Chapter 3 - Engagement Planning Flashcards
audit committee is hired by…
the board
pre-engagement activities include…
client acceptance or continuance, compliance with requirements, engagement letters
in communication between predecessor and prospective auditors, what is required by prospective auditor>
an attempt to communicate
after securing the approval from the audit client, communication should include…
management integrity, disagreements with management, and reason for change
if management is sketchy, there could be…
high litigation risk
a lack of independence can result in..
disciplinary action by litigation bu regulators and/or professional organizations and litigation
engagement letter show..
exactly what auditors should be doing
engagement letters act as..
a contract between auditor and client
engagement letters serves as a means of..
reducing risk of misunderstanding between clients and firms
engagement letter should include…
management responsibilities, auditor responsibilities, objectives of engagement, any limitations
how is an engagement letter different from audit report?
no opinion in the letter
an audit plan is a…
Specific list of the specific audit procedures that the audit team needs to gather sufficient appropriate evidence on which to base its opinion on the F/S
develop and document a plan that describes the procedures to be performedto assess the…
risk of MATERIAL MISTATEMENT at the financial statement and assertion level
plan the _________ of control tests and substantive tests that are designed to mitigate these risks
nature, timing, and extent
plan the nature, timing, and extent of…
control tests and substantive tests
quality assurance partners look at…
high risk areas
for complex engagements, what staff is usually assigned?
more experiences
is the audit engagement team or the audit team bigger?
engagement
IT auditors are often needs to..
evaluate the effect of computerized processing on the audit
IT auditors ___________ info
generate, process, and complete
IT auditors skills are needed to understand…
the flow of transactions, or to design and perform audit procedures
external auditors must obtain the work of the client’s…
internal audit department
we must consider internal auditor’s….
objectivity and competence
internal auditors cannot do what tasks?
cannot be delegated tasks that require extensive professional judgement
we might be able to use the internal auditors work if…
it isn’t in a high risk area
who are audit specialists?
non-audit team members who are skilled in areas other than accounting
auditors must know specialists…
qualifications, experience, and reputation
are specialists referred to in the audit report?
only if their findings cause a modification
we evaluate the company specialists…
work; specifically evaluating data, methods, and assumptions made
the extent of the evaluation of the work of a company specialist is contingent on…
the risk of MM in the area, the significance of the work in the final opinion, and the objectivity and competence of the company’s specialist
the time budget is used to..
maintain control of the audit by identifying potential problem areas early in the engagement
interim work refers to…
procedures completed several weeks or moths before the balance sheet date
YE audit work refers to…
procedures performed shortly before and after the balance sheet date
time budget helps us know..
budget fees, where people will be at in audit, how many people needed on audit
four stages on-time budget
planning, IC testing, interim testing, YE testing
when does the planning stage happen on the time line?
prior year 10 k filling to start of Q3
when does IC testing usually occur?
around Q2
when on the timeline does interim testing occur?
Q3 to YE
when does YE testing happen on the timeline?
YE to 10k filling
time reports are recorded by budget categories for the purposes of..
evaluating the efficiency of the audit team members, compiling a record for billing the client, compiling a record for planning the next audit
materiality is something that…
would influence decision makers
the emphasis of materiality is on who?
users of F/S
auditors must examine what two factors when determining materiality?
qualitative and quantitative
examples of quantitative criteria
absolute size, relative size, cumulative size
examples of qualitative criteria
nature of the item or issue, circumstances, uncertainty
ultimately, materiality is a manner of…
professional judgment
what three things does materiality guide in an audit?
- planning substantive procedures
- evaluating evidence (performance materiality)
- making decisions about the audit report
planning substantive procedures refers to…
directing attention and audit work that is important or risky
auditors use performance materiality to….
make sure the aggregate of uncorrelated and undetected misstatements does not exceed materiality for the financial statements as a whole
three purposes for why auditors use audit engagements
- gain an understanding for the client and risks associated with them
- to test the operating effectiveness of internal controls
- to produce evidence about management’s assertions related to the amounts and disclosures in a client’s F/S
what procedure is “gain an understanding for the client and risks associated with them”?
risk assessment procedures
what procedure is “to test the operating effectiveness of internal controls”?
test of controls
what procedure is “to produce evidence about managements assertions related to the amounts and disclosures in a clients F/S “ ?
substantive procedures
substantive audit plan should contain..
