Chapter 3 -- Planning and Risk Assessment Flashcards
Section 3.1: Pre-Engagement Acceptance Activities
What are the terms that is included in an engagement letter?
- Objective and scope of the audit
- Responsibilities of the auditor and management
- Inherent limitations of the audit and internal control
- The financial reporting framework
- The expected form and content of the audit reports
Section 3.1: Pre-Engagement Acceptance Activities
What are the preconditions of management before the engagement of an audit?
- Use of an acceptable financial reporting framework
- Is responsible for the preperation and fair presentation of the financial statements
- Is responsible for the design, implementation and maintenance of internal control
- Allows the auditors access to all of the necessary information
Section 3.2: Planning an Audit
What are the components of an audit plan?
The audit plan consists of:
* Risk Assessment Procedures
* Additional audit procedures performed at the assertion level based on nature, timing and extent of further audit procedures.
* Other procedures that comply to GAAS
Section 3.2: Planning an Audit
When does the auditor create the audit plan?
The audit plan is created after the auditor obtains an understanding of existing internal control.
Section 3.2: Planning an Audit
How is an internal audit plan different from an independent auditor’s audit plan?
The internal audit plan is much more detailed because it includes evaluation of the company’s reliability and integrity, the effectiveness and efficiency of operations, the safeguarding of assets and the compliance with laws, regulations and contracts.
However, the independent auditor’s plan is limited to expressing an opinion on the fairness of the financial statements. So they don’t have to evaluate the component that the internal auditor needs to evaluate.
Section 3.2: Planning an Audit
What are the steps in developing the initial audit plan?
After accepting the client, the auditor should
Meet with the client to agree on the type, scope and timing of certain aspects of the engagagement.
Determine the extent of involvement from internal control.
Make a preliminary judgement about materiality.
Section 3.2: Planning an Audit
What is included in the audit plan?
- A description of risk assessment procedures
- A description of further audit procedures
- Other audit procedures required by GAAS and PCAOB
Section 3.2: Planning an Audit
What are the steps in devloping an audit plan for the 1st time?
- Communicate with the predecessor auditor
- Audit procedures regarding opening balances
- Assignment of firm personnel with appropriate qualificiations
- Precedures required by the firm’s system of quality control for initial engagements.
Section 3.2: Planning an Audit
What are the risk assessment procedures?
Risk assessment procedures include
* Inquiries of management and others within the entity.
* Analystical procedures
* Observation and inspection
Section 3.2: Planning an Audit
What should be asked to the predecessor auditor before accepting an engagement?
- The successor auditor should find out if the financial statements:
- Contain misstatements materially affecting the current statements.
- If appropriate accounting policies are consistently applied in the current staements.
- Relevant audit evidence that may be reported in the most recent audited statements.
- The predecessor’s report on the financial statements.
- The results of inquiry of the predecessor
- A review of the predececessor’s audit documentation.
Section 3.2: Planning an Audit
What should not be communicated to the audit committee, or those charged with governance?
- While the auditor should communicate an overview of the scope and timing of the audit, the auditor should not communicate:
- Nature and timing of detailed audit procedures.
- Management should not have knowledge of how samples are selected.
Section 3.2: Planning an Audit
What are the components of the overall strategy that is developed?
- Characteristics of the engagement and reporting objectives.
- Appropriate materiality levels
- Areas of high risk of material misstatement.
- Material client locations and the use of component auditors.
- Whether to seek evidence of the operating effectiveness of controls.
- Relevant entity-specific, industry or financial developments
- The audit resources required.
Section 3.3: Audit Risk and Materiality
What is the definition of audit risk?
Inherent risk is assessed very early in the audit process and planning stage.
A material misstatement:
* May happen in the company’s accounting process?
* Will not be detected or prevented by the company’s own internal control
* Will not be detected by the independent auditors, which will then be inadvertently reported in the audited financial statements.
Section 3.3: Audit Risk and Materiality
What is the Audit Risk Model?
Audit risk is based on the risk of material misstatements and detection risk.
Audit Risk = Risk of Material Misstatement (RMM) x Detection Risk
Risk of Material Misstatement = Inherent Risk x Control Risk
Detection Risk = Auditor’s Risk
Section 3.3: Audit Risk and Materiality
What are the types of risk factors?
- Audit Risk: The risk, which is assessed by the auditor, that the auditor will fail to modify an opinion on the financial statements when they are actrually materially misstated.
- Control Risk: Assumes the risk will not be prevented or detected on a timely basis by internal controls.
- Inherent Risk: Assumes no internal controls exist. Also, complex calculations are more likely to be misstated than simple ones.
- Detection Risk: Detection risk is the amount that the auditor is willing to accept.
