AUD 1.09 - PLANNING PROCEDURES Flashcards
1.09 - Planning Procedures:
The audit program usually cannot be finalized until the
A) Engagement letter has been signed by the auditor and the client.
B) Consideration of the entity’s internal control structure has been completed.
C) Internal control deficiencies have been communicated to the audit committee.
D) Search for unrecorded liabilities has been performed and documented.
B) Consideration of the entity’s internal control structure has been completed.
The audit program is a step-by-step list of audit procedures. These procedures are designed to achieve specific audit objectives and the audit program describes the nature, timing and extent of audit procedures.
The auditor must gain an understanding of the entity’s internal controls to design appropriate tests to achieve audit objectives. The auditor’s understanding of internal control is one of the factors considered in determining the nature, timing, and extent of further audit procedures, which will be specified in the audit programs.
1.09 - Planning Procedures:
Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year?
A) Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by GAAS due to the timing of acceptance of the engagement.
B) Assessment of control risk below the maximum level./
C) Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern.
D) Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.
D) Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.
An auditor would be able to accept an engagement after the close of the fiscal year if the auditor had a means of obtaining sufficient appropriate audit evidence regarding opening balances, such as developing a remedy for the inability to observe inventory by performing alternate procedures.
The inability to obtain evidence regarding opening balances may result in a disclaimer of opinion in regard to the income statement, the statement of cash flows, and the statement of changes in equity, but it would not preclude the auditor from expressing an opinion on the balance sheet.
The auditor does not assess control risk until after the engagement has been accepted.
The auditor’s evaluation as to the ability of the client to continue as a going concern will be based on the auditor’s evaluation of evidence obtained during the course of the engagement, not a representation from the predecessor.
1.09 - Planning Procedures:
STEPS in PLANNING - PLANNING PROCEDURES:
B R A I N S T O P S
Basic discussion with client - nature of engagement/client industry and business
Review of audit documentation - predecessor auditor to assist in developing audit program
Ask about recent developments
Interim financial statements - analytical procedures are mandatory
Non-audit personnel - inquire
Staffing - budget for audit
Timing - of audit procedures
Outside assistance - maybe specialist
Pronouncements - changes in accounting principles
Scheduling with Clients - coordinate activities with client staff
1.09 - Planning Procedures:
Prior to commencing field work, an auditor usually discusses the general audit strategy with the client’s management. Which of the following details do management and the auditor usually agree upon at this time?
A) The effects that inadequate controls may have over safeguarding of assets
B) The specific matters to be included in the communication with the audit committee
C) The minimum amount of misstatements that may be considered to be material
D) The schedules and analyses that the client’s staff should prepare
D) The schedules and analyses that the client’s staff should prepare
The auditor and client will agree on the schedules and analyses that the client’s staff will prepare. The client will need to make certain that staff is available and the auditor will have to plan the audit taking into consideration when the schedules and analyses will be available.
The auditor, not the client, determines what matters will be included in the communication with those charged with governance.
Materiality is a matter of the auditor’s professional judgment and is not agreed upon with the client.
It is also the auditor’s responsibility to determine the effect of inadequate controls may have over the safeguarding of assets and the effect that will have on the audit procedure employed to support the assertion of existence.
1.09 - Planning Procedures:
AUDIT PLAN/PROGRAM:
Define = _____
Consider 3 things:_____
BRAINSTOPS
DEFINE:
- Step by step list of procedures
- Designed to achieve specific objectives
- Describes nature, timing, and extent of procedures
CONSIDER 3 THINGS:
- Materiality - smallest aggregate dollar
- RMM = Control Risk + Inherent Risk (cash is highest)
- Business/Industry
BRAINSTOPS
1.09 - Planning Procedures:
A successor auditor ordinarily should request to review the predecessor’s working papers relating to
A) Neither contingencies nor internal controls
B) Contingencies
C) Contingencies and internal controls
D) Internal Control
C) Contingencies and internal controls
Both contingencies and internal controls are matters of continuing significance and would be among the subjects of inquiry between the successor and the predecessor.
1.09 - Planning Procedures:
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?
A) Internal control activities requiring the segregation of duties are subject to management override.
B) It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.
C) Management continues to employ an inefficient system of information technology to record financial transactions.
D) There are significant related party transactions that management claims occurred in the ordinary course of business.
An auditor would not accept an engagement if it is unlikely that sufficient appropriate audit evidence is available since the auditor would not be able to form an opinion on the financial statements.
Significant related party transactions would not preclude the auditor from accepting the engagement.
The auditor would want to obtain evidence, however, that they are properly accounted for and disclosed.
Internal controls are often subject to management override, which affects the performance of the engagement due to the increased control risk, but does not affect acceptance.
Likewise, the continued employment of an inefficient IT system will affect the conduct of the engagement, but not its acceptance.
1.09 - Planning Procedures:
Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?
A) Staff will need to rescheduled to cover this new client.
B) The client’s financial reporting system has been in place for 10 years.
C) There will be a client-imposed scope limitation
D) The firm will have to hire a specialist in one audit area.
