AUD Deck 2 Flashcards
What should the Engagement Letter include?
- a statement regarding the INHERENT LIMITATIONS of the audit. the inherent limitation statement would describe the unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with GAAS
- assistance desired from client staff
- communication between successor and predecessor auditor
Prior to acceptance of a new engagement, an auditor must do what?
communicate with the predecessor auditor
What should the successor auditor inquire with the predecessor auditor about?
- the predecessor’s knowledge of changing auditors
- disagreements the predecessor had with the client concerning auditing procedures and accounting principles
if the auditor believes the client’s request is reasonable regarding a change in engagement review, how should the auditor handle the audit work that was done previously?
the auditor must comply with the standards for a review and issue an appropriate report. the report should not refer to the original engagement, to any auditing procedures performed, or the scope limitation
auditing standards required that the auditor must be independent, except when ____ BY LAW or REGULATION to accept the engagement
REQUIRED
____ fees are prohibited when performing F/S audit
CONTINGENCY
When the audit engagement includes reporting on selected financial data, the report prepared by the auditor should be _____ to the data that was obtained from the financial statements
LIMITED
What are the elements of Quality Control?
HELP ME!
HR
Engagement/client acceptance and continuance
Leadership Responsibilities
Performance of the Engagement
Monitoring
Ethical Requirements
What is a system of Quality Control?
it establishes POLICIES AND PROCEDURES that provide REASONABLE ASSURANCE of conforming with PROFESSIONAL STANDARDS
______ standards relate to the conduct of a firm’s entire practice, whereas professional standards such as GAAS relate to the conduct of an individual engagement.
QUALITY CONTROL
must maintain audit workpapers and support documentation for ____ years for REGISTERED PUBLIC ACCOUNTING/PCAOB Standards and ___ years for nonissuers/SAS
7 years = ISSUERS/PCAOB Standards/Sarbanes-Oxley Act of 2002;
5 years = NONISSUERS/SAS
final audit documentation file must be assembled by the auditor within ____ days following the report RELEASE date (auditing standards/nonissuer) but according to PCAOB Standards, the documentation completion date is ____ days following the report release date
60 days = nonissuer/auditing standards/SAS
14 days = PCAOB/issuer
What is the management representation letter?
the client asserts that all material matters have been adequately disclosed to the auditor
The Audit Strategy Comes before Audit Planning. What is the difference between audit strategy and audit planning?
*Audit STRATEGY is an OUTLINE that SETS THE SCOPE, TIMING, AND DIRECTION of the AUDIT. also helps GUIDE the DEVELOPMENT of the audit plan
*Audit PLAN is based on the audit strategy that OUTLINES the NATURE, EXTENT, and TIMING of the procedures to be performed during the audit
Audit uses a ____ based approach
RISK
when audit procedures are performed before year-end (interim), the auditor must assess the ______ RISK involved
INCREMENTAL
What is the difference between Test of Controls and Substantive Procedures?
*Test of Controls = if applicable. Used to EVALUATE THE OPERATING effectiveness of controls in PREVENTING or DETECTING material misstatements
*$ubstantive Procedures = REQUIRED. used to DETECT MATERIAL MISSTATEMENTS to transaction classes, account balances, and disclosures. It includes other audit procedures required by GAAS - test of details and Substantive analytical procedures
What is the difference between footed and cross-footed?
*FOOTED = summation of COLUMN
*CROSS-FOOTED = summation of ROW
What are F/S Assertions?
COVERUP
COMPLETENESS
cutOFF
VALUATION, ALLOCATION, and ACCURACY
EXISTENCE and OCCURRENCE
RIGHTS and OBLIGATIONS
UNDERSTANDABILITY of Presentation and classification
according to PCAOB standards, a centralized accounting function is indicative of ____ (more/less) complex transactions
LESS
a ______ (increase/decrease) in the amount of misstatements that the auditor could tolerate will cause the auditor to perform the planned auditing procedures closer to the B/S date
DECREASE
the auditor would perform substantive procedures before year-end if the amount of misstatements the auditor could tolerate were _______ (increase/decrease
INCREASED
(TRUE/FALSE) the earlier in the year that the auditor performs substantive testing, the greater the incremental risk the auditor accepts regarding the year-end F/S
TRUE
if there is a high likelihood of misstatements then the auditor sets materiality at a _____ (higher/lower) amount resulting in the auditor looking closer at audit evidence
LOWER
What are analytical procedures?
used for planning purposes, as substantive tests, and as an overall final review
an ______ (increase/decrease) in materiality levels would result in a decrease in audit risk resulting in less substantive testing
INCREASE
What is Audit Risk?
the risk that the auditor may UNKNOWINGLY FAIL to appropriately MODIFY THE OPINION on financial statements that are MATERIALLY MISSTATED. audit risk should be low
What is Audit Risk Formula?
