Audit Standards & Engagement Planning

Question 1

What is meant by the term preconditions for an audit?

Answer 1

The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management to the premise on which an audit is conducted

Question 2

Who initiates the communications between the predecessor auditor and successor auditor?

Answer 2

The successor auditor initiates the communication with the predecessor by requesting that the client authorize the predecessor auditor to allow the successor auditor to review the predecessor auditor’s working papers.

Question 3

What is meant by the term initial audit?

Answer 3

The prior year’s financial statements have been audited by a predecessor auditor.

Question 4

What matters are typically addressed in an engagement letter?

Answer 4

[FACSIMILE]
Fees
Auditor's Responsibilities
Confirmation of Engagement
Scope & Objective of Engagement
IC
Management's Responsibilities (chose AFRF)
Irregularities (Fraud)
iLLegal acts - noncompliance with laws
Errors  
* Both parties need to sign

Question 5

What is the difference between an overall audit strategy and an audit plan?

Answer 5

An audit strategy deals with higher level issues, such as allocating audit resources, whereas an audit plan is more detailed and deals more specifically with the nature, timing, and extent of audit procedures to be performed.

Question 6

List 3 circumstances that impact the extent of planning activities.

Answer 6

Size and complexity of the entity
Auditor’s experience with that entity
Auditor’s understanding of the entity and its environment, including its internal control.

Question 7

Identify factors relevant to establishing an overall audit strategy.

Answer 7

• Identify characteristics of the engagement affecting its scope;
• Identify the reporting objective of the engagement and required communications;
• Consider the factors relevant to utilizing the audit team;
• Consider the results of preliminary engagement planning activities; and
• Determine the nature, timing, and extent of necessary resources for the engagement.

Question 8

Identify 3 planning-related issues that should be included in the auditor’s documentation.

Answer 8

The overall audit strategy;
The audit plan; and
Any significant changes made to the audit strategy or the audit plan during the engagement, along with the reasons for any such changes.

Question 9

What are the steps in the audit planning process

Answer 9

[BRAINSTOPS]
Basic discussion with client about engagement, nature of business
Review of audit documentation from previous audit
Ask about recent developments
Interim F/S (analyze to identify)
Non-audit personnel of firm who provided services to client
Staffing
Timing of procedures
Outside assistance (specialist)
Pronouncements
Scheduling with the clients

Question 10

What is the basic meaning of the concept of materiality?

Answer 10

An understanding of what is important.

Question 11

What 4 matters should be documented with respect to materiality considerations?

Answer 11

1-Materiality for the financial statements as a whole;
2-Materiality level(s) for applicable transactions, account balances, or disclosures;
3-Performance materiality; and
4-Any revision of those considerations during the audit engagement.

Question 12

What is meant by the term tolerable misstatement?

Answer 12

The application of performance materiality to a particular sampling procedure or application

Question 13

Define “risk of material misstatement.”

Answer 13

The risk that the financial statements contain one or more material misstatements prior to the audit. (Note: RMM = IR x CR)

Question 14

What is the audit risk model that is applicable to classes of transactions or to account balances?

Answer 14

Audit Risk = inherent risk x control risk x detection risk.

Question 15

Define “inherent risk.”

Answer 15

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

Question 16

Define “control risk.”

Answer 16

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

Question 17

Define “audit risk.”

Answer 17

The probability that the auditor fails to modify the opinion on financial statements that contain a material misstatement.

Question 18

What matters must be documented in connection with analytical procedures?

Answer 18

1-The auditor’s expectation and the factors considered in developing it;
2-The results of the comparison of the recorded amounts (or ratios) with the expectations; and
3-Any additional auditing procedures performed to investigate significant differences identified by that comparison.

Question 19

What 3 purposes might analytical procedures serve and when are they required?

Answer 19

1-Required during planning
2-May be used as substantive evidence (not required)
3-Required during final review.

Question 20

Define “analytical procedures.”

Answer 20

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

Question 21

Identify the auditor’s responsibility for detecting fraud in a financial statement audit.

