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CPA Review - AUD > CPAExcl 2-Planning Activities > Flashcards

CPAExcl 2-Planning Activities Flashcards

1
Q

What matters are typically addressed in an engagement letter?

A
  1. The objective and scope of the audit;
  2. The auditor’s responsibilities;
  3. Management’s responsibilities;
  4. A statement about the inherent limitations of an audit;
  5. A statement identifying the applicable financial reporting framework;
  6. Reference to the expected content of any reports to be issued; and
  7. Other matters, as warranted (e.g., fees, etc.)
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2
Q

What is meant by the term initial audit?

A

The prior year’s financial statements have been audited by a predecessor auditor.

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3
Q

What is meant by the term preconditions for an audit?

A

The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management to the premise on which an audit is conducted.

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4
Q

What matters should be covered in the (successor) auditor’s inquiry of the predecessor auditor?

A
  1. Facts related to management’s integrity;
  2. Significant accounting or auditing disagreements;
  3. Any communications with the audit committee (or others charged with governance) about fraud, illegal acts, and significant deficiencies in internal control matters; and
  4. Predecessor’s understanding of the reason(s) for the client’s change in auditors
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5
Q

Who initiates the communications between the predecessor auditor and successor auditor?

A

The successor auditor initiates the communication with the predecessor by requesting that the client authorize the predecessor auditor to allow the successor auditor to review the predecessor auditor’s working papers.

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6
Q

List several circumstances that impact the extent of planning activities.

A

Size and complexity of the entity

Auditor’s experience with that entity

Auditor’s understanding of the entity and its environment, including its internal control.

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7
Q

Identify factors relevant to establishing an overall audit strategy.

A
  1. Identify characteristics of the engagement affecting its scope;
  2. Identify the reporting objective of the engagement and required communications;
  3. Consider the factors relevant to utilizing the audit team;
  4. Consider the results of preliminary engagement planning activities; and
  5. Determine the nature, timing, and extent of necessary resources for the engagement
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8
Q

What is the auditor’s basic audit planning responsibility?

A

The auditor should plan the audit (and design the required written audit program or plan) to be responsive to the auditor’s assessment of the risk of material misstatement.

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9
Q

Identify 3 planning-related issues that should be included in the auditor’s documentation.

A
  1. The overall audit strategy;
  2. The audit plan; and
  3. Any significant changes made to the audit strategy or the audit plan during the engagement, along with the reasons for any such changes.
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10
Q

What is the difference between an overall audit strategy and an audit plan?

A

An audit strategy deals with higher level issues, such as allocating audit resources, whereas an audit plan is more detailed and deals more specifically with the nature, timing, and extent of audit procedures to be performed.

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11
Q

Identify some activities associated with pre-engagement activities.

A
  1. Perform appropriate procedures to address the quality control issues associated with the acceptance/continuance of the audit engagement;
  2. Evaluate the audit team’s compliance with relevant ethical requirements (especially independence issues); and
  3. Establish an understanding in writing of the terms of the engagement.
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12
Q

List the audit procedures that should occur during the planning phase of an audit.

A
  1. Review client records
  2. Inquire of client personnel
  3. Coordinate client assistance
  4. Determine if specialists are needed
  5. Coordinate staffing requirements
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13
Q

Prior auditing standards referred to evaluation stage materiality. What did the term evaluation stage materiality mean?

A

The determination of whether the financial statements were fairly stated in all material respects at the completion of field work.

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14
Q

What 4 matters should be documented with respect to materiality considerations?

A
  1. Materiality for the financial statements as a whole;
  2. Materiality level(s) for applicable transactions, account balances, or disclosures;
  3. Performance materiality; and
  4. Any revision of those considerations during the audit engagement
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15
Q

What is the basic meaning of the concept of materiality?

A

An understanding of what is important.

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16
Q

The clarified auditing standards introduced the term performance materiality. What does that term mean?

A

The amount(s) set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.

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17
Q

The terms planning stage materiality and evaluation stage materiality in prior auditing standards has been replaced by what single concept in the clarified auditing standards?

A

Performance materiality.

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18
Q

What is meant by the term tolerable misstatement?

A

The application of performance materiality to a particular sampling procedure or application.

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19
Q

Prior auditing standards referred to planning stage materiality. What did the term planning stage materiality mean?

A

The size of the misstatements that the audit program was designed to detect.

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20
Q

What risk is within the auditor’s control?

A

Detection risk.

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21
Q

Define “risk of material misstatement.”

A

The risk that the financial statements contain one or more material misstatements prior to the audit. (Note: RMM = IR x CR)

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22
Q

Define “audit risk.”

A

The probability that the auditor fails to modify the opinion on financial statements that contain a material misstatement.

