misstatements (DR).

Answer 139

A

Audit risk is the product of two different component risks:

Risk of Material Misstatements (RMM)
1. 1 Inherent risk (IR)
2. 2 Control risk (CR)
Detection risk (DR)

Audit Risk = Risk of Material Misstatement x Detection Risk

Audit Risk = RMM x DR

Audit Risk = ( Inherent Risk x Control Risk ) x Detection Risk

Audit Risk = IR x CR x DR

Answer 140

A

Audit Risk = Risk of Material Misstatement x Detection Risk

Audit Risk = RMM x DR

Audit Risk = ( Inherent Risk x Control Risk ) x Detection Risk

Audit Risk = IR x CR x DR

Answer 141

A

Audit Risk = ( Inherent Risk x Control Risk ) x Detection Risk

Audit Risk = IR x CR x DR

Answer 142

A

Risk of Material Misstatements (RMM)

The risk that the relevant assertions related to account balances, classes of transactions, or disclosures contain misstatements that could be material to the financial statements when aggregated with other misstatements.

RMM = Inherent risk (IR) x Control risk (CR)

Answer 143

A

Control Risk (CR)

The risk that the client’s internal control structure will fail to prevent or detect and correct a material misstatement on a timely basis.

This is a function of the effort put forth by the client’s management to safeguard assets and ensure reliable financial records.

As a result, it is affected by the actions of the client but not the auditor.

Answer 144

A

Detection Risk (DR)

The risk that audit procedures will incorrectly lead to a conclusion that a material misstatement does not exist in an account balance when, in fact, such a misstatement does exist.

This is a function of the effort put forth by the auditor in performing tests of details of transactions and accounts, and analytical procedures.

It is the only risk component that the auditor can affect.

It is the risk that the Auditor will not detect a misstatement that exists in a relevant F/S assertion.

Answer 145

A

Detection risk (DR) can be broken down into its two components:

o Test of details risk (TD)
o Substantive analytical procedures risk (AP)

Detection Risk = Test of Details Risk x Substantive Analytical Procedures Risk

DR = TD x AP

Answer 146

A

Audit Risk = Risk of Material Misstatement x Detection Risk

Audit Risk = ( Inherent Risk x Control Risk ) x Detection Risk

Audit Risk
= ( Inherent Risk x Control Risk ) x ( Test of Details Risk x Substantive Analytical Procedures Risk)

AR = ( IR x CR ) x ( TD x AP )

Answer 147

A

Audit Risk

= ( Inherent Risk x Control Risk ) x ( Test of Details Risk x Substantive Analytical Procedures Risk)

Answer 148

A

Audit Risk

= ( Inherent Risk x Control Risk ) x ( Test of Details Risk x Substantive Analytical Procedures Risk)

Answer 149

A

Audit Risk = Risk of Material Misstatement x Detection Risk

Detection Risk = Audit Risk / Risk of Material Misstatement

Acceptable Detection Risk = Audit Risk / Risk of Material Misstatement

Acceptable DR = AR / RMM

Detection risk should bear an inverse relationship to Risk of Material Misstatement (IR × CR).

The greater the risk of material misstatement the auditor believes exists, the less the detection risk that can be accepted and vice versa.

Answer 150

A

Inherent risk and control risk (RMM) differ from detection risk in that they exist independently of the audit,

whereas detection risk relates to the auditor’s procedures and can be altered by adjusting the nature, timing, and extent of substantive procedures.

Answer 151

A

Detection risk relates to the auditor’s procedures and can be altered by adjusting the nature, timing, and extent of substantive procedures.

Answer 152

A

Auditors determine the acceptable level of audit risk (AR), the risk that the auditor is willing to take, incorporating cost and benefit considerations, that a material misstatement may not be detected by the audit.

Answer 153

A

Auditors assess the risk of material misstatement (RMM) by evaluating the inherent risk (IR) associated with financial statement elements and assessing control risk (CR) based on the auditor’s understanding of internal control.

Answer 154

A

Auditors determine the level of detection risk (DR) that is necessary to achieve the desired audit risk (AR).

Answer 155

A

Based on an inherent risk of 75% and a control risk of 80%, RMM is 60% (75% × 80%).

To achieve an audit risk of 6%, detection risk must be reduced to 10%.