a list of audit procedures for gathering evidence related to the relevant assertions identified for the significant financial statement accounts and disclosures of an audit client
two ways to conduct substantive tests
- substantive analytical procedures
- tests of details
three types of inspections of records and documents
Vouching, tracing, scanning
which two types of inspections do it in a directional way?
tracing and vouching
Vouching is used to test what assertions?
existence or occurance
tracing is used to test what assertions?
completeness
what direction does vouching go?
start to end
what direction does tracing go?
end to start
when do you do both vouching and tracing?
for large corporations
when an auditor compares the expectation to a record balance…
analytical procedures are being performed
when are analytical procedures being performed?
when an auditor compares the expectation to a record balance
auditors can evaluate financial statement account by developing…
expectation about what a balance should be based on an analysis of relevant financial and non financial data
analytical procedures are required in what phase of the audit?
planning and review (completion)
auditors can use analytical procedures to provide evidence during what phase of the audit?
testing
auditors should use _________ info for analysis
independent and reliable
analytical procedures take how many general forms?
5
three steps of analytical procedures
- planning
- review
- substantive analytical procedures
analytical procedure example for planning purposes and at the end of the audit
analytical procedures used for the 10-Q reviews; comparing balance sheet and income statements to prior years
analytical procedure example for substantive testing
individual financial stamens line items OR accounts; benchmark based on prediction of what the account balance should be
audit documentation definition
” the written record of the basis for the auditors’ conclusions that provides the support for the auditors’ representations, whether those representations are contained in the report or otherwise’
two objectives of audit documentation
- improve audit quality
- enhance public confidence
example of improve audit quality
system of quality controls should audit documents
example of enhancing public confidence
proof that we followed auditing standards
permanent files includes…
information of continuing audit significance
examples of permanent files
key contracts, bylaws, agreements, etc.
current files include…
the entire engagement administration file for the year under audit and all documentation that is sufficient to support all conclusions of the audit
what files include all documentation that is sufficient to support all conclusions of the audit?
current files
purposes of audit documentation
- integral part of audit quality
- documents nature, timing, and extent of work performed
- evidence for DUE CARE
- basis for conclusion
- facilitates planning, performance, and supervision
- provides basis for review
audit documentation an integral part in..
audit quality
audit documentation documents the…
nature timing and extent of work performed
audit documentation provides evidence for…
due care
audit documentation provides a basis for…
conclusion and basis of review
audit documentation facilitates…
planning, performance, and supervision
documentation should be prepared in sufficient detail to enable an EXPERIENCED auditor to…
- Understand the nature, time, extent, and results and evidence obtained and conclusions reached
- determine who performed the work, date of work, reviewer and date of review
audit documentation be prepared in enough detail that the auditor should understand the nature, timing, extent, and results of..
procedures, evidence obtained and conclusions reached
audit documentation be prepared in enough detail that the auditor can determine what about the work?
who performed the work, date of work, reviewer and date of review
documentation should provide a clear link between significant findings/issues and…
- demonstrate compliance with professional standards
- support basis for conclusions for each relevant assertion
- document that accounting records agree with financial statements
the planning document must include…
a listing of each significant amount and disclosure in the clients financial statements
an account is considered significant if…
there is a chance it could contain material misstatement
the documentation must include a list of each relevant financial statement…
assertion related to the significant accounts and disclosures
if the assertion has a reasonable possibility of containing a misstatement that would cause the statements to be materially misstated, it is considered…
relevant
an assertion is considered relevant if…
it has a reasonable possibility of containing a misstatement that would cause the statements to be materially misstated
relevant assertions if cash was a significant account
existence, valuation, and presentation/disclosure
relevant assertions if A/R is a significant account
existence, completeness, valuation
cash lead sheet is…
The first file of the work papers that lists all cash accounts and a small analysis
cash lead sheet is a guide for..
how to look at the rest of the work papers
what info is on each work paper?
- name, date, purpose, page number
- procedures performed and conclusions reached by the auditor (evidence that auditor followed GAAS and audit tick mark legend)
- preparers and reviews initials
documents must be rated for how long?
7 years from report release date
if no report is issued, documentation should be retained from…
the last day of fieldwork
all documentation must be finalized within…
45 days of audit reports release date
documents to be retained include..
those documenting discussion and subsequent resolution of differences in professional judgements among team members
within the 45 days from filing to documentation finalized, what can reviewer do?
cleaning notes but no changes to conclusions
