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Auditing > Audit 3: Engagement acceptance & understanding the assignment > Flashcards

Audit 3: Engagement acceptance & understanding the assignment Flashcards

1
Q

What does auditor need to assess before accepting the audit?

A

Ability to meet reporting deadlines

Ability to staff engagement

Independence Integrity of client mgmt

Group Audit work to be done

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2
Q

Required Contents of Engagement letter

A

The Objective and Scope of the Audit

The Responsibilities of the Auditor,

The Responsibilities of Mgmt

Stmt about inherent limitations of audit

ID of applicable framework

Reference form and content of reports

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3
Q

For Recurring audits when do changes need to be made

A

Significant changes in ownership or nature or size of business

Changes in mgmt, legal, reporting framework etc

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4
Q

PCAOB Nature, Extent and Timing (NET) rules are based on… A3-10

A

Size and complexity of client

Previous experience with client

Changes in circumstances during audit

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5
Q

The Nature, Extent and Timing of Supervision depend on..

A

Size and complexity of entity

Nature of the work

Assessed risk of material misstatement

Qualifications of assisstants

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6
Q

Performance materiality is…

A

Amount less than material for fin stmts as a whole to reduce the level of misstatement of aggregate undetected or uncorrected misstatements

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7
Q

Tolerable misstatement is…

A

the maximum error in a population that the auditor is willing to accept

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8
Q

Substantive procedures are… what do they include

A

procedures used to detect material misstatement include Test of details Analytical procedures

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9
Q

What are the main assertions of financial stmts

A

COVERU

Completeness

CutOFF

Valuation, accuracy and allocation

Existence and Occurrence

Rights and Obligations

Understandibility and Classification

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10
Q

Audit plan is

A

Written plan that is required for every audit Says what procedure are necessary to complete the audit

Procedures:

  1. Risk assessment req- obtain understanding of compan and IC
  2. Further audit procedures- test of controls (effectivness of IC), substanctive procedures (detect mat miss test of details)
  3. other procedures (letter to attorney)
  4. Timing: MGMT discussion about NET
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11
Q

Internal auditors…

A

Cannot share responsibility or be depended upon items with high risk of material misstatements or high degree of subjectivity

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12
Q

Use of work of Internal Auditor depends on their

A

Competence Objectivity Application of disciplined approach

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13
Q

Audit Risk Model Shows what..

A

The risk that the auditor will issue the wrong opinion–> SHOULD BE AS LOW AS POSSIBLE

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14
Q

Audit Risk Equation …

A

Audit Risk= Risk of Material Misstatement (Inherent x Control Risks) x Detection Risk

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15
Q

Risk of Material Misstatement =

A

Inherent Risk x Control Risk

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16
Q

Inherent Risk is

A

the chance of a material misstatement assuming no controls (based on judgment - detection)

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17
Q

Control Risk is..

A

the chance a material misstatement would not be caught by the internal controls in a timely bases (prevention).

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18
Q

Detection Risk is…

A

the chance that the auditor doesnt catch a material misstatement in assertion, the only risk controlled by the auditor!

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19
Q

What should auditor do if risk of material misstatement (RMM) is judged to be high?

A

Detection Risk should be set low

–> MORE WORK–>LESS RISK ACCEPTED

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20
Q

How can the auditor change detection risk?

A

By changing the Nature Extent Timing of Audit Procedures

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21
Q

Fraud versus Error

A

Error=unintentional

Fraud=Intentional

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22
Q

Fraud Risk Factors

A

POR

Pressure

Opportunity

Rationalization

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23
Q

What needs to be done communication wise if fraud suspected?

A

Communicate at least one level above mgmt where fraud is suspected, if no higher authority –> get legal advice. It is not auditor’s responsability to report to regulatory and enforcement authorities

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24
Q

Auditor’s responsibility with compliance to laws and regulations?

A

Provide Reasonable assurance that the financial stmts are free from Material misstatement due to non-compliance NOT responsible for prevent noncompliance and not supposed to detect all of it

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25
Q

Procedures related to Noncompliance

A

Get Mgmt Rep letter

Understand:

  1. Legal and Regulatory Framework
  2. How entity is complying with that framework
26
Q

Noncompliance issue has effect on fin stmts what sort of opinion?

A

GAAP So Except for or Adverse

27
Q

How to Assess the Risks of Material Misstatement?