RMM = IR × CR
= 75% × 80%
= 60%

AR = RMM × DR 
6%  = 60% × DR

DR = AR / RMM
DR = 6% / 60%
= 10%

Detection risk is a function of the (N) nature, (T) timing, and (E) extent of audit procedures, and, as such, may be changed by the auditor.

Answer 156

A

Assume the auditor decides an audit risk of 6% is acceptable,
indicating that the auditor is willing to accept that there will be a 6% probability that a material misstatement that would cause the auditor to modify the report will not be detected in the audit.

AR = RMM × DR

6% = RMM × DR

Answer 157

A

As a result, the auditor may assess control risk below maximum.
Assume a value of 80%, indicating that, if a material misstatement does occur, there is an 80% probability that it will neither be prevented nor detected and corrected on a timely basis.

Answer 158

A

The components of the audit risk (AR) model may be assessed in quantitative terms, such as %,

or in non-quantitative terms such as high, medium, or low risk.

Answer 159

A

There is an inverse relationship between Audit Risk and Materiality.

Answer 160

A

The auditor may make a combined assessment of inherent risk and control risk or separate assessments of inherent risk and control risk.

Answer 161

A

The assessment of risk of material misstatement (RMM) is a matter of professional judgment rather than a precise measurement of risk, the auditor should have an appropriate basis for that assessment.

This basis may be obtained through risk assessment procedures performed to obtain an understanding of the entity and its environment, including its internal control, and through the performance of test of controls.

Answer 162

A

The auditor’s responsibility is to plan and perform the audit to obtain reasonable assurance that no errors or acts of fraud have caused the financial statements to be materially misstated.

Answer 163

A

A misstatement may refer to any of the following:

A difference between the amount, classification, or presentation of a reported financial statement element, account, or item and the amount, classification, or presentation that would have been reported under GAAP.
The omission of a financial statement element, account, or item.
A financial statement disclosure that is not presented in accordance with GAAP.
The omission of information required to be disclosed in accordance with GAAP.

Answer 164

A

Misstatements should not just be evaluated quantitatively, but qualitatively, such as:

Misstatements that affect trends of profitability.
Misstatements that change losses into income.
Misstatements that affect segment information.
Misstatements that affect compliance with legal and contractual requirements.

Answer 165

A

The use of estimates in accounting increases the risk of material misstatements. Because estimates require the application of judgment:

They are subject to human error.
They are susceptible to manipulation, resulting in fraudulent financial reporting.

Answer 166

A

The auditor generally examines samples as a basis for drawing conclusions about a population.

Misstatements that are detected in a sample often indicate that comparable misstatements may be present proportionately within the population, implying a likely proportional misstatement of the population.

Answer 167

A

Material misstatements in the financial statements can result from errors, meaning unintentional mistakes, or fraud, meaning intentional misbehavior, and both may be known or likely.

Errors
Fraud

Answer 168

A

Errors
• Unintentional mistakes, misjudgments or omissions of amounts or disclosures.
• May be due to human error or the incompetency of employees.

Answer 169

A

Fraud – an intentional act by one or more individuals among management, those charged with governance, employees, or third parties involving the use of deception that results in a misstatement in financial statements that are the subject of an audit.

Answer 170

A

Two types of fraud (Intentional Acts):

Fraudulent financial reporting
(Management fraud, or “cooking the books”) – Misrepresentation of facts
Misappropriation of assets – Defalcation schemes

Answer 171

A

Misappropriation of assets – Defalcation schemes

▪ Embezzlement of funds
▪ Theft of other assets
▪ Misuse of entity assets

Answer 172

A

Fraudulent Financial Reporting
(management fraud, or “cooking the books”) – Misrepresentation of facts – Integrity of management.

▪ Manipulation, falsification, alteration of accounting records or supporting documents.
Inability to produce or locate relevant documents may also be indicative of fraud.

▪ Misrepresentation or omission of events, transactions or information.

▪ Intentional misapplication of accounting principles.
▪ The non-recording of transactions.

Answer 173

A

An auditor evaluates two types of misstatements resulting from errors or fraud.

They are (1) known or (2) likely.

Known misstatements are misstatements specifically identified during the audit
Likely misstatements are misstatements that have not been specifically identified, but are considered likely to exist based on audit evidence obtained or due to a difference between management and auditor judgments.

Answer 174

A

Likely is one of the two types of misstatements resulting from errors or fraud.

