AUDIT Flashcards
Agency Risk
managers not acting in best interest of shareholders
Engagement letter
the practitioner and the client.
The purpose of the engagement letter is to lay out the terms of the engagement, including the following:
- the objective and scope of the audit of the financial statements
- the responsibilities of the practitioner
- the responsibilities of management
- identification of the applicable financial reporting framework for the preparation of the financial statements
- reference to the expected form and content of any reports to be issued by the practitioner and a statement that there may be circumstances in which a report may differ from its expected form and content
- the basis on which fees are computed and any billing arrangements
Materiality (CAS 320)
- focus on users and their objectives
- planning: which procedures to focus on
executing: evaluate errors discovered n determine if any additional procedures are needed.
Guidelines for calc of materiality - focus on sensitivity to misstatement
very = lower
not as much = higher
ofit entities:
- 3% to 7% of normalized income before tax
- 1% to 3% of revenues or expenses
- 1% to 3% of total assets
- 3% to 5% of equity
Not-for-profit entities:
- 1% to 3% of revenues or expenses
- 1% to 3% of total assets
Materiality Steps
- User and objs
2.Determine base (normalized income or total assets) and remove not normal income (nibt)
3.Calculate materiality
more sensitive = lower percentage. always conclude why you chose this base = overall materiality - performance materiality = audit focused = how much audit work to be done = if risk high, PM is lower so 60%
- specific materiality (users)
must not exceed overall materiality - affects users decision eg. bank having max limit of inv. etc 1%?
- SPM: so a % of the SM.
Which of the following best describes when an auditor is required to consider materiality in an audit?
Incorrect Response
a)
During the planning phase of the audit
Correct Answer
b)
Throughout the entire audit
c)
At the end of the audit
d)
When risk is assessed
Answer b) is correct. Materiality should be calculated in the planning stage and subsequently reassessed to incorporate changes in the needs and sensitivities of the users.
Audit Risk CAS 200
AR = RMM*DR RMM=IR*CR DR based on procedures n risk that they won't find wrong stuff IR,CR based on OFSL n assertion level DR needs to be low if RMM high
RMM at OSFL
Affects entire organization, not just an account or transaction either inherent or from controls
Don’t forget those that reduce risk
IR risk factor examples
highly competitive = greater chance of overstatements
foreign currency risk
pressures from board or society
CR risk factor examples
no formal policies n processes
high employee turnover
having a knowledgable CPA
Which of the following statements is true?
a) Inherent risk is the susceptibility of an assertion to a material misstatement, either individually or when aggregated with other misstatements, assuming that there are some related controls.
b) Control risk is the risk that a material misstatement, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by related controls.
c) Inherent risk is the risk that a material misstatement, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.
d) Detection risk is the risk that an error will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.
Answer c) is incorrect. This statement is false. See CAS 200.13 (n)(i) — inherent risk is independent of any related controls. Answer b) is correct. Control risk is the risk that a material misstatement, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by related controls. See CAS 200.13 (n)(ii).
Which of the following statements is true in relation to the auditor’s requirement in identifying and assessing the risks of material misstatement?
a) An auditor is required to obtain an understanding of all control activities in an entity.
b) An auditor is required to obtain an understanding of an entity’s relevant controls by evaluating the design of the controls and determining whether the controls have been implemented as designed.
c) The auditor is permitted to solely use inquiry of the entity’s personnel as a risk assessment procedure to obtain audit evidence about the design and implementation of the internal controls.
d) An auditor is only required to obtain an understanding of controls if a combined approach is planned to be taken.
Answer d) is incorrect. Per CPA Canada Handbook – Assurance, CAS 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment, paragraph 12, the auditor is required to obtain an understanding of internal controls relevant to the audit, regardless of the planned approach. Answer b) is correct. This is consistent with CPA Canada Handbook – Assurance, CAS 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment,
paragraph 13.
FRAUD (CAS 240)
There are two types of fraud: fraudulent financial reporting (USUALLY AT MGMT LEVEL) and misappropriation of assets (EMPLOYEE LEVEL or smaller orgs)
Fraud triangle consists of
ROI - risk of dr is higher
- Incentives and pressures
- Opportunity (usually internal control risks)
- Rationalization and attitude
Going Concern (CAS 570)
stay alert for triggers that suggest negative changes for the entity. Consider whether there is an impact to its ability to continue to operate
Mgmt should include 12 month cashflow to prove that they are a going concern
Material + Going Concern exists
Disclose = unmodified opinion with an emphasis of matter
If not = qualified or adverse opinion
