Chapter 6: Planning the Audit/ Designing Audit Plans Flashcards
Plan the audit
establish an understanding with the client as to the nature of the engagement. develop:
- strategy
- plan
- program
obtain understanding of client, its environment, and internal control
perform risk assessment procedures, including:
- inquiries of management and others within entity
- analytical procedures
- observation and inspection of activities, operations, etc.
- inquiries of others outside the company (legal counsel, valuation experts, etc.)
- review info from external sources
assess risks of material misstatement and design further audit procedures
identify and assess risks of material misstatement for account balances, classes of transactions, and disclosures, consider: 1. what can go wrong 2. the magnitude involved 3. likelihood of a material misstatement design futher audit procedures
perform further audit procedures
approaches:
1. tests of controls
2. analytical procedures
3. tests of detail of transactions and balances
audit procedures:
1. inspection
2. observation
3. inquiry
4. confirmation
5. recalculation
6. reperformance
complete the audit
audit procedures:
- search for unrecorded liabilities
- review minutes of meetings
- perform final analytical procedures
- perform procedures to identify loss contingencies
- perform review for subsequent events
- obtain representation letter
- evaluate audit findings
form an opinion and issue the audit report
public company reporting requires reporting on internal control and on the financial statements
nonpublic company reporting ordinarily involves reporting on the financial statements
engagement risk
(of auditors) is the overall risk to the CPA firm of association with a particular audit client (risk the client could potentially damage the firm’s reputation and or cause litigation)
bad client to audit
(not auditable) poor reputation, integrity, internal controls
near bankruptcy, poor record keeping
Predecessor Auditor
(either terminated or discharged) must attemot to get in touch with (required) ask client for permission first (refuse-drop engagement) ask about management integrity, conflicts, why left, disagreements, etc.
management responsibility
- financial statements
- effective internal control over financial reporting
- compliance with laws and regulations
- providing representation letter to auditor at conclusion of audit
- adjusting financial statements for material misstatements
engagement letter
contract between client and auditor includes:
- timing, client assistance
- assurance per GAAS
- arrangements with predecessor auditor
- fees and billing arrangements (lowballing?)
- specialists to be used
- limitations of liability
- other services
understanding clients
- business strategy
- customers
- suppliers
- investors
- regulators
- other external and internal parties
materiality
must plan the audit to obtain reasonable assurance of detecting misstatements that auditor believes could be large enough individually or in the aggregate to be quantitatively material to the financial statements, helps determine sample sizes and audit scope
tolerable misstatements
materiality threshold disaggregated into smaller amounts for individual accounts
lower materiality
percentage of quantity
more work and you have to make work more precise