Audit Risk = RMM x Detection Risk
Audit Risk = (inherent risk x control risk) x Detection Risk
s/b low = assessed by auditor x controlled by auditor
DR = AR / RMM (IR X CR)
What is inherent risk?
the risk that an account is MORE LIKELY to have the AMOUNTS WRONG OR DISCLOSURES INCORRECT ON FINANCIALS.
inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls
factors: COMPLEXITY, SUBJECTIVITY, CHANGE, UNCERTAINTY, MANAGEMENT BIAS
What are examples of high inherent risk?
HIGH-VOLUME, UNIQUE, OR INDIVIDUALLY SIGNIFICANT TRANSACTIONS / COMPLEX OR SUBJECTIVE CALCULATIONS / AMOUNTS DERIVED FROM ESTIMATES / CASH.
TECHNOLOGY THAT RENDERS A PRODUCT OBSOLETE, LACK OF WORKING CAPITAL, DECLINE IN THE OVERALL INDUSTRY OR ECONOMY
What is Control Risk?
the risk that a material misstatement that could occur will NOT BE PREVENTED, DETECTED, AND CORRECTED ON A TIMELY BASIS BY THE ENTITY’S SYTEM OF INTERNAL CONTROL.
RISK THAT CLIENT’S INTERNAL CONTROLS DON’T CATCH IT
an auditor assesses control riskBELOW the maximum (low or medium) if:
AUDITOR PLANS TO RELY ON CONTROLS. THE DESIGN AND IMPLEMENTATION OF CONTROLS APPEAR TO BE OPERATING EFFECTIVELY. –> AUDITOR WILL NEED TO TEST CONTROLS TO SUPPORT CONTROL RISK BELOW THE MAX.
RMM will be equal to IR x CR
an auditor assesses control risk AT the maximum (HIGH) if:
- THERE ARE NO EFFECTIVE CONTROLS TO THE SPECIFIC ASSERTION
- THE IMPLEMENTED CONTROLS ARE NOT OPERATING EFFECTIVELY
- SUFFICIENT APPROPRIATE AUDIT EVIDENCE MAY BE OBTAINED BY SUBSTANTIVE TESTING ONLY. –> AUDITOR WILL NOT TEST CONTROLS WHEN CONTROL RISK IS ASSESSED AS HIGH AND WILL PROCEED WITH SUBSTATNIVE TESTING.
RMM will = IR
What is Detection Risk?
the risk that the auditor WILL NOT DETECT A MATERIAL MISSTATEMENT THAT EXISTS IN A RELEVANT ASSERTION. the risk that the auditor will NOT DETECT a misstatement that EXISTS. CONTROLLED BY AUDITOR
What type of relationship does RMM have with DR?
IMVERSE RELATIONSHIP. RMM AFFECTS DR
↑ RMM, then ↓ DR = ↑ more assurance required from Substantive Testing. If there is a riskier area (RMM ↑), an area that is more likely to contain a material misstatement, then lets get more persuasive evidence
↓ RMM, then ↑ DR = ↓ less assurance required from Substantive Testing
What is the relationship between Audit Risk and Materiality?
IMVERSE
______ risk arises when a test of controls or substantive test is restricted to a sample, the auditor’s conclusions may be different from the conclusions that would have been reached had the test been applied to ALL items in the account balance or class of transactions
SAMPLING
_____ risk increases when an auditor performs substantive analytical procedures for F/S accounts at an interim date
DETECTION
What are examples of Control Risk?
posting of unauthorized journal entries, inaccurate physical inventory count, incorrect formula in a worksheet
a misstatement that involves an estimate is considered a ______ misstatement
JUDGMENTAL
