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CPA_Audit > Audit Standards & Engagement Planning > Flashcards

Audit Standards & Engagement Planning Flashcards

1
Q

Name the three types of audits

A

1) Compliance Audits
2) Operational Audits
3) Financial Statement Audits

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2
Q

What is the purpose of an audit

A

Examination for the purpose of giving an objective opinion as to the fairness of financial statement presentations, in all material respects, that are free from material misstatement, whether due to fraud or error, in conformity with an APPLICABLE FINANCIAL REPORTING FRAMEWORK (AFRF) , such as GAAP

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3
Q

Two examples of AFRF

A

1) General purpose (GAAP, FASB, IFRS, GASB)
2) Special purpose
(OCBOA, cash, tax basis, regulatory)

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4
Q

To obtain reasonable assurance, the auditor must:

A

1) Plan the work
2) Properly supervise assistants
3) Identify and assess risks of material misstatements
4) obtain sufficient appropriate audit evidence

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5
Q

Steps in an audit

A

1) Prepare for the audit
2) Obtain understanding of client and environment (INTERNAL CONTROLS)
3) Assess RMM
4) Perform Test of Controls
5) Perform substantive procedures
6) Formulate an Opinion
7) Issue audit report

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6
Q

Clarity Standards

A

Created by the Auditing Standards Board (ASB) to make Generally Accepted Auditing Standards easier to understand and apply. These standards apply to audits of nonissuers (non-public companies) and are issued by the ASB.

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7
Q

Generally Accepted Auditing Standards (overview)

A

Created by the AICPA
Apply to nonissuer and issuers.
Measures the quality of the auditor’s performance

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8
Q

Ten Generally Accepted Auditing Standards

A

1) Training & Proficiency
2) Independence
3) Due Professional Care
4) Planning & Supervision
5) Internal Controls
6) Corroborative Audit Evidence (substantive test.)
7) Accounting Principles in conformity with US GAAP
8) No new accounting principles applied (consistency)
9) No omitted informative disclosures
10) Expression of an opinion

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9
Q

Attest Engagements

A 
Requires Independence 
E     Exams (audits)
R     Reviews
A     Agreed-Upon procedures
S     Special reports

(and compilations if not stated)

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10
Q

Services that don’t require independence

A
  • Compilations (as long as no independence is stated)
  • Taxes
  • Consultations
  • Financial Statement Preparation Engagement
  • Other non-attest services (bookkeeping and payroll)
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11
Q

What impairs independence?

A

Any direct financial interest and/or material indirect financial interest

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12
Q

Due professional care

A

Critical review of judgement used at every level
Skill and care of a prudent CPA
Preparation of complete workpapers
Operating without negligence/due diligence
Professional skepticism - maintaining attitude during the audit
Acting with competency and diligence

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13
Q

Assurance services

A

Independent professional services that improve the quality of information or its context, for decision makers.
Report designed to enhance the degree of confidence.
Includes audit/review services.

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14
Q

2 preconditions for an audit

A

1) Determining the acceptability of the applicable financial reporting framework being applied
2) Obtaining management’s agreement that it understands and accepts certain responsibilities.

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15
Q

Auditor would not be precluded from accepting an engagement because of a scope limitation:

A
  • Imposed by management that will likely result in a qualified opinion or
  • Imposed by circumstanced beyond management’s control
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16
Q

Once client authorizes communication, the successor will generally make inquiries of the predecessor with several key issues

A

R Reasons for change
I Integrity of management
D Disagreements during audit
C Communications with Management or those charged with Governance

17
Q

Things an auditor communicates to those charged with governance

A 
D  Disagreements with management
I    Illegal acts - noncompliance with laws and regs
S   Significant accounting policies
A   Adjustments (AJEs and RJEs)
P   Prior discussions
P   Problems or significant difficulties
R   Responsibilities
O   Other Info discussed with management
V   Views of the accountant
E   Estimates
18
Q

Per Engagement letter - auditor’s responsibilities are

A
  • Conducting an audit in accordance with GAAS (doesnt guarantee that errors and fraud will be disclosed)
  • Informing the client of improvements in control or economy of operations that come to the auditor’s attention during the engagement
19
Q

Per Engagement letter - client’s responsibilities

A
  • Making available all records
  • Not limiting the scope of the auditor’s work
  • Paying the fee based on the agreed-upon method
20
Q

Elements of an engagement letter

A 
F   Fees
A   Auditor's responsibility (GAAS)
C   Confirmation of Engagement
S   Scope & Objectives of Engagement
I    Internal Controls
M  Management's Resp.
I    Irregularities - Fraud
L   Illegal Acts
E  Errors
21
Q

