Audit Standards & Engagement Planning

Question 1

Name the three types of audits

Answer 1

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

Question 2

What is the purpose of an audit

Answer 2

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

Question 3

Two examples of AFRF

Answer 3

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

Question 4

To obtain reasonable assurance, the auditor must:

Answer 4

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

Question 5

Steps in an audit

Answer 5

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

Question 6

Clarity Standards

Answer 6

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.

Question 7

Generally Accepted Auditing Standards (overview)

Answer 7

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

Question 8

Ten Generally Accepted Auditing Standards

Answer 8

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

Question 9

Attest Engagements

Answer 9

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

(and compilations if not stated)

Question 10

Services that don’t require independence

Answer 10

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

Question 11

What impairs independence?

Answer 11

Any direct financial interest and/or material indirect financial interest

Question 12

Due professional care

Answer 12

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

Question 13

Assurance services

Answer 13

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.

Question 14

2 preconditions for an audit

Answer 14

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

Question 15

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

Answer 15

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

Question 16

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

Answer 16

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

Question 17

Things an auditor communicates to those charged with governance

Answer 17

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

Question 18

Per Engagement letter - auditor’s responsibilities are

Answer 18

• 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

Question 19

Per Engagement letter - client’s responsibilities

Answer 19

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

Question 20

Elements of an engagement letter

Answer 20

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

Question 21

Planning the audit after EL

Answer 21

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

Question 22

Considerations in the development of the audit program

Answer 22

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

Question 23

A high reliance of internal controls

Answer 23

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

Question 24

A lower reliance of internal controls

Answer 24

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

Question 25

Steps of an audit planning include

Answer 25

``` 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 ```

Question 26

Audit risk

Answer 26

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

Question 27

Inherent Risk

Answer 27

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

Question 28

Control Risk

Answer 28

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.

Question 29

Detection risk

Answer 29

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.

Question 30

Two types of fraud

Answer 30

1) Fraudulent financial reporting | 2) Misappropriation of Assets

Question 31

Fraudulent Financial Reporting

Answer 31

"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

Question 32

Misappropriation of Assets

Answer 32

Defalcation schemes * Embezzlement of funds * Theft of other assets * Misuse of entity assets

Question 33

Fraud trianble

Answer 33

* Reasons or Motivation (incentive/pressure) * Opportunity * Rationalization

Question 34

Motivation (Incentive/pressure) Fraud triangle

Answer 34

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

Question 35

Opportunity Fraud triangle

Answer 35

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

Question 36

Rationalization Fraud triangle

Answer 36

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

Question 37

Quality Control Standards

Answer 37

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.

Question 38

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)

Answer 38

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

Question 39

Audit Program

Answer 39

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.