AUD Deck 2-Planning Acitvities

Question 1

Auditor’s Objective under AU 210 “Terms of Engagement”

Answer 1

The auditor’s objective is to accept an audit engagement involving a new or existing audit client only when the basis for the audit has been agreed upon by (1) establishing when the “preconditions for an audit” are present; and (2) confirming that a common understanding of the terms of the engagement exists between the auditor and management.

Question 2

Preconditions for an audit-

Answer 2

The use by management of an acceptable financial reporting framework in the preparation of the f/s & the agreement of management to the premise on which an audit is conducted.

Question 3

Agreement on audit engagement terms-The agreement of the terms of the engagement should be documented in an audit “engagement letter” and address the following-

Answer 3

a) The objective & scope of the audit
b) The auditor’s responsibilities
c) Management’s responsibilities
d) A statement about the inherent limitations of an audit
e) A statement identifying the applicable financial reporting framework
f) Reference to the expected content of any reports to be issued
g) Other matters as warranted in the auditor’s judgement

Question 4

In establishing the overall audit strategy, the auditor should:

Answer 4

a) Identify relevant characteristics of the engagement affecting its scope.
b) Identify the reporting objectives of the engagement & required communications
c) Consider the factors that are significant in utilizing the audit team.
d) Consider the results of preliminary engagement activities
e) Determine the nature, timing, & extent of necessary resources for the engagement
f) The overall strategy affects the auditor’s decisions regarding the allocation of audit resources to specific audit areas & how those resources are managed & supervised
g) Communication with those charged with governance

Question 5

The audit plan encompasses:

Answer 5

a) The nature & extent of planned risk assessment procedures
b) The nature, timing, & extent of planned “further audit procedures” at the relevant assertion level
c) Other planned audit procedures necessary to comply with GAAS

Question 6

Materiality-

Answer 6

“an understanding of what is important” in financial reporting based on the auditor’s perception of the users’ needs.

Question 7

The determination of materiality is a matter of professional judgement, and involves both:

Answer 7

Quantitative (the relative magnitude of the items in question) and qualitative (the surrounding circumstances) considerations.

Question 8

Audit Risk-

Answer 8

The risk that the auditor expresses an inappropriate audit opinion when the f/s are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.

Question 9

Risk of Material Misstatement-

Answer 9

The risk that the f/s are materially misstated prior to the audit. RMM exists at 2 levels: (1) the overall f/s level and (2) the assertion level for classes of transactions, account balances, and disclosures.

Question 10

Inherent Risk-

Answer 10

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures.

Question 11

Control Risk-

Answer 11

The probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls that are applicable.

Question 12

Detection Risk-

Answer 12

The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditor’s substantive audit procedures.

Question 13

Analytical Procedures-

Answer 13

Evaluations of financial information through analysis of plausible relationships among both financial and non financial data.

Question 14

Fraud-

Answer 14

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in misstatement in the f/s.

Question 15

Fraud Risk Factors-

Answer 15

Events or conditions that indicate (a) an incentive or pressure to perpetrate fraud; (b) provide an opportunity to commit fraud; (c) indicate attitudes or rationalizations to justify a fraudulent action.

Question 16

Auditor’s Specialists-

Answer 16

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence.

Question 17

Management’s Specialists-

Answer 17

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the entity to assist the entity in preparing the financial statements.

Question 18

Those charged with governance-

Answer 18

The person(s) organization(s) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity (encompasses the term “board of directors” or “audit committee” used elsewhere in the auditing standards).

Question 19

Management-

Answer 19

The person(s) with executive responsibility for the conduct of the entity’s operations.