Likely misstatements are misstatements that have not been specifically identified, but are considered likely to exist based on audit evidence obtained or due to a difference between management and auditor judgments.

▪ Likely misstatements may be based on the assumption that known misstatements identified in a sample are proportionately present in the population.

▪ Likely misstatements may be based on the auditor’s knowledge of the entity, its industry, or its environment and a disparity with information presented in the financial statements.

Answer 175

A

Misstatements resulting from errors or fraud

The auditor must communicate all known and likely misstatements to the appropriate level of management on a timely basis.

The auditor must communicate all known and likely misstatements (even immaterial), identified during the audit, other than those the auditor believes are trivial, to the appropriate level of management on a timely basis.

• Management must correct all known misstatements and should evaluate items for which there are likely misstatements.

Answer 176

A

The auditor is required to communicate all knowledge or suspicion of fraud to management and/or governance,

although the auditor is required to communicate with governance when senior management is involved in the fraud.

The communication may be oral or in writing, but should be documented by the auditor.
The auditor may want to consult with legal counsel.

Answer 177

A

3 conditions that are generally assumed to be present whenever a successful fraud occurs (Fraud Triangle):

Reason or Motivation (Incentive/pressure)
Opportunity
Rationalization

Answer 178

A

Fraud Triangle

Answer: 3 Rationalization

Reason or Motivation (Incentive/pressure)
o Personal gain
o Pressure, such as to meet analysts’ expectations
Opportunity
o A lack of internal controls or internal controls that are not being enforced
o Authority to override controls or the ability to circumvent controls, such as through collusion
Rationalization – the perpetrator’s belief system.
o They do not believe it is really wrong (common practice, eliminating an unfair advantage)
o They perceive to have no choice since the repercussions of not perpetrating the fraud would be too severe, such as the effect on stock price of not meeting an earnings expectation.

Answer 179

A

Fraud Triangle

Answer: 3 Rationalization

Reason or Motivation (Incentive/pressure)
o Personal gain
o Pressure, such as to meet analysts’ expectations
Opportunity
o A lack of internal controls or internal controls that are not being enforced
o Authority to override controls or the ability to circumvent controls, such as through collusion
Rationalization – the perpetrator’s belief system.
o They do not believe it is really wrong (common practice, eliminating an unfair advantage)
o They perceive to have no choice since the repercussions of not perpetrating the fraud would be too severe, such as the effect on stock price of not meeting an earnings expectation.

Answer 180

A

Fraud Triangle

Answer: 2 Opportunity

Reason or Motivation (Incentive/pressure)
o Personal gain
o Pressure, such as to meet analysts’ expectations
Opportunity
o A lack of internal controls or internal controls that are not being enforced
o Authority to override controls or the ability to circumvent controls, such as through collusion
Rationalization – the perpetrator’s belief system.
o They do not believe it is really wrong (common practice, eliminating an unfair advantage)
o They perceive to have no choice since the repercussions of not perpetrating the fraud would be too severe, such as the effect on stock price of not meeting an earnings expectation.

Answer 181

A

Fraud Triangle

Answer: 2 Opportunity

Reason or Motivation (Incentive/pressure)
o Personal gain
o Pressure, such as to meet analysts’ expectations
Opportunity
o A lack of internal controls or internal controls that are not being enforced
o Authority to override controls or the ability to circumvent controls, such as through collusion
Rationalization – the perpetrator’s belief system.
o They do not believe it is really wrong (common practice, eliminating an unfair advantage)
o They perceive to have no choice since the repercussions of not perpetrating the fraud would be too severe, such as the effect on stock price of not meeting an earnings expectation.

Answer 182

A

Fraud Triangle

Answer: 1 Reason or Motivation (Incentive/pressure)

Reason or Motivation (Incentive/pressure)
o Personal gain
o Pressure, such as to meet analysts’ expectations
Opportunity
o A lack of internal controls or internal controls that are not being enforced
o Authority to override controls or the ability to circumvent controls, such as through collusion
Rationalization – the perpetrator’s belief system.
o They do not believe it is really wrong (common practice, eliminating an unfair advantage)
o They perceive to have no choice since the repercussions of not perpetrating the fraud would be too severe, such as the effect on stock price of not meeting an earnings expectation.

