AUD 1.2 - Audit Engagements

Question 1

What is the financial reporting framework that is acceptable in view of the nature of the entity and the objective of the financial statements, or that is required by law or regulation? This includes general purpose frameworks defined to meet the needs of a wide range of users and special purpose frameworks.

Answer 1

Applicable financial reporting framework

Question 2

This gives credibility to the financial statements. Without this, they would be considered meaningless to the public.

Answer 2

The auditor’s report

Question 3

Management and those charged with governance are responsible for what three aspects of the audit?

Answer 3

1. Preparation and fair presentation of the financial statements
2. Design, implementation, and maintenance of internal controls
3. Providing the auditors with access to information and persons within the entity needed to complete the audit

Question 4

Under managements responsibility of preparing and fairly presenting the financial statements, there are three requirements that must be completed:

Answer 4

1. Identify applicable financial reporting framework
2. Prepare and fairly present the financial statements in accordance with the framework
3. Include an adequate description of the framework in the financial statements

Question 5

Along with expressing an opinion of the financial statements, an auditor is also responsible for:

Answer 5

1. Maintaining professional skepticism
2. Complying with ethical requirements
3. Exercising professional skepticism
4. Obtaining appropriate audit evidence
5. Complying with GAAS

Question 6

This is a high, but not absolute, level of assurance:

Answer 6

Reasonable assurance

Question 7

In order to obtain reasonable assurance, the auditor must:

Answer 7

1. Plan and properly supervise work
2. Apply appropriate materiality levels
3. Identity and assess risks of material misstatement
4. Obtain appropriate audit evidence

Question 8

What are three inherent limitations that restrict auditors from being able to obtain absolute assurance that the financial statements are free from material misstatement?

Answer 8

1. Nature of the financial statements
2. Nature of audit procedures
3. Timeliness of financial reporting and the balance between cost and benefit

Question 9

This inherent limitation exists because some financial statement items are subject to an inherent level of variability because they involve judgement by management or they involve subjective decisions or assessments or a degree of uncertainty.
Examples - AR bad debt estimates; Obsolete inventory items; PPE life and salvage value; intangible cash flows.

Answer 9

The nature of financial reporting

Question 10

This inherent limitation exists because there are practical and legal limits on an auditor’s ability to obtain evidence such as:
Management might not provide, intentionally or unintentionally, the complete information. Fraud might be concealed. And an audit is also not an investigation into a wrongdoing and auditors do not have legal powers.

Answer 10

The nature of audit procedures

Question 11

This inherent limitation exists because the auditor will form an opinion on the financial statements within a reasonable period of time and will achieve a balance between benefit and cost, recognizing that it is impracticable to address all information that may exist.

Answer 11

Timeliness of financial reporting and the balance between cost and benefit

Question 12

Nonissuers have the choice of what two things when an audit is needed?

Answer 12

1. Financial statement audit only
2. Integrated audit

Question 13

What is the difference between a financial statement audit and an integrated audit?

Answer 13

Financial statement audit - one opinion is rendered on the fairness of the financial statements.
Integrated audit - two opinions are rendered. One on the financial statements and one on the operating effectiveness of internal controls

Question 14

What choice do issuers have when an audit is needed?

Answer 14

No choice!

Issuers MUST complete an integrated audit

Question 15

What are the overall objectives of the financial statement audit?

Answer 15

1. To obtain reasonable assurance that the financial statements as a whole are free from material misstatement.
2. To report on the financial statements

Question 16

What are the objectives of the audit of internal control over financial reporting?

Answer 16

1. Express an opinion on the effectiveness of the company’s internal control over financial reporting.
2. Obtain reasonable assurance about whether material weaknesses exist as of the date specified in management’s assessment