Answer 21

1-Auditors must design audit to provide reasonable assurance of detecting material misstatements whether due to fraud or error;
2-Auditors are required to specifically assess the risk of material misstatement due to fraud;
3-Auditors must document the assessment of the risk of material misstatement due to fraud and the resulting response(s) associated with any risk factors identified.

Question 22

What are the three categories of fraud-related risk factors that should be considered by the auditor?

Answer 22

1-Incentives/Pressures (the motivation for committing fraud)
2-Opportunities (the ability to commit fraud)
3-Attitudes/Rationalizations (the justification or excuse for committing fraud).

Question 23

What are the auditor’s responsibilities to communicate fraud identified by the auditor?

Answer 23

1-If the fraud is not material, the auditor should inform the appropriate level of management.
2-If the fraud is material (or if senior management is involved, even if not material), the auditor should inform those charged with governance.

Question 24

When might an auditor have a duty to inform others outside of the audited entity of fraud-related matters?

Answer 24

1-In response to a valid subpoena;
2-To comply with applicable legal and regulatory requirements;
3-To respond appropriately to successor auditor’s inquiries when the former client has given permission to the predecessor;
4-To report fraud to the applicable funding agency under the requirements of government auditing standards.

Question 25

Identify 3 audit procedures might bring to the auditor’s attention noncompliance with laws and regulations that do not have a direct effect on the entity’s financial statements.

Answer 25

1-Inquiry of management and those charged with governance about noncompliance with applicable laws and regulations;
2-Inspection of correspondence with regulatory authorities;
3-Reading the minutes of meetings of those charged with governance.

Question 26

What actions should an auditor consider when an illegal act has been detected?

Answer 26

1-Gather additional evidence to determine relevant facts;
2-Discuss the matter with the appropriate level of management;
3-Consider consulting with the entity’s attorney and/or relevant specialists;
4-Consider the implications to other audit areas.

Question 27

What reference to a specialist may an auditor make when expressing a modified opinion?

Answer 27

The auditor may reference the specialist, if that will facilitate the readers’ understanding of the reason(s) for the modified opinion.

Question 28

What reference to a specialist may an auditor make when expressing an unmodified opinion?

Answer 28

The auditor should NOT reference the specialist in an unmodified opinion.

Question 29

Examples of discrepancies in accounting records that could be used to assess the risk of material misstatement due to fraud include..

Answer 29

1-Transactions that are not recorded in a complete or timely manner or are improperly recorded as to amount, accounting period, classification, or entity policy
2-Unsupported or unauthorized balances or transactions
3-Last-minute adjustments that significantly affect financial results
4-Evidence of employees’ access to systems and records inconsistent with that necessary to perform their authorized duties
5-Tips or complaints to the auditor about alleged fraud

Question 30

Once the client has authorized communication, the successor will generally make inquiries of the predecessor about…

Answer 30

[RID-C] Get rid and see you later!
Reasons for change
Integrity of management
Disagreements during the audit
Communication with Mngmt/TCWG regarding fraud, noncompliance, errors, sig deficiencies and material weaknesses

Question 31

Certain matters that should be communicated to TCWG

Answer 31

[DISAPPROVE] (can be oral or written and may be communicated during audit or after audit report issued)
Disagreements with management
Illegal acts, noncompliance w/ laws
Significant acct policies adopted or changed by Mgmt
Adjustments (uncorrected misstatements and its effects)
Prior discussions w/ mgmt before acceptance
Problems or significant difficulties
Responsibilities of auditor under GAAS
Other information discussed with by mgmt
Views of the accountant regarding the qualitative aspects of entities sig acct policies- whether acceptable
Estimates and process used to obtain them

Question 32

The 6 elements of Quality Control system at a firm:

Answer 32

[HEAL-ME]
HR- hiring, development, advancement
Ethical- independence, act w/ integrity/objectivity
Acceptance and continuation
Leadership responsibilities, “tone at the top”
Monitoring
Engagement perfromance

Question 33

Relationship of AR and materiality

Answer 33

Inverse relationship