Answer 183

A

3 conditions that are generally assumed to be present whenever a successful fraud occurs (Fraud Triangle):

Motivation
Opportunity
Rationalization

Answer 184

A

The auditor is required to communicate knowledge or suspicion of noncompliance with applicable laws and regulations (AU-C 250), also referred to as illegal acts, to those charged with governance, other than those that are clearly inconsequential.

Answer 185

A

Noncompliance is defined as acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations.

The auditor distinguishes between those with a direct effect on the amounts and disclosures in the financial statements, which result in adjusting entries, and those with an indirect effect, which generally result in contingencies.

Answer 186

A

Illegal Acts

Illegal acts with a direct and material effect may include nonpayment of payroll taxes or business license fees.
Illegal acts with an indirect effect may include antitrust violations, price-fixing, or purchasing securities based on insider information.

Other examples include violations of occupational safety laws (OSHA) that might result in financial losses from government fines; or the Foreign Corrupt Practices Act, which makes payment of bribes to foreign officials’ illegal and requires publicly held companies to maintain systems of internal control sufficient to provide reasonable assurances that such activities are detected.

Answer 187

A

Illegal Acts

The auditor’s responsibility is to consider laws that have both a direct effect and those that do not have a direct effect (indirect effect) on the financial statements.
The auditor should communicate with those charged with governance, matters involving noncompliance, other than inconsequential matters, as soon as practicable.
The documentation should include a description of the identified or suspected noncompliance and the results of the discussion with management and those charged with governance and other parties inside or outside the entity.

Answer 188

A

Illegal Acts

When noncompliance is identified or suspected, the auditor should obtain an understanding of the nature of the illegal act and the circumstances under which it occurred and any further information that may assist in evaluating the potential impact on the financial statements.

The matter should be discussed with management or those charged with governance, as appropriate, to determine if support can be provided indicating compliance.
If compliance cannot be supported and the amount is potentially material, the auditor should consider consulting with legal counsel.

Answer 189

A

The auditor should pay special attention to fraud risk factors that increase the probability of fraudulent financial reporting or defalcation.

Answer 190

A

The auditor is required to communicate to governance knowledge or suspicion of noncompliance with applicable laws and regulations, also referred to as illegal acts.

An entity is not in compliance when, intentionally or unintentionally, it commits acts contrary to prevailing laws or regulations or omits acts required by laws or regulations.

Answer 191

A

Certain laws and regulations have a direct effect on the amounts and disclosures in the financial statements, such as the nonpayment of payroll taxes or, in some jurisdictions, business license fees.

These will result in adjusting entries.

Others may have an indirect effect, such as those that are fundamental to the operations of the business, fundamental to the entity’s ability to continue as a going concern, or necessary to avoid a potentially material penalty.

These may result in contingencies or may have no financial statement effect, although they may require disclosure.

Answer 192

A

Compliance Audits
Operational Audits
Financial Statement Audits

Answer 193

A

Compliance Audits

Compliance audits are performed to determine if an entity is complying with applicable laws and regulations.

They are often performed by governmental or regulatory organizations on entities that may be chosen on a random basis or may be selected due to some indication that there may be one or more incidents of noncompliance, such as a tax return with unusual deductions.

Answer 194

A

Compliance Audits

• Are they following laws and regulations?

  o IRS audits

  o Governmental units to determine compliance with laws and regulations

  o CPA to determine compliance with provisions of a bond or note agreement

Answer 195

A

Operational Audits

Operational audits are generally performed by internal auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with internal controls.

Answer 196

A

Operational Audits

• Effectiveness/Efficiency/Economy – done by Internal Auditors, Governmental auditors or CPAs.

  o Audit a department or division of a corporation to see if meeting organizational goals.

  o Review by governmental auditors to determine the effectiveness and benefit of specific gov. funded programs.

Answer 197

A

Operational Audits

Operational audits are generally performed by internal auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with internal controls.

Answer 198

A

Operational Audits

Operational audits are generally performed by internal auditors to determine if management’s policies are being followed appropriately and to evaluate the entity’s performance as well as its compliance with internal controls.

Answer 199

A

Financial Statement Audits

Financial statement audits are performed exclusively by CPAs, and are designed to determine if financial statements are fairly presented in accordance with the applicable financial reporting framework.

Answer 200

A

Financial Statement Audits

Financial statement audits are performed exclusively by CPAs, and are designed to determine if financial statements are fairly presented in accordance with the applicable financial reporting framework.