A

I’M A CPA

Internal control unsderstanding- assess

Material misstatement assessment

Asses level of risk respond- other procedures

Control test

Perform substantive procedures

Audit evidance - evaluate sufficiency and appropriatness

28
Q

What are the components for the COSO framework for Internal Control

A

CRIME

Control Environment, overall tone

Risk Assessment by Mgmt

Information and Communication

Systems Monitoring of internal control

Existing control activities

29
Q

Strong Control System has what

A

PAIDTIPS

Prenumbered documents

Authorization of transactions

Independent Checks

Documentation

Timely performance reviews

Information Processing Controls

Physical Controls for guarding assets

Segregation of Duties

30
Q

Segregation of duties sections

A

ARC

Authorization

Record Keeping

Custody of Assets

31
Q

IC Documentation may include

A

FIND

  1. Flowchart
  2. Internal control questionnaire or checklist
  3. Narrative
  4. Documentation from the client (including copies of the entity’s procedures manuals and organizational charts).
32
Q

Auditor Evidence Hiearchy

A

AEIOU

Auditor Knowledge

External evidence

Internal Evidence

Oral Evidence

U Know it

33
Q

Substantive Procedures include

A

Acct balances

Analytical Procedures

Ratios

34
Q

Financial House for vouching and tracing

A

Financial Stmts

Trial Balance

General Ledger

Sub-ledgers

Books

Documents

Events

35
Q

For Vouching and Tracing what do you need to do?

A

Vouching go from top to bottom of financial house Tracing the bottom to top of the house

36
Q

When does current auditor need to talk to prior auditor?

A

Before ACCEPTING engagement

37
Q

Other items in engagement letter

A

Arrangement with predecessor auditor

Fees and billing

Further discussions with mgmt

38
Q

What should auditor do if they discover opening account balance is wrong?

A

Get mgmt to have 3 party meeting with predecessor auditor

39
Q

New auditor should ask old auditor… A3-8

A

About Mgmt integrity Disagreements with mgmt

Reason for the change in auditors

Communication to mgmt, audit committee

40
Q

How to assess the objectivity of Internal Auditors

A

use standards developed by The Institute of Internal Auditors

41
Q

Can internal auditors help with any or all understanding internal control performing test of controls performing substantive tests

A

Yes to all

42
Q

When to mention a specialist in auditor’s report?

A

ONLY When giving less than unmodified opinion if unmodified dont mention

43
Q

If an assistant has disagreement with opinion reached what should they do?

A

Document the details of the disagreement with the conclusion reached

44
Q

An auditor should obtain sufficient knowledge of info system to understand?

A

Process used to prepare significant accounting estimates

45
Q

When should an auditor determine whether internal controls are operating effectively?

A

Should be determined AFTER obtaining an understanding of internal control

Should only be determined for specific controls upon which auditor is going to rely

46
Q

Management directives are part of what group?

A

Control Activities Not Info and Communication

47
Q

Types of Service Organization Reports

A

Type 1= Report on Design and implementation Gives No Evidence to Reduce Risk

Type 2=Report on Design and Operating Effectiveness Does Give Evidence to Reduce Risk

48
Q

Can a primary auditor refer to service organization auditor in audit report?

A

No

49
Q

What sort of information that noncompliance may occur with laws and regulations may be occuring?

A

Checks made to cash Bearer bonds Transfers to numbered accounts

50
Q

Communication with predecessor before acceptance

A

Mandatory! Mgmt integrity disagreements reasons for the change communication req fraud

51
Q

Communication with predecessor after acceptance

A

matters that may facilitate the evaluation of fin rep consistency between current and prior years

52
Q

Assessing internal auditor objectivity

A
  1. previous experiance
  2. level to which ia reports (mgmt or committee)
  3. external quality reviews
  4. professional internal auditing standards
53
Q

Assessing competence of internal auditor

A
  1. education
  2. profesional certification
  3. experiance performance evaluation
  4. quality of audit documentation
54
Q

Risk assessment required documentation

A

discussion amont team

key elements of understanding

assessment of RMM

ID of risks and related controls

(the more complex–> the more doc)

55
Q

Preventive controls

A

designed to provide reasonable assurance that only valid transactions are recognized, approved and submitted for processing.

56
Q

Control environment

A

overall tone of the organization (integrity, competence, and participation of those charged w/governance, mgmt., philosophy, organizational structure, and assignment of responsibility, human resource responsibility.

57
Q

Risk assessment

A

identification and analysis of risks (by mgmt.) to achievement of its objectives.

58
Q

Information and communication system

A

support the identification, capture and exchange of information in a timely and useful manner_. Accounting processing_- from initiation of transaction to inclusion in the FS,. The accounting records- supporting information, and specific accounts involved in initiating, authorizing, recording, processing and reporting transactions. Financial reporting process - includes the development of significant accounting estimates and the inclusion of appropriate disclosures.

59
Q

Monitoring

A

assess the quality of internal control over time.

60
Q

Existing and control activities

A

policies and procedures that help to ensure that management directives are carried out and the necessary steps to address those risk are taken. (Authorization, segregation of duties, safeguard of assets, assets accountability)

Control activities relative to an audit include (PAID TIPS)

61
Q

Detective controls

A

designed to provide reasonable assurance those errors or irregularities are discovered and corrected on a timely basis

62
Q

Under IT system segregation of duties should be:

A

COPAL

  1. Control Group (internal auditor)
  2. Operators (Employee who input data)
  3. Programmers (person who wrote/design the program)
  4. Analysts (System analyst, who set up the system/ flow of item)
  5. Librarian (person who hold the keys or access to the various programs)

Note: When one person oversees/ supervise another are OR working in another IT area in the IT system, is a “Weakness”

Auditing (9 decks)

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