Audit Process Notes

Question 1

General Approach in auditing FS

Answer 1

• FS assertions
• audit procedures
• audit evidence

Question 2

FS Assertions

Answer 2

mgt implicitly or explicitly makes assertions regarding the recognition, measurement, presentation and disclosure of the various elements of FS and related disclo.

Question 3

Assertions

Answer 3

1. about classes of transactions and events for the period under audit
2. about account balances at the period end.
3. about presentation and disclosure

Question 4

about classes of transactions and events for the period under audit (COCAC)

Answer 4

a. Classification - T&E have been recorded in the proper accts
b. Occurrence- transactions/events that have been recorded have occurred and pertain to the entity
c. Completeness- all T&E that should have been recorded have been recorded
d. Accuracy- amounts and other data relating to recorded T&E - appropriately
e. Cutoff- T&E - correct accounting period

Question 5

about account balances at the period end (CREV)

Answer 5

a. Completeness- ALE that should have been recorded…
b. Rights and Obligations - Rights (assets), Obli (Liab)
c. Existence - ALE only
d. Valuation and Allocation - ALE included in FS at appro amounts

Question 6

about presentation and disclosure (COCA)

Answer 6

a. classification and understandability- Fin Info is presented appropriately and describe and disclosures are explain
b. Occurrence and rights and obli- disclosed events, trans, and other matters have occurred and pertain to the entity.
c. Completeness- all disclosures that should have been included in the FS have been included.
d. Accuracy and valuation- financial and other info are disc. fairly and at appro amounts.

Question 7

Audit Procedures

Answer 7

Use assertions for:

a. assessment of risks of material misstatements
b. design and performance of further audit procedure.

Question 8

Basic Criterion of procedures selected

Answer 8

-it should enable the auditor to gather sufficient appro evi. about a particular assertion

Question 9

Audit Procedures (gather evidence) ICOCIA

Answer 9

a. inspection
b. confirmation
c. observation
d. computation
e. inquiry
f. analytical procedure

Question 10

Inspection

Answer 10

involves examining of records, documents or tangible assets

Question 11

Confirmation

Answer 11

consists of the response to an inquiry to corroborate info contained in the accounting records

Question 12

Observation

Answer 12

consists of looking at a process or procedure being performed by others.

Question 13

Computation

Answer 13

consists of checking the arithmetical accuracy of source documents and accounting records or performing indpnt calculations.

Question 14

Inquiry

Answer 14

consists of seeking info from knowledgeable persons inside or outside the entity

Question 15

Analytical Procedures

Answer 15

consists of analysis of significant ratios and trends

Question 16

Audit Evidence

Answer 16

info obtained by the auditor in arriving at the conclusions on w/c the audit opinion is based.

Composed of :

• source docu
• acctg records

Question 17

Audit evidence

Answer 17

either prove or disprove the validity of the management assertions

Question 18

Audit Process (AACPCI)

Answer 18

sequence of audit events

1. Accepting an engagement
2. Audit Planning
3. Considering Internal Control
4. Performing substantive test
5. completing the audit
6. issuing a report

Question 19

Accepting an engagement

Answer 19

• require evaluation of the auditor’s qualifi.
• require auditability of the prospective client’s fs

involves preliminary understanding of the client’s business and background investigation

Question 20

(AE) Preliminary planning Activities - PSA 300

Answer 20

a. performing proce. regad. the continuance of the client relationship and the specific audit engagement.
b. evaluating compliance w/ ethical reqts, including independence
c. establishing an understanding of the terms of the engagement

Question 21

Audit Planning

Answer 21

• obtains more detailed knowledge about the client’s biz

- preliminary assessment of risk and materiality

Question 22

Considering the Internal Control

Answer 22

• entity’s internal control directly affects the reliability of the FS
• stronger IC- more assurance

-obtaining understanding of the entity’s control systems and assessing the level of control risk

Assess control risk:

• sufficient appro evi must be obtained to prove that the IC is functioning well
• evidence can be obtained by performing tests of controls

Question 23

Performing Substantive Test

Answer 23

• to determine whether the entity’s FS are presented fairly in accordance with FRS
• extent depends on auditors assessment of IC. if IC is good, then less scope of substantive

Question 24

Completing the Audit

Answer 24

additional audit procedure

a. review of subsequent events and contingencies
b. assessing the going concern assumption
c. performing overall analytical review proce
d. obtaining written representation from the client’s mgt

Question 25

Issuing a report

Answer 25

the opinion(audited fs) is communicated to various interested users

Question 26

Accepting an Engagement

Answer 26

Consideration on Accepting or Rejecting: a. competence b. independence c. ability to serve the client properly d. integrity of the prospective client's mgt.

Question 27

Competence

Answer 27

- it is acquired thru a combination of education, training and experience. - CPA should not portray themselves as having expertise which they do not possess - auditor should obtain preliminary knowledge to determine if has degree of competence required by the engagement or whether such competence can be obtained before the completion of audit.

Question 28

Independence

Answer 28

auditor should consider whether there are any threats to the audit team's independence and objectivity and, if so, whether adequate safeguards can be established.

Question 29

Ability to serve client properly

Answer 29

``` - engagement should not be accepted if there are no enough qualified personnel to perform the audit PSA 220- assignment to proper personnel - there should be sufficient direction, supervision and review of work at all levels ```

Question 30

Integrity of the Management

Answer 30

background tasks: a. making inquiries of appro parties in the business - banker, legal counsel, underwriter b. communicating with the predecessor unit

Question 31

(I) communicating with predecessor unit

Answer 31

a. allows the incoming auditor to obtain info whether to accept or not b. incoming auditor should obtain client's permission - REFUSAL: raise serious question as to whether accept the engagement or not If Permitted, asks preditor. a. preditor's understanding as to the reasons for the change of auditor b. any disagreement between the preditor and client c. any facts that might have a bearing on the integrity of the prospective client's mgt

Question 32

Retention of Existing clients

Answer 32

- client should be evaluated at least once a year or upon occurrence of major events

Question 33

Engagement letter

Answer 33

after accepting the audit engagement

Question 34

Contents of the Engagement letter

Answer 34

a. objective of the audit of FS w/c is to express an opinion on the FS b. Mgt's responsibility for the fair presentation of the FS c. scope of the audit d. forms or any reports or other communication that the auditor expects to issue e. fact that because of the limitations of the audit, there is an unavoidable risk that material misstatements may remain undiscovered f. responsibility of the client to allow the auditor to have unrestricted access to whatever records, documentation and other information requested in connection with the audit

Question 35

Addition of Engagement letter contents

Answer 35

a. billing arrangements b. expectations of receiving mgt representation letter c. arrangements concerning the involvement of others (experts, other auditors, internal auditors and other client personnel) d. request for the client to confirm the terms of the engagement

Question 36

Importance of Engagement Letter

Answer 36

a. avoid misunderstanding with respects to the mgt. | b. document and confirm the auditor's acceptance of the appointment

Question 37

Recurring audits

Answer 37

factors of sending new EL: a. any indication that the client misunderstands the objective and scope of the audit b. any revised or special terms of the engagement c. a recent change of senior mgt, BOD, or ownership d. a significant change in the nature or size of the client's business e. legal requirements and other gov't agencies pronouncement

Question 38

Audit of components

Answer 38

When the auditor of parent and subsidiary is the same, factors whether to send separate letter: a. who appoints the auditor of the subs b. whether a separate audit report is to be issued on the component c. legal requirements d. extent of any work performed by other auditor e. degree of ownership by parent f. degree of independence of the component's mgt