Standards for the performance of financial statement audits are established by the Auditing Standards Board (ASB) of the AICPA for audits of nonpublic entities; by the PCAOB for audits of public entities; and by the IAASB for audits performed under international standards.
• Examination for the purpose of giving an objective opinion as to the fairness of financial statement presentations, in all material respects, that are free from material misstatement, whether due to fraud or error, in conformity with an Applicable Financial Reporting Framework (AFRF), such as U.S. Generally Accepted Accounting Principles (GAAP).

Answer 201

A

Financial Statement Audits

Standards for the performance of financial statement audits are established

by the Auditing Standards Board (ASB) of the AICPA for audits of nonpublic entities;

by the PCAOB for audits of public entities; and

by the IAASB for audits performed under international standards.

Answer 202

A

Financial Statement Audits

• Examination for the purpose of giving an objective opinion as to the fairness of financial statement presentations,

in all material respects,

that are free from material misstatement,

whether due to fraud or error,

in conformity with an Applicable Financial Reporting Framework (AFRF),

such as U.S. Generally Accepted Accounting Principles (GAAP).

Answer 203

A

Financial Statement Audits

Financial statement audits are performed exclusively by CPAs, and are designed to determine if financial statements are fairly presented in accordance with the applicable financial reporting framework.

Standards for the performance of financial statement audits are established by the Auditing Standards Board (ASB) of the AICPA for audits of nonpublic entities; by the PCAOB for audits of public entities; and by the IAASB for audits performed under international standards.

• Examination for the purpose of giving an objective opinion as to the fairness of financial statement presentations, in all material respects, that are free from material misstatement, whether due to fraud or error, in conformity with an Applicable Financial Reporting Framework (AFRF), such as U.S. Generally Accepted Accounting Principles (GAAP).

Answer 204

A

Clarity Standards

In 2009, the Auditing Standards Board (ASB) began issuing a series of standards referred to as the “clarity” standards, to make Generally Accepted Auditing Standards (GAAS) easier to understand and apply.

Answer 205

A

Clarity Standards

To make Generally Accepted Auditing Standards (GAAS) easier to understand and apply, the Auditing Standards Board (ASB) began issuing a series of standards referred to as the “clarity” standards

Answer 206

A

Clarity standards apply to audits of nonissuers
(Non-public companies) and

are issued by the Auditing Standards Board (ASB) of the AICPA.

Answer 207

A

Clarity standards apply to audits of nonissuers (Non-public companies) and are issued by the Auditing Standards Board (ASB) of the AICPA.

Answer 208

A

Clarity Standards

These standards clarify the auditing standards, make them easier to follow, easier to understand and to increase the convergence with International Standards on Auditing (ISA).

Answer 209

A

Clarity Standards

In 2009, the Auditing Standards Board (ASB) began issuing a series of standards referred to as the “clarity” standards, to make Generally Accepted Auditing Standards (GAAS) easier to understand and apply.

These standards, effective for audits of financial statements for periods ending on or after December 15, 2012, are organized in a uniform manner.

These standards clarify the auditing standards, make them easier to follow, easier to understand and to increase the convergence with International Standards on Auditing (ISA).

These standards apply to audits of nonissuers (Non-public companies) and are issued by the Auditing Standards Board (ASB) of the AICPA.

Answer 210

A

Clarity Standards

In anticipation of issuing the clarity standards, the ASB issued a pronouncement that described two levels of requirements that are imposed on auditors,

(1) unconditional requirements and
(2) presumptively mandatory requirements

that apply to an audit performed in accordance with GAAS.

Answer 211

A

Clarity Standards

In anticipation of issuing the clarity standards, the ASB issued a pronouncement that described two levels of requirements that are imposed on auditors,

(1) unconditional requirements and
(2) presumptively mandatory requirements

that apply to an audit performed in accordance with GAAS.

Answer 212

A

Clarity Standards

In anticipation of issuing the clarity standards, the ASB issued a pronouncement that described two levels of requirements that are imposed on auditors,

(1) unconditional requirements and
(2) presumptively mandatory requirements

that apply to an audit performed in accordance with GAAS.

Answer 213

A

Clarity Standards

In a standard entitled “Defining Professional Requirements in Statements on Auditing Standards”,

the Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors:

• (1) An unconditional requirement

must be complied with for the auditor to complete an engagement in accordance with GAAS.