C) There will be a client-imposed scope limitation
A client imposed scope limitation may prevent the auditor from issuing an unmodified opinion and may require a qualified opinion or a disclaimer of opinion.
The need to reschedule staff or to hire a specialist, may create inconvenience, inefficiencies, or added cost, but will not prevent the auditor from obtaining audit evidence or forming an opinion on the financial statements.
The fact that the client’s financial reporting system has been in place for 10 years may actually reduce risk rather than increase it.
1.09 - Planning Procedures:
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes
A) The auditor’s responsibility for determining the preliminary judgments about materiality and audit risk factors.
B) Management’s responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.
C) Management’s responsibility for identifying mitigating factors when the auditor has doubt about the entity’s ability to continue as a going concern.
D) The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in internal control that come to the auditor’s attention.
D) The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies or material weaknesses in internal control that come to the auditor’s attention.
In establishing an understanding with the client, the auditor will inform the client of its responsibility to notify the audit committee of any significant deficiencies or material weaknesses in internal control.
The understanding will not generally address the auditor’s responsibility under GAAS to determine preliminary judgments about materiality and audit risk factors.
The understanding indicates management’s responsibility for the preparation and fair presentation of the financial statements; for the design, implementation, and maintenance of internal control; and for providing the auditor with access as needed.
There is no reference, however, to the client’s responsibility to identifying mitigating factors when the auditor has going concern doubts. When this occurs, the client will have the opportunity to avoid disclosure of the uncertainty or conversion to the liquidation basis of accounting by presenting mitigating factors to the auditor.
The client provides the auditor with written representations, including that it has disclosed the results of its assessment of the risk that the financial statements may be materially misstated as a result of fraud. This is not, however, included in the engagement letter.
1.09 - Planning Procedures:
Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client’s management. Which of the following matters does the auditor and management agree upon at this time?
A) The determination of the fraud risk factors that exist within the client’s operations
B) The appropriateness of the entity’s plans for dealing with adverse economic conditions
C) The coordination of the assistance of the client’s personnel in data preparation
D) The control weaknesses to be included in the communication with the audit committee
C) The coordination of the assistance of the client’s personnel in data preparation
The client and auditor should agree on the coordination of the assistance of the client’s personnel in data preparation as the client will need to make staff available to prepare the data and the auditor’s work will depend on its availability.
The client, not the auditor, is responsible for the appropriateness of its plans for dealing with adverse conditions.
The client assesses risk as part of its risk assessment procedures in applying its internal control policies and procedures and the auditor assesses risk in determining the nature, timing, and extent of additional audit procedures, but they do not agree upon them.
The auditor, not the client, determines which internal control weaknesses will be communicated to the audit committee.
1.09 - Planning Procedures:
Which of the following is correct regarding the communication between successor and predecessor auditors?
A) The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor
B) The client should be present during the communications between the predecessor auditor and the successor auditor.
C) The successor and predecessor auditors should communicate with each other in writing regarding potential problems.
D) The successor auditor should contact the predecessor auditor prior to proposing an audit engagement.
A) The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor
A predecessor auditor may not respond to requests for information from a successor without the permission of the client due to the confidential nature of knowledge obtained during the course of performing an audit or other professional engagement.
As a result, the successor should ask the client to give the predecessor to respond fully to the successor’s inquiries.
1.09 - Planning Procedures:
Before accepting an engagement to audit a new client, a CPA is required to obtain
A) A preliminary understanding of the prospective client’s control environment
B) An understanding of the prospective client’s industry and business
C) The prospective client’s signature to the engagement letter
D) The prospective client’s consent to make inquiries of the predecessor auditor, if any.
D) The prospective client’s consent to make inquiries of the predecessor auditor, if any.
In determining whether or not to accept an engagement, an auditor is required to make certain that the client does not have management that lacks integrity.
One means of making such a determination is through communication with the predecessor auditor, if there is one.
Failure to consent to communication with the predecessor may indicate a lack of integrity.
The auditor is required to have or obtain an understanding of the client’s industry and business, but not as a prerequisite to acceptance.
The auditor is required to document an understanding with the client, which would be done upon acceptance of the engagement but not before.
The auditor obtains an understanding of a client’s internal control, including the control environment, in the performance of the audit but is not required to do so before acceptance.
1.09 - Planning Procedures:
During the initial planning phase of an audit, a CPA most likely would
A) Discuss the timing of the audit procedures with the client’s management.
B) Identify specific internal control activities that are likely to prevent fraud.
C) Evaluate the reasonableness of the client’s accounting estimates
D) Inquire of the client’s attorney as to whether any unrecorded claims are probable of assertion.
A) Discuss the timing of the audit procedures with the client’s management.
Although all of the alternatives represent activities of the auditor, discussing the timing of audit procedures with the client’s management is the only activity that would be performed during the initial planning phase of the audit.
The auditor will identify specific control activities likely to prevent fraud while obtaining an understanding of the entity and its environment, including its internal control, performed after initial planning.
The auditor will evaluate the reasonableness of client estimates while obtaining and evaluating audit evidence, and will also inquire of the client’s attorney regarding unrecorded claims and other contingencies while obtaining audit evidence, generally near the end of the process.
