Aud 2 Flashcards
Name the elements of quality control
(HELP ME)
- Human resources
- engagement / client acceptance
- leadership responsibilities
- Performance of the engagement
- Monitoring
- Ethical requirements
What are the objectives of the auditor when implementing quality control procedures at the engagement level
Auditor’s provide reasonable assurance:
- ) audit complies with professional standards and any legal or regulatory requirements
2) that the report issued by the auditor is appropriate for the engagement
Characteristics of an engagement quality reviewer
Must be a partner who is not associated with the engagement and who is competent, independent, objective and acts with integrity
When does a significant engagement deficiency exist?
- Engagement team failed to obtain sufficient appropriate evidence
- The engagement team reached an inappropriate overall conclusion
- The engagement report is not appropriate for the circumstances
- the firm is not independent of the client
What are the requirements for audit documentation
- detailed enough so that an experienced auditor, with no previous affiliation with the audit can understand the nature, extent, and timing of audit procedures performed, audit results and evidence obtained
- any significant findings or issues that surfaced during the audit results and conclusions reached including whether significant judgement was involved in reaching those conclusions
What is report release date and documentation completion date and the requirements for both
Report release date - the date on which the auditor grants the client permission to use the report
Documentation completion date - the date by which final documentation must be assembled
non issuers - documentation completion date = report release date +60
issuers - documentation completion date = report release = 45 days
What are factors that affect the quantity, type, and content of audit documentation
Determined by auditor’s judgement. To determine NET of documentation the auditor should consider
1) size and complexity of the entity
2) the nature of the specific auditing procedure
3) the risk of material misstatement
4) the significance of the evidence obtained
5) the nature and extent of any exceptions identified
6) the need to document conclusions that may not be obvious
7) the audit methodology and tools used
8) the extent to which judgement was required in performing the work and evaluating results
What should be included in the engagement letter?
- objectives and the scope of the audit
- management’s responsibilities
- the auditor’s responsibilities
- the inherent limitations of the engagement
- Identification of the applicable financial reporting framework
- Reference to the expected form and content of any reports
It may also refer to timing, client assistance, fees and billings
What is the purpose of the engagement letter
Reduce the risk of misunderstanding. The engagement letter is required under PCAOB
What should the auditor assess related to the firm’s client acceptance and continuance policies?
- The firm’s ability to meet reporting deadlines
- Firm’s ability to staff the engagement
- Independence
- Integrity of client management
- The group engagement team ability to obtain sufficient appropriate audit evidence
When should an auditor assess the firm’s client acceptance and continuance policies?
Pre-acceptance
What communication should happen between the predecessor and successor auditor?
1) obtain client’s permission to make inquiries of the predecessor auditor
2 ) specific inquiries include
- information that might bear on management’s integrity
- disagreement with management over accounting principles, auditing procedures, or other similarly significant matters
- the predecessor’s understanding as to the reason for the change of the auditor’s
- communication t management, the audit committee , and those charged with governance regarding fraud, illegal acts by clients, and matters relating to internal control
The engagement partner is responsible for what three functions?
- Planning the audit
- supervising the work of engagement team members
- complying with relevant audit standards
What factor’s determine the NET of supervision
1) size and complexity of the entity
2) the nature of the work assigned to each engagement team member
3) the assess risk of material misstatement
4) the qualifications of the assistants
What is the audit strategy?
Outlines the scope of the audit engagement, the reporting objectives, timing of the audit, communications, and the factors that determine the focus of the audit. The audit strategy also includes a pre-assessment of materiality and tolerable misstatement
Is the auditor required to have prior experience with a client’s business or industry before accepting the engagement?
No - However, once an engagement has accepted, the auditor must obtain an understanding of the client’s industry and business.
for example - attending a conference or reading appropriate publications
What is an audit plan?
The audit plan is based on the audit strategy and outlines the NET of the procedures to be performed during the audit including
1) risk assessment procedures performed to assess the risk of material misstatement
2) planned further audit procedures, including tests of the operating effectiveness of internal controls and substantive procedures
3) obtain audit procedures that may be required to comply with GAAS
Name the six main financial statement assertions
C - completeness O- CutOff V- Valuation, allocation, and accuracy E- existence and occurrence R - rights and obligations U - understandability and classification
What assertions apply to transactions and events?