An auditor is required to comply with an unconditional requirement, which will always include the word

”must” or
the phrase “is required to”

in every circumstance to which it applies.

Answer 214

A

Clarity Standards

The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors:

• (1) An unconditional requirement

must be complied with for the auditor to complete an engagement in accordance with GAAS.

An auditor is required to comply with an unconditional requirement, which will always include the word

”must” or
the phrase “is required to”

in every circumstance to which it applies.

Answer 215

A

Clarity Standards

The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors:

• (2) A presumptively mandatory requirement

is one that the auditor is also expected to comply with in every circumstance to which it applies.

In rare circumstances, however, the auditor may depart from a presumptively mandatory requirement if the required procedure would be ineffective,

but must document how an alternate procedure was sufficient to achieve the objective of the standard (i.e., the auditor must document an explanation for not doing so).

A presumptively mandatory requirement will always include the word “should.”

Answer 216

A

Clarity Standards

A presumptively mandatory requirement will always include the word “should.”

Answer 217

A

Clarity Standards

The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors:

• (2) A presumptively mandatory requirement

is one that the auditor is also expected to comply with in every circumstance to which it applies.

Answer 218

A

Clarity Standards

The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors:

• (2) A presumptively mandatory requirement

is one that the auditor is also expected to comply with in every circumstance to which it applies.

Answer 219

A

Clarity Standards

The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors:

• (2) A presumptively mandatory requirement

is one that the auditor is also expected to comply with in every circumstance to which it applies.

In rare circumstances, however, the auditor may depart from a presumptively mandatory requirement if the required procedure would be ineffective,

but must document how an alternate procedure was sufficient to achieve the objective of the standard (i.e., the auditor must document an explanation for not doing so).

A presumptively mandatory requirement will always include the word “should.”

       o On some occasions, a standard will include an indication that the auditor should consider a procedure.

       o This establishes a presumptively mandatory requirement to consider the procedure or item being referenced, but does not establish a requirement to perform the procedure.

Answer 220

A

Clarity Standards

The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors:

• (1) An unconditional requirement
always include the word ”must” or the phrase “is required to”

• (2) A presumptively mandatory requirement
always include the word “should.”

• These terms apply for Public and Non-Public audits, as well as GAGAS audits.

Answer 221

A

Clarity Standards

The Auditing Standards Board (ASB) describes two types of requirements it imposes on auditors:

• (1) An unconditional requirement
always include the word ”must” or
the phrase “is required to”

• (2) A presumptively mandatory requirement
always include the word “should.”

• These terms apply for Public and Non-Public audits, as well as GAGAS audits.

Answer 222

A

The clarity project also changed the format, with each standard including the following sections:

Introduction
Objectives
Definitions
Requirements
Application and Other Explanatory Material

Each standard begins with an Introduction, which includes the purpose and scope of each standard.

This tells us when the individual standards do or do not apply.

Answer 223

A

Clarity Standards

Each standard begins with an Introduction, which includes the purpose and scope of each standard. This tells us when the individual standards do or do not apply.

Each standard follows with

an indication of the objective of that standard (i.e., what requirements are expected to be achieved),
which the auditor uses in planning and performing the audit,
considering the interrelationships within GAAS,

to achieve the overall objectives of the auditor.

Answer 224

A

Clarity Standards

Each standard follows with an indication of the objective of that standard.

This assists the auditor:

In determining if audit procedures in addition to those required are necessary, which will be the case when, in the auditor’s judgment, performing the required procedures will not achieve the objective
In evaluating whether the auditor has obtained sufficient appropriate audit evidence

Answer 225

A

In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of:

Considering evidence obtained in achieving other objectives
Extending work performed to comply with a requirement, such as by increasing a sample size
Performing procedures in addition to those required

Answer 226

A

In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of:

Considering evidence obtained in achieving other objectives
Extending work performed to comply with a requirement, such as by increasing a sample size
Performing procedures in addition to those required

Answer 227

A

In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained.

Answer 228

A

In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of:

Considering evidence obtained in achieving other objectives
Extending work performed to comply with a requirement, such as by increasing a sample size
Performing procedures in addition to those required

Answer 229

A

In making the determination, the auditor will evaluate whether sufficient appropriate audit evidence can be obtained by some combination of:

Considering evidence obtained in achieving other objectives
Extending work performed to comply with a requirement, such as by increasing a sample size
Performing procedures in addition to those required

Answer 230

A

The auditor may determine that the objective of a relevant standard may not be achievable.

