Chapter 6 - Client Acceptance, Preliminary Planning, and Materiality Flashcards
What are the three main reasons that auditors should plan engagements properly?
- To enable the auditor to obtain sufficient appropriate audit evidence
- To help keep audit costs reasonable
- To avoid misunderstandings with the client.
What are the three parts of the audit plan?
The nature, timing, and extent or risk assessment procedures
The nature, timing, and extent of further audit procedures
Any other audit procedures required
What is the client business risk?
The risk that the entity will fail to achieve its objectives or execute its strategies.
What is engagement risk?
The extent of risk that the audit firm is willing to tolerate (firms risk tolerance in accepting or continuing with a client)
What is the risk of material misstatement? What are the two parts of RMM?
Risk that the financial statements contain material misstatements due to fraud or error prior to the audit. Inherent risk - Susceptibility as a whole or individual accounts and control risk - Clients controls do not prevent or detect material misstatements.
What does RMM help auditors to plan and determine?
How much persuasive evidence is required and the experience level of staff needed to perform an appropriate audit.
What does assessing client business risk help to plan and determine
It is good in determining the engagement risk and the RMM. A company that has ongoing losses may eventually become bankrupt.
What are the 4 preliminary engagement activities?
- Perform procedures to assist the auditor in deciding whether to accept or continue doing the audit for the client. (Decision made by experienced auditor)
- Consider ethical requirements, like independence
- Identify purpose of the financial statements
- Obtain an understanding with the client about the terms of the engagement. The purpose of this is to avoid misunderstandings.
How do we decide whether to accept a client or not?
You want to avoid clients that lack integrity or always argue about audit fees. Assess whether the audit firm has quality management like their integrity, compliance with relevant ethical requirements, and competence to perform the engagement.
- In addition, each firm will have their own continuance policies.
What are 3 things that make engagement risks more risky
- The degree to which external users rely on the statements.
- Likelihood that the client will have financial difficulties after the audit
- Integrity of the management
What are 2 factors that influence the engagement risk?
- Distribution of ownership - Public companies statements are normally relied upon more than users of the private companies
- Nature and the amount of liabilities - If there is a large amount of liabilities it will be used more extensively by actual or potential creditors.
What are 5 indications of going concern issues?
- Liquidity problems - Short of cash and working capital cannot pay obligations
- Profits going down from previous years - Increased likelihood of solvency problems
- Method of financing growth - Reliance on debt is more risky especially is operations decline.
- Nature of the clients operations - Start up tech more risky than food manufacturer
- Competence of management - Those who are not alert and try to enhance their operating methods are risky
What are considerations when investigating a new client
- Standing in the business community and their financial stability
- Communication with the previous auditors (Note: Require permission from the client)
What are considerations when deciding on continuing clients?
- Consider conflicts regarding fees, scope, or the type of opinion issued
- Consider if they have lost integrity
- Consider if there are pending lawsuits
- Consider if the engagement risk has risen though none of the above criteria exist.
What are the two ethical requirements on the auditors side to decide whether to accept a client or not?
- Competence - Can you perform the work, do you have the time and resources
- Independence - Assess independence threat analysis and describe them. Determine if safeguards exist and if not remove yourself from the engagement
What are the two pre conditions for an audit?
- The use by management of an acceptable financial reporting framework - IFRS or ASPE and purpose of the statements and nature of reporting entity.
- Agreement with management / governance on the terms of the engagement - Clear understanding of the terms of the engagement should exist.
What is an engagement letter?
A written agreement between the public accounting firm and the client as to the terms of the engagement for the conduct of the audit and related services.
What are the 8 components of the engagement letter?
- Objective, scope, and limitation of the audit engagement
- Responsibility of the auditor and management
- The framework used by management
- Expected form and content of the audit report
- Restrictions on the auditors work
- Deadlines
- Client assistance in obtaining records and documents
- Internal audit department - Assistance in actual audit work / schedules to be prepared for the auditor.
What is a scope limitation?
When the client imposes a restriction on the auditor like denying access to certain information , which can make the auditor disclaim the opinion on the financial statement
What does the overall audit strategy set out?
- Types and allocation of resources to be deployed for specific audit areas.
2.Timing of audit procedures - Materiality
What are the four parts of resources required for an engagement
- Select staff for the engagement - Ensure have sufficient competence and experience, specialists may also be assigned like an IT specialist.
- Evaluate need for external experts - Specialized knowledge may be required, thus requiring to consult a specialist.
- Evaluate whether internal audit work can contribute - May be able to use the internal auditors work or the internal auditor provides direct assistance
- Evaluate reliance on other auditors - If multiple locations or subsidiaries may need to engage other auditors
What is the staff continuity consideration?
Ensure continuity from year to year as it helps the PA maintain familiarity with the business operation and interpersonal relationships, however it may create an independence threat.
Describe the use of internal auditors?
If they have the competence, integrity, and objectivity you may use their work. However if RMM is high restrict using their work. If they assist then review the internal auditors work.
What are component auditors?
What are group auditors?
What should be assessed with the component auditor?
Component - The auditor for a particular division or subsidiary
Group - Auditor responsible for the consolidated financial statements
Assess the competence, independence, and they operate in a regulatory environment that is overseen