Chapter 5 Preliminary Audit Planning

Question 1

What is an audit engagement letter?

Answer 1

The engagement letter is from the auditor and addressed to those in charged with governance of the auditee. The engagement letter must be signed by the responsible parties at the client company to show their agreement, and returned to the auditor. The engagement letter describes the nature of the audit, as well as management’s responsibilities for fair presentation of the financial statements, for implementing effective internal controls, and for providing all the information and representations that the auditor needs to complete the engagement. The letter also describes the auditor’s responsibilities to conduct the audit in accordance with GAAS and sets out the type of audit opinion and report expected to be issued at the end of the engagement.

Question 2

Describe the 3 main steps in the financial statement audit process?

Answer 2

Once the audit engagement is accepted, the process of performing the audit engagement begins. There are 3 main steps in the financial statement audit process: (I) risk assessment, (II) responding to the assessed risks, and (III) concluding and reporting.

Question 3

What is the purpose of a time budget? What info does it contain?

Answer 3

At the beginning of a typical audit, a time budget is developed to manage the engagement project. The time budget sets out the key tasks required in the audit, the people with required skills and experience assigned to the audit engagement team, the estimated time required by team members to perform the engagement tasks, and when this work is expected to be done.

Question 4

What does the term materiality mean in auditing?

Answer 4

In auditing, the term materiality refers to a monetary amount that auditor’s believe financial statement users would find significant, or material, to their decision making.

Question 5

What are the overall objectives of the independent auditor of a financial statement as per CAS 200?

Answer 5

1) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and
2) to report on the financial statements, and communicate as required by the CASs, in accordance with the auditor’s findings