Chapter 3: Engagement Planning and Audit Evidence Flashcards
Procedures performed several weeks or months before the date of the financial statements
interim audit work
Acc bal audited during intermin are later rolled forward at year end
Procedures performed shortly after before and after the date of the finanical statments
year-end audit work
What members does a typical audit engagment team consist of? (6)
- audit engagement partner (final responsibility & usually industry specialist)
- audit manager
- IT auditor
- tax specialist
- quality assurance partner (reviews audit work in critical areas)
- audit staff
Audit Plan
comprehensive list of specific procedures needed to gather sufficient appropriate evidence
To plan the nature, timing, and extent of further audit procedures to be performed, an auditor should establish an ____ level for the financial statemetns as a whole that is appropriate in light of the company’s earning and other relevant factors
materiality
Several activities public accounting firms undertake before beginning any audit engagement
What is the benefit?
Risk Management Activities
Benefit: to reduce their own business risks
What is risk?
probability that firm could issue clean audit opinion, when actually a material misstatement does exist and the opinion should have been modified
What are the 3 things the professional standards state an auditor should do before beginning audit engagement?
- Client acceptance or continuance
- Determine compliance w/ independence and ethics requirement
- Reach contractual understanding w/client for audit
Independence in fact vs independence in appearance
lack of independence can result in disciplinary action and litigation
What should be included in an engagement letter?
- objectives of engagement
- management’s responsibilities
- auditors’ responsibilities
- any limitations of the engagement
Who is required to lead the planing processed?
the assigned engagement partner
What is performance materiality?
What is the benefit?
an amount less than materiality for the financial statements as a whole
Benefit: to make sure uncorrected and undeteced immaterial misstatements don’t exceed materiality for financial statements as a whole
When auditors use sampling, performance materiality is referred to as _______ .
tolerable misstatement
The planning process begins with a calculation of a preliminary materiality amount that is based on a relevant ____ and a rule of thumb percentage applied to it.
benchmark
Verifying if all transactions were recorded in the proper period address the ASB assertion of_______.
cutoff
A list of audit procedures for gathering evidence related to the relevant assertions identified for an audit client’s financial statement accounts and disclosures is a(n)… _____ _____ plan.
substantive audit
The auditor begins the search for evidence by focusing on transactions that have already been recorded in the financial statements and following them back to the source when engaged in _______.
vouching
Testing the completeness assertion by following a sample of shipping documents forward to sales invoices, the sales journal and revenue earned is called _______.
tracing
Auditors use audit procedures for _____
assessment, tests of ____
, and to produce evidence about management’s assertions.
risk; controls
Physical inspection of tangible assets provides strong evidence regarding the assertion of ____ and may provide some evidence related to the assertion of _____.
existence; valuation
Reperformance is a representative audit procedure used to test the PCAOB and ASB assertion of ______.
valuation and allocation
The substantive audit plan depends almost exclusively upon the:
risk assessment of the client
Observation is commonly used as a test of ______.
controls
Selecting an item in the financial records and following its path back to the source document is referred to as _______.
vouching
The collection of verbal evidence from independent parties and management is the audit procedure known as ______.
inquiry
Confirmation can provide evidence regarding ______. (4)
- rights and obligations
- cutoff
- valuation
- existence
Inspection of tangible assets does not necessarily provide any evidence of ______.
Explain why
rights (assets may be held on lease or consignment)
The physical presence of assets is an example of evidence available to test the ASB assertion of________.
existence
An audit procedure that is similar to recalculation but much broader in approach is called ________.
reperformance
Viewing a client’s physical facilities and participating in a surprise payroll distributions are examples of the audit procedure known as _____.
observation
What are analytical procedures?
When are they required to be used?
when an auditor compares the expectation to a recorded balance
Required when planning audit and when performing review of financial statements near end of audit
Audit documentation _____. (3)
- should contain support for the audit decision
- provides the auditors’ records of compliance with standards
- may be in either electronic or hard copy form
A widely used auditing procedure is _________
by direct correspondence with independent parties.
confirmation
What files contain information of continuing audit significance over many years’ audits of the same client?
Provide both names
Continuing audit files AKA permanent files
When the audit team recomputes computations previously performed by client personnel, the audit procedure is called _____.
recalculation
According to the professional standards, if there is a chance an account could contain a material misstatement, it should be identified as ____.
significant
Information to familiarize new audit team members with a client, company history, continuing schedules and prior years financial statements and audit reports may all be found in the ______ files.
permanent
According to the professional standards, if an assertion has “a reasonable possibility of containing a misstatement that could cause the financial statements to be materially misstated,” it must be categorized as ____ .
relevant
