Chapter 2 Flashcards
What is included in an auditor’s engagement letter?
Management’s responsibility for the fair presentation of the financial statements
Fill in the blank
The primary objective of an auditor when considering the acceptance of an initial audit engagement of a nonissuer is to establish whether the ….. for an audit are present
Preconditions
Fill in the blank
An audit should be planned and performed to obtain….assurance about whether the financial statement are free of material misstatement.
Reasonable
Absolute assurance us not provided
What is in the content of an engagement letter for an audit of a nonissuer?
- Information regarding th einvolvement of other auditors
- Specialist
- Internal Auditors
- Other staff of the entity
What is the required pre-acceptance procedure of a engagement to audit a new client?
- Prospective client’s constent to make inquiries
- Inquiry of the predecessor auditor
If there is a reasonable justification for the change to the engagement to a review, should the accountant’s review report include reference to the scope limitation that caused the changed engagement?
No
If there is a reasonable justification for the change to the engagement to a review, should the accountant’s review report include reference to the original engagement that was agreed to?
No
True or False
An a audit may be changed to a compilation or review due to a change in client requirements
True
Elements of quality control
HELP ME
H - Human Resources
E - Engagement/Client Acceptance and Continuance
L - Leadership responsibilities
P - Performance of the engagement
M - Monitoring
E - Ethical requirements
One of a CPA firm’s basic objectives is to provide professional services that conform with professional standards
A system of quality control
PCAOB Standards (Issuers)
What is the documentation completion date? What is the required retention period?
Anything public goes out fast but stays public longer
45-days from the report release date; 7 Years is the required retention period
SAS (Nonissuers)
What is the documentation completion date? What is the required retention period?
60-days from the report release date; 5 Years is the required retention period
Principles of Effective Internal Controls
Control Environment
EBOCA - Tone of top (sets foundation
- Commitment to ethical values and integrity
- Board independence and oversight
- Organizational structure
- Committement to competence
- Accountability
Principles of Effective Internal Controls
Risk Assessment
SAFR - We want to make the environment SAFR
- Specify objectives
- Identify and analyze risks
- Consider potential for fraud
- Identify and assess changes
Principles of Effective Internal Controls
Information and Communication
OIE - Boy this is a lot of information
- Obtain and use information
- Internally communicate information
- Communicate with external parties
Principles of Effective Internal Controls
Monitoring Activites
SOD - Monitoring so the grass can grow
- Ongoing and/or separate evaluations
- Communication of deficiencies
Principles of Effective Internal Controls
(Existing) Control Activites
CATP
- Select and develop control activities
- Select and develop technology controls
- Deployment of policies and procedures
Five Stages of an Audit Strategy
- Engagement Acceptance
- Assess Risk and Plan Response
- Perform Procedures and Obtain Evidence
- Form Conclusions
- Reporting
A decrease in the amount of misstatements that the auditor can tolerate will cause the auditor to…
For example, holding other planning considerations equal that decrease the amount of misstatements in a class of transactions
Modify the nature, timing and/or extent of auditing procedures
True or False
The earlier in the year that the auditor performs substantive testing, the greater the incremental risk the auditor accepts regarding the year-end financial statements.
Remember substantive procedures are performed before year-end
True
True or False
An independent auditor can share responsibility with an entity’s internal auditor
False
The independent auditor is solely responsible for reporting on the financial statements. An internal auditor is still an employee of the company, presenting potential biases (i.e. gray areas) so an independent auditor cannot share responsibility with them.
Fill in the blank
As the degree of subjectivity increases, the need for the auditor to perform tests of the assertions increases or decreases?
Increases
Existence of fixed asset additions involves little subjectivity. Should this work be performed by an internal auditor or independent auditor?
Internal Auditor
Valuation of intangible assets. Should this work be performed by an internal auditor or independent auditor?
Independent Auditor
Testing the valuation of related party transactions involves much subjectivity, and should, therefore, be performed by the auditor
What is the role of an independent auditor?
To supervise, review, evaluate, and test the work performed by the internal auditors when direct assistance is provided by the internal auditor.
How does GAAS define a specialist?
A person or firm with special skills in a field other than accounting or auditing (e.g., actuaries, appraisers, attorneys, or engineers)
True or False
An internal auditor can be involved with tests of controls and of details (i.e., substantive tests), their involvement should generally be limited.
True
Formula
Overall Materiality
Applicable Benchmark * Applicable Percentage
Formula
Detection Risk
Audit Risk
__________________
Risk of Material Misstatement
When the level of risk of material misstatement increases the detection risk (increases/decreases)?
Decreases
When the level of risk of material misstatement decreases the detection risk (increases/decreases)?
Increases
True or False
When the level of risk of material misstatement increases and the detection risk decreases, more assurance is required from substantive testing.
True
What is required if substantive tests increase?
NET
- Change nature of substantive tests from a less effective to a more effective procedure
- Change the extent of the substantive tests (e.g., using a larger sample size)
- Change the timing of the substantive tests (e.g., preforming at year-end rather than interim)
Define Inherent Risk
The susceptibility that an error or omission will occur in a financial statement due to a factor other than a failure of control
Define Control Risk
The risk that a material misstatement that could occur in an assertion within MD&A will not be prevented or detected on a timely basis
Define Detection Risk
The risk that the practitioner will not detect a material misstatement that exists in an assertion within MD&A
Name the fraud risk factors
- Incentives/pressures
- Inadequate organizational structure
- Rationalization/attitude
- Opportunity
Fill in the blank
Distinguishing factor between fraud and error is..
Intent
Fraud is an intentional act to deceive, while error is an unintentional mistake.
True or False
When determining a tolerable misstatement threshold, an auditor should take into account the amount of misstatements that were accumulated in prior periods
True
Difference between a permanent file and a current file
Permanent files are relevant for more than one year; current files are current for one year (current) or less
True or False
The Auditors workpapers support the auditor’s opinion; they do not support the client’s financial statements.
True; the client’s records support the financial statements
Differentiate between a nonissuer and issuer enagagement quality standard
For a nonissuer, the engagement partner is responsible for the overall quality of the engagement. For an issuer, enagements are reviewed by the lead partners and a concurring partner.
The entity’s objectives for internal controls can be divided into three categories. What are they?
ORC
- Effectiveness and efficiency of operations
- Reliability of Financial Reporting
- Compliance with applicable laws and regulations
What are the five components of internal controls?
CRIME
- Control Environment
- Risk Assessment
- Information and Communication
- Monitoring
- (Existing) Control Activities
Out of the five components of internal controls, which of the following include direct controls?
- Information and Communication
- (Exisiting) Control Activities
Control Activities
PAID TIPS
- Prenumbering of Documents
- Authorization and approval of transactions
- Independent checks to maintain asset accountability
- Documentation
- Timely and appropriate financial repreformance reviewes
- Information processing controls
- Physical or logical controls for safeguarding assets and information
- Segregation of duties
The control activity, segregation of duties involve the following:
ARC - This is your ARC to protect against a flood of troubles
- Authorization
- Record keeping
- Custody of related assets
Financial statement assertions include:
- Valuation
- Allocation
- Accuracy
- Completeness
- Understandability of presentation and classification
True or false?
The results of analytical procedures would most likely be obtained to assess competence, objectivity, an application of a systematic and discplined approach by the entity’s internal audit function
False; analytical procedures may be used to enhance the auditor’s understanding
