AUD 1.06 - STEPS IN AUDIT PROCESS

Question 1

1.06 STEPS IN THE AUDIT PROCESS:

ACCEPTING THE ENGAGEMENT:

Preconditions for an audit:

1. _______
2. _______

First Year Audits (Reaudit):

1. ______
2. ______
3. _______
   - RID-C

Answer 1

Preconditions:

1. AFRF Acceptability/Applicability
2. Management willing to accept responsibilities

First Year Audits:
1. Audit evidence for beginning balance/disclosure
2. Consistency in accounting method
3. Inquiry of old auditor (info confidential/not privileged)
R - Reason for change
I - Integrity of management
D - Disagreement during audit
C - Communication w/mgmt regarding fraud

Question 2

1.06 STEPS IN THE AUDIT PROCESS:

COMMUNICATE TO MANAGEMENT and THOSE CHARGED WITH GOVERNANCE:

D
I
S
A
P
P
R
O
V
E

Answer 2

Communicate the following circumstances to management/those charged with governance/audit committee:

D - Disagreement w/mgmt - frameworks
I - Illegal Acts
S - Significant accounting policies and changes
A - Adjustments - RJEs/AJEs
P - Prior discussion with management
P - Problems during audit - obtaining evidence
R - Responsibilities of auditor
O - Other info
V - View of accountant - qualitative aspects
E - Estimates - reasonableness

Question 3

1.06 STEPS IN THE AUDIT PROCESS:

Which of the following matters is an auditor not required to communicate to an entity’s audit committee?

A) Significant adjustments arising from the audit that were recorded by management.

B) The degree of reliance the auditor placed on the management representation letter.

C) The level of responsibility assumed by the auditor under GAAS.

D) The basis for the auditor’s conclusions about the reasonableness of management’s sensitive accounting estimates.

Answer 3

B) The degree of reliance the auditor placed on the management representation letter.

The auditor would communicate with governance regarding significant adjustments arising from the audit as they may provide information about management’s integrity or competence, depending on whether the misstatements were considered intentional or unintentional.

The auditor will communicate about the reasonableness of management’s estimates for similar reasons.

The auditor will also communicate the level of responsibility being taken under GAAS to avoid a misunderstanding.

The auditor will not, however, indicate the degree of reliance that will be placed on management’s representation letter, which is a matter of professional judgment.

Question 4

1.06 STEPS IN THE AUDIT PROCESS:

An auditor’s communication with the audit committee is required to include the

A) Justification for the auditor’s selection of sampling methods

B) Basis for the auditor’s preliminary judgment about materiality

C) Assessment of the quality of the entity’s earnings as compared to the prior year.

D) Discussion of disagreements with management about matters that significantly impact the entity’s financial statements.

Answer 4

D) Discussion of disagreements with management about matters that significantly impact the entity’s financial statements.

Disagreements with management about matters that significantly impact the entity’s financial statements bear on management’s competence, if unintentional, or on management’s integrity, if intentional.

In either case, the auditor would communicate such matters to those responsible for governance.

The auditor’s judgment about materiality and selection of sampling methods are at the discretion of the auditor and are not communicated to governance.

The auditor is not engaged to evaluate the quality of the entity’s earnings.

Question 5

1.06 STEPS IN THE AUDIT PROCESS:

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s

A) Evaluation of all matters of continuing accounting significance

B) Opinion of any subsequent events occurring since the predecessor’s audit report was issued

C) Awareness of the consistency in the application of GAAP between periods.

D) Understanding as to the reasons for the change of auditors.

Answer 5

D) Understanding as to the reasons for the change of auditors.

The primary objective of communicating with a predecessor auditor is to enable the successor to determine if the client’s management lacks integrity.

The predecessor’s understanding of the reasons for the change in auditors may be relevant as the change may have been due to a disagreement about accounting principles or a scope limitation, which might affect the successor’s evaluation.

A predecessor would not necessarily be aware of events subsequent to the issuance of the predecessor’s report.

In addition, although the predecessor did have to ascertain that accounting principles were consistently applied in the prior and immediately preceding period, the predecessor would not be aware as to whether they continued to be applied on a consistent basis.

Although the successor may make inquiries of a predecessor regarding matters of continuing accounting or auditing significance, the auditor is not required to do so.