Chapter 3

Question 1

Required engagement letter contents:

Answer 1

1) the objective and scope of the audit
2) the responsibilities of the auditor
3) the responsibilities of mgmt
4) stmt that because of the inherent limitations - unavoidable risk that some go undetected
5) ID of the applicable financial reporting
6) reference to the expected form and content of any reports to be issued by the auditor

Question 1

For Audit of issuers – engagement:

Answer 1

The auditor must agree to the terms of the engagement with the audit committee in an engagement letter; letter should be provided to the audit comittee annually

Question 2

Appropriate factors for change in engagement

Answer 2

1) indication that mgmt misunderstands the objective
2) any revised or special eng terms
3) a change in senior mgmt
4) a significant change in ownership
5) change in legal or regulatory req
6) change in financial reporting framework

Question 3

Initial audit: communication with the predecessor auditor

Answer 3

Inquires regarding:

1) info that might bear on mgmt integrity
2) disagreements with mgmt over accounting principles
3) the predecessors understanding as to the reasons of the change
4) communication to mgmt regarding fraud

Question 4

Overview of planning - auditor required to:

Answer 4

1) obtain knowledge of the clients business and industry
2) develop the audit strategy
3) develop the audit plan
4) perform risk assessment procedures to obtain understanding of the entity

Question 5

Auditor plans audit to be responsive to the initial assessment but:

Answer 5

Should be prepared to revise the audit strategy and the audit plan based on the results of the audit procedures

Question 6

NET of supervision

Answer 6

1) the size and complexity of the entity
2) the nature of the work assigned
3) the assessed risks of material misstatement
4) the qualifications of the assistants

Question 7

for planning: knowledge of the clients business and industry

Answer 7

1) tour client facilities
2) review the financial history of the client
3) obtain an understanding of client accounting
4) inquire of client personnel

Question 8

Written audit plan

Answer 8

Required

Question 9

Factors used to make the preliminary assessment of materiality:

Answer 9

1) the application of a % to an appropriate FS benchmark
2) prior period financial results
3) any significant known or expected changes in the entitys circumstances
4) changes in the conditions of the industry or the economy as a whole

Question 10

6 main FS assertions

Answer 10

1) completeness
2) cutoff
3) valuation, allocation and accuracy
4) existence and occurrence
5) rights and obligations
6) understandability and classification

Question 12

Consideration of fraud: an auditor should -

Answer 12

1) discuss fraud risk with team
2) obtain info to identify fraud risks
3) assess fraud risk and develop an appropriate response
4) evaluate audit evidence on fraud
5) make appropriate communication about fraud
6) document the auditors consideration of fraud

Question 13

risk assessment procedures - procedures to know entity and environment

Answer 13

1) inquiries
2) analytical procedures
3) observation and inspection
4) risk assessment discussion
5) other procedures

Question 14

Auditors risk assessment: documentation required (1)

Answer 14

1) the planning discussion
2) the procedures performed on Fraud
3) identified RMM due to fraud
4) if the auditor has not identified improper revenue recognition as a Fraud risk

Question 14

Response to fraud risk

Answer 14

Auditor does by designing appropriate audit procedures

Question 15

COSCO framework internal control:

Answer 15

Crime

Control environment
Risk assessment
Information and communication syste
Monitoring
Existing control activities

Question 16

Significant risks - required documentation

Answer 16

1) discussion among audit team: how, when, participants, & subject matter
2) key elements of understanding of entity
3) assessment of the risks
4) the identified risks and controls evaluated
5) more complex entity= more extensive audit doc

Question 17

Effective control environment:

Paid tips

Answer 17

Prenumbering docs
Authorization of transactions
Independent checks to maintain asset
Documentation
Timely and appropriate perfo reviews
Information processing controls
Physical controls for safeguarding
Segregation of duties

Question 18

Documentation may include:

