Chapter 3 Part 1 Flashcards
Why do predecessor auditors need to obtain the client’s consent to give information to prospective auditors?
because confidentiality remains even when the auditor-client relationship ends
information on management’s integrity; on disagreements with management about accounting principles, audit procedures, or similar matters; and the reasons for a change of auditors
What information should prospective auditors try to obtain from predecessor auditors?
The engagement letter acts as a contract. It serves as a means for reducing the risk of misunderstandings with the client and as a means of avoiding legal liability for claims that the auditors did not perform the work promised.
What benefits are obtained by having an engagement letter?
The documentation provided to former clients dealing with the subject of future services,
(1) access to audit documentation by new auditors
(2) reissuance of the auditors’ report when required for SEC reporting or comparative financial reporting
(3) fee arrangements for such future services
Termination Letter
This letter sets forth the understanding with the client
(1) the objectives of the engagement
(2) management’s responsibilities
(3) the auditors’ responsibilities
(4) any limitations of the engagement.
Engagement Letter
A comprehensive list of the specific audit procedures that the audit team needs to perform to gather sufficient appropriate evidence on which to base their opinion on the financial statements.
Audit Plan
auditors must know about his or her professional qualifications, experience, and reputation
it is imperative that the audit professional gain a detailed understanding of the methods and assumptions of an audit specialist, including detailed tests on the data that was provided by the client to the specialist
What must external auditors do to use the work of audit specialists in the audit of an entity’s financial statements?
They must assess the objectivity and competence on the internal auditors, and then make an assessement on how much testing/reliance they need for the information they provide.
objectivity: look at what the department reports to and their processes
competence: look at certifications and personnel
What must external auditors do to use the work of internal auditors in the audit of an entity’s financial statements?
For a typical audit engagement, describe the people and skills that are normally assigned to a full-service audit team.
audit engagement partner- the person with final responsibility for the audit and usually an industry specialists
an audit manager
an information technology (IT) audit specialists
a tax partner
a quality assurance partner- the second audit partner who reviews the audit team’s work in critical audit areas
audit staff
What is meant by material information in accounting and auditing?
information is material if it is likely to influence financial statement users’ decisions
“important information”
a fact is material if there is “a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available” (PCAOB AS 11)
