AUD 2 Flashcards
Obtain permission to talk to the prior auditor and make inquiries about?
a. Management integrity
b. Disagreements with management
c. Reasons for change
d. Any fraud, non-compliance, and internal control matters related to
communications
e. Nature of clients relationships
f. Review Predecessor auditor work
Auditor must review (Before accepting an engagement):
- Firm’s ability to meet reporting deadlines considering:
a. Timing and complexity of the engagement - Firm’s ability to staff the engagement
- Firm’s independence
- Integrity of client’s management and group engagement partner/team will be able to
obtain sufficient appropriate evidence - Acceptable framework
- Management responsibility of IC
- Management access to all information relevant to the financial statements (scope
limitation)
Quality control procedures/standards “HELP ME” ***
- Human Resources (hiring competent employees)
a. Hiring
b. Assign personnel to engagement
c. Professional development
d. Performance and evaluation - Engagement/Client acceptance and continuance
a. Minimize association with client management that lacks integrity
b. Reasonably expect to complete with professional competence
c. Obtain an understanding on the Nature and Scope
d. Policies and procedures to withdraw - Leadership responsibilities (firm’s tone at top)
- Performance of the engagement (allow consultation with experts)
- Monitoring
a. Inspections
b. Peer review (Every 3 years)
c. “Wrap-up” (Second partner review) - Ethical requirements
a. Evaluating independence
Document retention**
- SAS rules (Non-issuer) = holder for 5 years after release, assembled 60 days after report release
- PCAOB rules (Issuer) = holder for 7 years after release, assembled 45 days after report release
Audit documentation should:
- Assist engagement team in planning, conducting, and supervising.
- Accounting record reconcile with FSs
- Reach conclusion drawn from the results, findings, and judgements
- Enough detail that an “EXPERIENCED AUDITOR” can understand
- Add who did the work and date
ORC - “Objectives” of COSO
- Effective and efficient operations
- Reliability of financial reporting
- Compliance with laws and regulations
**5 Components of Internal Control (CRIME)* APPLIES TO ORC – PRESENT + FUNCTIONING
- Control environment (Tone at the top) (EBOCA)
* Ethics, Independent BOD, Organization structure, Competence, Accountability - Risk assessment (FS misstated, not efficient) (SAFR)
* Specify objectives, Analyze risks, Consider potential fraud, ID and assess changes - Information and communication systems (Fair, accurate, complete, timely) “FACT” (OIE)
* Obtain and use information, internally report, externally report - Monitoring (Effectiveness of controls + reporting) (SOD)
* Ongoing and separate evaluations, Communicate deficiencies - Existing Control activities (policies to mitigate risks) (CAT P)
Select control activities, Technology controls, deploy policy and procedures
“PAID TIPS”
Pre-number documents
Authorize and approval of transactions
Independent checks
Example: Bank recs
Documentation
Timely and appropriate financial performance reviews
Information processing
Physical and logical controls
Segregation of duties
Engagement partner responsible for?
- Planning, Supervision, and compliance
Supervision of assistants include directing efforts/responsibility, communicating to team, reviewing work, and staying informed
“NET” of supervision uses the “COVER U” - Communicating Written plan with those charged with governance
a. Planned scope and timing
b. Internal control
c. Materiality factors
d. Use of internal audit staff
e. Plan to address significant changes
f. Fraud
Audit Plan made up of? *******
- Written - “NET” helps assess staff, location, time needed
- Audit plan is made up of: NET of audit proceduresa. Risk assessment procedures
Understanding of entity and environmentb. Further audit procedures
Test of controls (Testing effectiveness)
$ubstantive procedures (Required) - NET of assertions under consideration
Developing overall audit strategy (Focus) INITIAL PLANNING PHASE items include?
- Scope of the engagement
Size of complexity
Information technology
Knowledge gained from prior experience
Use of service org - Reporting objective
Deadlines/Key dates
Nature and timing of audit team/3rd party communications - Timing of the audit
Helps determine what resources are needed for the engagement - Required communications to governance
- Preliminary judgment of materiality
- The focus of the audit
- Risk assessment
When should you use more interim dates over year end dates?
- Strong IC = More Interim dates
- Weak IC = More year-end (RISK OF DETECTION)
What is NET of an audit plan made up of?
Preliminary analysis (Nature “NET”) helps determine materiality, audit risk, and type of procedures
Preliminary analysis (Extent “NET”) characteristics of size, complexity, other factors (Scope) (Number of items)
Preliminary analysis (Timing “NET”) helps determine deadlines and communication testing period
Formula for performance materiality?
$140,000 (overall materiality) × 0.5 (lower range provided in audit firm guidance) = $70,000
What should you establish to reduce the risk that the aggregate of undetected misstatements in the group financial statements
Component materiality that is lower than the materiality for the group financial statements.
Formula for audit risk?
RMM (IR * CR) * DR (Detection risk)
What is audit risk?
risk of issuing wrong opinion due to failing to detect material misstatement
relationship with RMM, “acceptable level of DR” ****
- RMM(increasing) = DR(decreasing)
a. More assurance required from $ubstantive testing
b. More tests at year end
- RMM(decreasing) = DR(increasing)
a. Less assurance required from $ubstantive testing
b. More tests at interim date
Control risk to sample size relationship?
Lower control risk = Lower sample (Positive relationship)
What are examples of IR?
- High-volume, unique, significant
- transactions
- Complex
- Amount with estimates
- Cash
- Economic change
- Low working capital
What are Management’s responsibility related to fraud?
Designing and implementing programs and controls to prevent fraud
Auditor’s responsibility related to fraud
- Plan and perform an audit
- Fraud assessment, and assess in every phase of the audit
Provide reasonable assurance on detecting errors - Discussion to every member of the engagement team
Document discussion - Obtaining information during the audit
a. Inquire of entity personnel regarding their views on fraud
b. Results of analytical procedures
c. Evaluate fraud risk factors
1. Types of risk
2. Significance of risk factors
3. Likelihood of the risk
4. Pervasiveness of the risk
What is the auditor’s response to fraud?
- Overall, general response
Consider when assigning engagement members - Changing the audit, year to year
Change the NET response encompassing specific audit procedures - Response addressing management override
Controls of journal entries
What are the exceptions to when you can give out the client’s information without their concent? (3)
- Subpoenaed
- Investigated by state board of accountancy
- Requested by your firm’s lawyers when being sued
What areas should an internal auditor not be able to provide direct assistance?
- Areas of high complexity/judgement
- Risk assessment
How is Income tax benefit be calculated?
Income/loss from operations +- Income/loss from discontinued operation * tax rate
When should an allowance for credit losses in added in factoring?
Factoring includes an allowance for credit losses added like (allowance for doubtful accounts) only when they are transferred recourse (AKA liability)
