Chapter 5: Engagement Acceptance/ Engagement Continuance Flashcards
What key decisions must the auditor make when deciding whether or not to undertake an engagement?
1) Can we do the audit?, 2) Do we want to do the audit?
What does determining the capability of performing a specific audit involve?
determining whether the firm would be able to do the audit in compliance with GAAS
What makes a client auditable?
Internal control must be at least adequate enough to ensure there is a record-link between all transactions that occurred and the financial records
What is an audit trail used to help verify?
1) All transactions have been recorded, 2) No fictitious transactions have entered the general ledger
Typical Audit Trail
Transaction, Source Document, Journal Entry, Ledger Posting, Financial Statement
What makes an audit trail useful?
1) Some level of confidence that all transactions have been recorded, 2) Minimum level of internal control, 3) Auditor needs to feel comfortable that evidence will be available to support financial statement assertions
What is determining whether the firm wants to do the audit based on?
risk involved in doing the audit and whether the client fits into the firm’s strategic goals
Engagement Risk
risks audit firm is exposed to due to its association with a particular client
Litigation risk
expected loss auditors will incur from lawsuits stemming from an audit of a particular client
What is the purpose of predecessor/successor auditor communication?
Talking with a client’s prior auditor, help determine the integrity of the potential client’s management
Purpose of an Engagement Letter
Put in writing the specific details of the engagement, including both the auditor’s and management’s responsibilities, and establishes contract between auditor and management