- Completeness
- Proper period cutoff
- accuracy
- classification
- occurrence
name the relevant assertions for account balances
- Completeness
- Allocation and valuation
- rights and obligations
- existence
name the relevant assertions for presentation and disclosure
- completeness
- understandability and classification
- rights and obligations
- valuation and accuracy
What is required during the planning stage of the audit?
- obtain knowledge of the client’s business and industry
- develop the overall audit strategy
- develop the audit plan
- perform risk assessment procedures to obtain and understanding of the entity and its environment
What factor’s does the external auditor have to assess if he or she plans to use the internal auditors to provide direct assistance?
The external auditor has to assess the internal auditor’s objectivity and competence.
The external auditor remains solely responsible for the audit report and may not share judgement responsibliity with the internal auditor
What factors should the auditor assess related to competency?
- Education of internal auditors
- Professional certification of internal auditors
- Experience of internal auditors
- Performance evaluations of internal auditors
- The audit plan, audit procedures and quality of internal audit documentation
What factor’s should the auditor assess related to objectivity
1) - Organization level to which the internal auditor reports
- Policies prohibiting audits of areas in which the internal auditor lacks independence
- Whether any constraints or restrictions are placed on the internal audit function by management or those charged with governance (e.g., restrictions on communicating findings to the external auditors)
What factor’s should be assessed to determine if the internal audit function applies a systematic and disciplined approach
- Existence, adequacy and use of documented internal audit procedures or guidance covering such areas as risk assessments, work programs, documentation and reporting
- The application of appropriate quality control policies and procedures or quality control requirements in standards set by relevant professional bodies for internal auditors
For which decisions must the external auditor not share responsibility?
- assessing risk of material misstatement
- evaluating the sufficiency of tests performed
- evaluating significant accounting estimates
- determining materiality
- determining the type of audit opinion
Should the auditor refer to the work of a specialist
no. unless the auditor decides to express a modified opinion due to the work of a specialist
What are the requirements for a specialist
1) competent
2) have professional capabilities
3) be objective
Define materiality
Materiality - amount of error or omission that would affect the judgement of a reasonable person. The auditor uses judgement to set the initial level of materiality (including materiality for financial statements, performance materiality, and materiality for particular classes of transactions, account balances, and disclosures and to revise them appropriately throughout the audit
Define tolerable misstatement
The maximum error in a population that the auditor is willing to accept. Tolerable misstatement is the application of performance materiality to a particular sampling procedure
What is the purpose of a risk assessment
it enables the auditor to identify and assess the risks of material misstatement and make informed judgements about other audit matters
What is included in a risk assessment
Obtaining an understanding of the entity and its environment, including its internal control. The auditor should obtain an understanding of
1) industry, regulatory and other external factors
2) nature of the entity
3) selection and application of accounting policies
4) the entity’s objectives, strategies, and business risks
5) entity’s financial performance
6) the group, its components and their environments if applicable
What are other notable risk assessment procedures used by the auditor?
- inquiries of management and others
- analytical procedures that study plausible relationships between financial and nonfinancial data of an entity
What are the objectives of internal control?
1) Promote efficiency and effectiveness of operations
2) ensure reliable financial reporting
3) encourage compliance with applicable laws and regulations
what are some inherent limitations of internal control?
- management override of internal controls
- human error - which may include errors in the design or use of automated controls
- deliberate circumvention of controls by collusion of two or more people
what factors are included in the control environment?
- communication and enforcement of integrity and ethical values
- management’s commitment to competence
- participation of those charged with governance
- management’s philosophy and operating style
- organizational structure
- assignment of authority, responsibility, and accountability
- human resource policies and practices
What procedures helps an auditor understand internal control
1) inquiry of entity personnel
2) observation of application of controls and of the entity’s premises and plant facilities
3) inspection of documents and records
4) walk throughs
What control activities are relevant to an audit
(PAID TIPS)
1) prenumbering of documents
2) authorization of transactions
3) independent checks to maintain asset accountability
4) documentation
5) timely and appropriate performance reviews
6) information processing general and application controls
7) Physical controls for safeguarding assets
8) segregation of duties
What functions should be segregated?
“segregation of duties is your ARC to protect against a flood of troubles”
a- Authorizing transactions
R- recording transactions
C- maintaining custody of the related assets