Planning the audit after EL

A

Plan audit around risk of material misstatement

  • The size and complexity of the entity
  • The auditor’s experience with the entity
  • Knowledge of the entity’s business and industry
  • Knowledge of the entity and its environment, including internal controls
22
Q

Considerations in the development of the audit program

A
  • Materiality
  • Risk of Material Misstatement (RMM(
  • Business and Industry considerations
23
Q

A high reliance of internal controls

A

A higher reliance will involve performing tests of controls and if controls prove to be effective, a reduction in the nature, timing, and extent of further audit procedures to be performed

24
Q

A lower reliance of internal controls

A

A lower reliance will mean that the auditor will not perform tests of controls and will enhance the nature, timing, and extent of further audit procedures to be performed

25
Q

Steps of an audit planning include

A 
B   Basic discussion with the client
R   Review of audit documentation
A   Ask about recent developments
I     Interim financial statements
N   Non-audit personnel
S   Staffing
T   Timing
O   Outside assistance
P    Pronouncements
S    Scheduling with the client
26
Q

Audit risk

A

The risk the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated

AR = IR X CR X DR

27
Q

Inherent Risk

A

The risk of a material misstatement of an assertion will occur in the absence of internal controls. Can’t be affected by actions of either the client or auditor

28
Q

Control Risk

A

The risk that the client’s internal controls structure will fail to prevent or detect and correct a material misstatement on a timely basis. This is a function of the effort put forth by the client’s management to safeguard assets and ensure reliable financial records. As a result, it is affected by the actions of the client by not the auditor.

29
Q

Detection risk

A

The risk that the auditor will not detect a misstatement that exists in a relevant F/S assertion. DR can be broken down into 2 components:

1) Test of Details
2) Substantive analytical procedures risk

This is a function of the effort put forth by the auditor in performing tests of details of transactions and accounts, and analytical procedures. Only risk auditor can effect.

30
Q

Two types of fraud

A

1) Fraudulent financial reporting

2) Misappropriation of Assets

31
Q

Fraudulent Financial Reporting

A

“cooking the books”
Misrepresentation of facts - integrity of management
*Manipulation, falsification, alteration of accounting records or supporting documents. Inability to produce or locate relevant documents may also be indicative of fraud
*Misrepresentation or omission of events, transactions or information
*Intentional misapplication of accounting principlies
*The non-recording of transactions

32
Q

Misappropriation of Assets

A

Defalcation schemes

  • Embezzlement of funds
  • Theft of other assets
  • Misuse of entity assets
33
Q

Fraud trianble

A
  • Reasons or Motivation (incentive/pressure)
  • Opportunity
  • Rationalization
34
Q

Motivation (Incentive/pressure)

Fraud triangle

A

Perpetrator will generally have a reason for having committed the fraud
*Personal gain
Pressure, such as to meet analysts’ expectations, is another common reason

35
Q

Opportunity

Fraud triangle

A

The perp. must have the ability to commit the fraudulent act.

  • A lack of internal controls that are not be enforced create opportunity
  • some perps have the opportunity because of the authority to override controls or the ability to circumvent controls, such as through collusion
36
Q

Rationalization

Fraud triangle

A

The perp. will generally rationalize the fraudulent act in a manner that is consistent with the perp’s belief system
*Some perps rationalizet their fraudulent acts because they do not believe it is really wrong

  • Some perps rationalize when they perceive they have no choice since the reprecussions of not perpetrating would be too sever. ex: effect on stock price of not meeting an earnings expectation
  • Commission is sometimes viewed as a means of eliminating an unfair advantage
37
Q

Quality Control Standards

A

Only applies to engagements governed by standards set by the Auditing Standards Board (ASB) or the Accounting and Review Services Committee (ARSC) of the AICPA

  • A CPA firm must establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with professional standards and applicable regulatory and legal requirements, and that the firm or engagement partners issue reports that are appropriate in the circumstances.
  • The standards are explicitly limited to their application to a firm’s accounting and auditing practice.
38
Q

6 Elements of Quality control

(The specific procedures depend on the size of the firm, the nature of the practice, the organizational structure and cost-benefit considerations)

A

H Human Resources
E Ethical Requirements (Independence)
A Acceptance and continuance of client relationships and specific engagements
L Leadership responsibilities for quality within the firm (“tone at the top”)
-
M Monitoring
E Engagement performance

39
Q

Audit Program

A

A audit program is a step-by-step listing that describes the nature, timing, and extent of audit procedures used to detect material misstatements during fieldwork. The audit program should be completed after the auditor has assessed the risk of material misstatement, which includes consideration of an entity’s internal controls.

Key factors to prepare an audit program:

  • Assess the risk of material misstatement (including internal controls)
  • Consider the client’s business environment
  • Calculate materality and apply to audit procedures.

CPA_Audit (2 decks)

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