This may prevent the auditor from achieving the overall objective of the engagement,

which will lead the auditor to either modify the audit report or withdraw from the engagement when allowed under applicable law or regulation.

Answer 231

A

The auditor may determine that the objective of a relevant standard may not be achievable.

This may prevent the auditor from achieving the overall objective of the engagement,

which will lead the auditor to either modify the audit report or withdraw from the engagement when allowed under applicable law or regulation.

Answer 232

A

The auditor may determine that the objective of a relevant standard may not be achievable.

This may prevent the auditor from achieving the overall objective of the engagement,

which will lead the auditor to either modify the audit report or withdraw from the engagement when allowed under applicable law or regulation.

Answer 233

A

The auditor will fail to meet an objective when:

The auditor is prevented from complying with relevant requirements.
The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.

Answer 234

A

The auditor will fail to meet an objective when:

The auditor is prevented from complying with relevant requirements.
The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.

Answer 235

A

The auditor will fail to meet an objective when:

The auditor is prevented from complying with relevant requirements.
The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.

Answer 236

A

The auditor will fail to meet an objective when:

The auditor is prevented from complying with relevant requirements.
The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.

Answer 237

A

The auditor will fail to meet an objective when:

The auditor is prevented from complying with relevant requirements.
The auditor is unable to apply additional audit procedures considered necessary to achieve the objective.

Answer 238

A

The inability to achieve an objective is considered a significant finding, which the auditor is required to document.

The auditor is not required to individually document the achievement of each objective, documenting the failure to achieve an objective assists the auditor in evaluating whether the overall objectives of the audit have been achieved.

Answer 239

A

The inability to achieve an objective is considered a significant finding, which the auditor is required to document.

Answer 240

A

The inability to achieve an objective is considered a significant finding, which the auditor is required to document.

The auditor is not required to individually document the achievement of each objective, documenting the failure to achieve an objective assists the auditor in evaluating whether the overall objectives of the audit have been achieved.

Answer 241

A

Each clarified standard identifies requirements in a section that includes all

unconditional or
presumptively mandatory requirements.

The auditor is expected to comply with every requirement to achieve the objective of the standard.

Answer 242

A

The only exceptions will apply when:

An entire section of GAAS does not apply
A specific requirement does not apply because the condition it is intended to provide audit evidence for, does not exist

Answer 243

A

Each clarified standard identifies requirements in a section that includes all unconditional or presumptively mandatory requirements.

The auditor is expected to comply with every requirement to achieve the objective of the standard.

The only exceptions will apply when:

• An entire section of GAAS does not apply

 (e.g., the section on reliance on the work of internal auditors is not applicable when the client does not have an internal audit department).

• A specific requirement does not apply because the condition it is intended to provide audit evidence for, does not exist

 (e.g., the requirement to communicate significant deficiencies and material weaknesses in internal control does not apply when no such weaknesses exist).

Answer 244

A

Clarified standards impose some new requirements that the auditor will need to fulfill.

• The auditor is required, for example,
to evaluate the acceptability of the applicable financial reporting framework.
The auditor needs to:
o Evaluate the NEEDS of Users
o Evaluate whether the applicable framework MEETS those needs
o Evaluate whether it is the MOST APPROPRIATE FRAMEWORK under the circumstances

Answer 245

A

Clarified standards impose some new requirements that the auditor will need to fulfill.

• The auditor is also required to apply Quality Control procedures at the engagement level.

Answer 246

A

Clarified standards impose some new requirements that the auditor will need to fulfill.

• The auditor is required, for example,
to evaluate the acceptability of the applicable financial reporting framework.
The auditor needs to:
o Evaluate the NEEDS of Users
o Evaluate whether the applicable framework MEETS those needs
o Evaluate whether it is the MOST APPROPRIATE FRAMEWORK under the circumstances

Management now has 2 major responsibilities added to the audit report
The auditor is also required to apply Quality Control procedures at the engagement level.

There were also significant changes made to both the form and content of the audit report,

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AUD 1 Audit Standards & Engagement Planning Flashcards

Type of Audits - Compliance Audits - Operational Audits - Financial Statement Audits

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