Chapter 3 planning and risk assessment

Question 1

what are the Preconditions for an Audit?

Answer 1

Before agreeing to conduct an audit, the auditor should determine that management

1. Uses an acceptable financial reporting framework (e.g., U.S. GAAP) in the preparation and fair presentation of financial statements.
2. Understand its Responsibilities for the preparation and fair presentation of financial statements.
3. Understand its Responsibilities for the design, implementation, and maintenance of internal control.
4. Understand its Responsibilities to provide access to all info and persons deemed necessary for the audit.

Question 2

What should be considered before accept an client?

Answer 2

1. Continued evaluation of client. Reject client if management lack integrity.
2. Communicate with predecessor auditor
3. Auditor is responsible for initiating the communication
4. Due to confidentiality reason, both of auditor and predecessor should obtain permission to discuss about intergrity of management and other audit-related issues.
5. Inquires include
   1) Facts revelant to management integrity
   2) disagreement with management about accounting
   policies, audit procedures and similar matters
   3) communications about fraud and noncompliance
   with laws and regulations
   4) communications about significant deficiencies and
   material weaknesses in internal control
   5) predecessor’s understanding of reason of change in auditors
6. Certain predecessor’s audit documentation is made available
7. consider whether to accept engagement if client or predecessor do not cooperate
8. consider reasonableness If management change terms of engagement. Withdraw and communicate if change is unreasonable and auditor is not permitted to continue the engagement.