Answer 18

Any item the auditor can FIND

Flowcharts
Internal Control Questionnaire
Narrative
Documentation from client

Question 19

Control Environment - key points

Answer 19

• integrity
• competence
• participation of those in governance
• mgmt philosophy
• organizational structure
• assignment of responsibility
• human resource policies

Question 20

Info and communication systems

Answer 20

• communicating roles and responsibilities

- initiating authorizing and reporting entity transactions conditions and events

Question 21

Characteristics of audit scope - extent:

Answer 21

• effect of IT on the audit
• knowledge gained from prior experience with entity
• use of service organizations
• size and complexity of entity to be audited

Question 22

Characteristics of audit scope - timing:

Answer 22

• deadlines for interim and final reporting
• key dates for meetings with mgmt
• nature and timing of audit communications

Question 23

Characteristics of audit scope - nature:

Answer 23

• preliminary evaluations of materiality, audit risk, and IC
• material locations and account balances
• areas where there is a higher risk of material mistatement

Question 24

Inverse Relationship

Answer 24

RMM to DR

Question 25

Consideration of non-compliance

Answer 25

• the legal and regulatory framework

- how the entity is complying with that framework

Question 26

Reporting non-compliance - governance not involved in mgmt

Answer 26

if issue SERIOUS, communicate intentional and material matters to governance ASAP

Question 27

Reporting non-compliance - governance involved in mgmt

Answer 27

communicate the matter to the next higher level of authority at the entity. if no higher level - obtain legal advice

Question 28

Risk assessment steps

Answer 28

IM A CPA

Internal control - understand
Material Misstatement - assess the risks
Assessed level of risk

IC - test for operating effectiveness
Perform substantive procedures
Evaluate the sufficiency and appropriateness of audit evidence

Question 29

Reporting to regulatory agencies

Answer 29

Auditor has duty if:

• in response to a predecessor auditor
• court order
• assistance from a government agency

Question 30

Objective of analytical procedures used during planning:

Answer 30

• enhance the auditors understanding of the entity and of transaction since last audit
• identify unusual transactions and events

Question 31

Factors Indicative of signifcant risks

Answer 31

• risk of fraud
• related parties and related party trans
• improper revenue recognition
• noncompliance with laws
• accounting principles

Question 32

Documenting NET of audit procedures performed:

Answer 32

• who performed the audit work and date completed
• who reviewed specific audit docs and date reviewed
• identifying characteristics of specific items tested

Question 33

Auditors specialist

Answer 33

used by auditor to assist in obtaining sufficient appropriate audit evidence

Question 34

Designing further audit procedures, consider…

Answer 34

• significance of the risk
• likelihood that a MM will occur
• characteristics of the relevant class of transaction, account balance, disclosure
• nature of the specific controls used by the entity

Question 35

Management’s Specialist

Answer 35

used by the entity to assist the entity in preparing the FS

Question 36

Relationship between audit risk and materiality

Answer 36

inverse relationship; they must be considered together in designing audit procedures; must be considered at FS level and at the individual level

Question 37

Referencing specialist

Answer 37

not mentioned in the auditors report if an unmodified opinion is issued; may reference the work if auditor receives prior permission from the specialist for a modified report

Question 38

Fraud - communicate outside the organization

Answer 38

• comply with certain legal and regulatory requirements
• to a successor auditor (with client permission)
• in response to subpoena
• to a funding agency or other specified agency
• possibly to authorities when mgmt./governance fail to take action

Question 39

When obtaining reasonable assurance about if FS free of MM, auditor should:

Answer 39

• exercise professionalism
• discuss fraud risk with engagement personnel
• obtain info about fraud
• identify and assess fraud risk
• evaluate how audit evidence
• communicate and document conclusions

Question 40

Auditor unable to obtain sufficient evidence regarding noncompliance

Answer 40

issue a qualified opinion or disclaimer of opinion

Question 41

Auditors risk assessment: documentation required (2)

Answer 41

5) results of procedures performed to assess the risk of mgmt override of controls
6) other conditions and analytical relationships that warranted further audit work
7) the nature if communciations made about fraud