Auditing Flashcards
Auditor’s responsibility regarding financial statements
An auditor’s responsibilities for audited financial statements are confined to the expression of the auditor’s opinions. He may draft an entity’s financial statements based on information from management’s financial system. This is known as compilation engagement.
Independent Audit Defined
Financial statement auditing is defined as a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.
Initial planning phase of a financial statement audit
At such a phase, an auditor considers certain procedures for developing an overall strategy for the expected conduct and scope of the audit. These procedures include determining the extent of involvement of the client’s internal auditors and obtaining an understanding of the risk assessment processes.
Purpose of an engagement letter
Is to help avoid misunderstandings with respect to the engagement. The engagement letter serves as the contract between the client and the accountant regarding the terms of the engagement and helps to avoid legal liability for claims that the auditor did not perform the work as promised.
Decision as to whether to accept responsibility
The principal auditor must decide whether to accept responsibility for the work of the component auditor. If so, no mention of the component auditor is made in the opinion. If not, the work of the component auditor is mentioned and responsibility is divided.
Before acceptance of engagement to audit a new client
The professional code of conduct precludes an auditor from disclosing confidential information obtained in an audit unless the client consents. The prospective client must authorize the predecessor auditor to respond to any inquiries from the successor.
Communication with the predecessor auditor AU-C210.A31
Before accepting an audit engagement, a successor auditor should make specific inquiries about the predecessor auditor regarding the predecessor’s understanding of the reasons for the change of auditors.
Compilation engagement
In discussion of a compilation engagement, AR 100.07-.10 makes no mention of the accountant obtaining an understanding of internal control. In discussing a review engagement, AR 100.25 specifically indicates that the accountant does not have to have an understanding of internal control.
CPA conclusion that a potential audit engagement should not be accepted
If it is unlikely that sufficient competent evidence will be available to support an opinion on the financial statements, it would be pointless to conduct an audit.
Significant difficulties communicated to those with governance responsibilities
that were encountered during the audit may include matters such as significant delays in management providing required information ; extensive unexpected effort required to obtain sufficient appropriate audit evidence and restriction imposed on the auditor by management. The calculation of materiality as it pertains to the audit is not a matter to be communicated.
Early stages of audit
At this early stage, the auditor develops a general idea of which internal tests controls and which substantive tests will be performed. Prior years workpapers are reviewd, general business and economic conditions are studied, and the scope of engagement is discussed with the client. The timing of the audit is set both with the client and the audit personnel.
Auditor’s communication with those charged with governance
Is required to include the discussion of disagreements with management about matters that significantly impact the entity’s financial statements. Other matters include the auditor’s responsibility under generally accepted auditing standards, an overview of the planned scope and timing of the audit, and significant findings from the audit.
Engagement letter
An engagement letter is a written communication by the auditor to the client that specifies the responsibilities of both the client and auditor. The client is responsible for the financial statements and any related assertions. Management’s responsibility for the entity’s compliance with laws and regulations is generally included in an auditor’s engagement letter.
All matters of auditor independence
Must be communicated in writing. While most matters can be communicated orally, any matter of independence must be communicated in writing.
Auditor’s engagement letter to the client
The auditor may involve specialists or internal auditors, if applicable. Management is responsible for adjusting the financial statements to correct material misstatements.
General audit strategy
The auditor would discuss the schedules and analyses that the client’s staff should prepare when discussing general audit strategy with management prior to the start of the fieldwork.
Referring to the specialist in the auditor’s report
In using the work of a specialist, an auditor may refer to the specialist in the auditor’s report if, as a result of the specialist’s findings the auditor becomes aware of conditions causing substantial doubt about the entity’s ability to continue as a going concern.
Audit plan should be designed so that
the audit evidence gathered supports the auditor’s conclusions.
CPA firm relying on the audit work performed by another audit firm.
Review the firms audit workpapers and reperform of subset of audit testing to validate the firm’s conclusions.
Degree of reliance
An auditor is not required to communicate to those charged with governance the degree of reliance the auditor placed on the written representations from management.
Lack of integrity
An auditor would most likely not accept a new audit engagement if the entity’s management probably lacks integrity. Lack of integrity could cause management to override the internal controls.
Percentage of coverage rule
When an entity qualifies as low risk, the scope of audits under the percentage of coverage rule in the Single Audit Act amendments of 1996 can be reduced to as low as 25% of the federal funding spent by the entity.
Before using internal audit function
Before the external auditor uses the internal audit function to obtain audit evidence, the external auditor should review the function’s organizational status and level of competence, and its application of a systematic and disciplined approach, including quality control.
Objectivity of internal auditors
When assessing the internal auditor’s objectivity, the auditor should obtain information about such factors as the organizational status of the internal auditors responsible for the internal audit function and the policits to maintain the internal auditors’ objectivity .
Charged with governance
The auditor is required to communicate certain information with those charged with governance in the engagement letter or in another form of communication. The term “those charged with governance” usually refers to an audit committee or the board of directors. IN some cases, those charged with governance and management are the same people.
Auditor’s use of the work of specialist
An auditor may use the work of a specialist who is related to the client under certain circumstances. If the specialist is related to the client, the auditor should consider applying additional procedures to the specialists’ assumptions , methods used, and/or findings.
Audit
An audit is an examination of financial statements by an independent CPA for the purpose of expressing an opinion on the fairness with which they present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.