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23
Q

Define “control risk.”

A

The probability that a material misstatement, that occurred in the first place, would not be detected by applicable internal controls.

24
Q

Define “inherent risk.”

A

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures.

25
Q

Define “detection risk.”

A

The probability that a material misstatement, that was not prevented or detected by internal control, was not detected by the auditor’s substantive audit procedures.

26
Q

What is the audit risk model that is applicable to classes of transactions or to account balances?

A

List the variables of planned audit procedures that can be adjusted to change detection risk.

27
Q

What is the purpose of analytical procedures in audit planning?

A

To aid in understanding client activities and in targeting risky areas where material misstatements are more likely to occur.

28
Q

What is the purpose of analytical procedures in the overall review?

A

To verify the conclusions reached in the audit.

29
Q

Define “analytical procedures.”

A

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.

30
Q

What 3 purposes might analytical procedures serve?

A
  1. Required during planning
  2. May be used as substantive evidence (not required)
  3. Required during final review
31
Q

List the four factors that affect the efficiency and effectiveness of analytical procedures for substantive purposes.

A
  1. Nature of assertion;
  2. Plausibility and predictability of relationship;
  3. Availability and reliability of data;
  4. Precision of expectation
32
Q

What matters must be documented in connection with analytical procedures?

A
  1. The auditor’s expectation and the factors considered in developing it;
  2. The results of the comparison of the recorded amounts (or ratios) with the expectations; and
  3. Any additional auditing procedures performed to investigate significant differences identified by that comparison
33
Q

Identify the auditor’s responsibility for detecting fraud in a financial statement audit.

A
  1. Auditors must design audit to provide reasonable assurance of detecting material misstatements whether due to fraud or error;
  2. Auditors are required to specifically assess the risk of material misstatement due to fraud;
  3. Auditors must document the assessment of the risk of material misstatement due to fraud and the resulting response(s) associated with any risk factors identified
34
Q

What are the three categories of fraud-related risk factors that should be considered by the auditor?

A

Incentives/Pressures (the motivation for committing fraud)

Opportunities (the ability to commit fraud)

Attitudes/Rationalizations (the justification or excuse for committing fraud)

35
Q

What is the definition of fraud that is relevant to the auditor?

A

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements.

36
Q

List the two types of financial-statement-related frauds.

A

Fraudulent financial reporting (sometimes called cooking the books)
Misappropriation of assets (covering up theft by false journal entries)

37
Q

Who should be informed when the auditor has identified fraud, but that fraud is not material and does not involve senior management?

A

The appropriate level of management should be notified (defined to be at least one level above the level where the fraud occurred).

38
Q

When might an auditor have a duty to inform others outside of the audited entity of fraud-related matters?

A
  1. In response to a valid subpoena;
  2. To comply with applicable legal and regulatory requirements;
  3. To respond appropriately to successor auditor’s inquiries when the former client has given permission to the predecessor;
  4. To report fraud to the applicable funding agency under the requirements of government auditing standards
39
Q

Who should be informed when fraud has occurred that is material (whether or not senior management is involved in the fraud).

A

The auditor should inform those charged with governance.

40
Q

What is the required form of the auditor’s communications about fraud-related issues?

A

May be either written or oral, but should be timely.

41
Q

What are the auditor’s responsibilities to communicate fraud identified by the auditor?

A
  1. If the fraud is not material, the auditor should inform the appropriate level of management.
  2. If the fraud is material (or if senior management is involved, even if not material), the auditor should inform those charged with governance
42
Q

What is meant by the term legal and regulatory framework?

A

Those laws and regulations to which an entity is subject; noncompliance may result in fines, litigation, or other consequences that may have a material effect on the financial statements.

43
Q

Identify 3 audit procedures might bring to the auditor’s attention noncompliance with laws and regulations that do not have a direct effect on the entity’s financial statements.

A
  1. Inquiry of management and those charged with governance about noncompliance with applicable laws and regulations;
  2. Inspection of correspondence with regulatory authorities;
  3. Reading the minutes of meetings of those charged with governance
44
Q

What procedure can an auditor undertake to help detect illegal acts?

A

Make inquiries of management about the entity’s compliance with applicable laws.

45
Q

What matters should the auditor document with respect to the entity’s compliance with applicable laws and regulations?

A
  1. The results of the discussion with management, those charged with governance, and others, as applicable;
  2. Any identified or suspected noncompliance with applicable laws and regulations
46
Q

What is the auditor’s responsibility to detect illegal acts?

A

The auditor should design the audit to provide reasonable assurance of detecting illegal acts having a direct and material effect on the financial statements.

47
Q

What actions should an auditor consider when an illegal act has been detected?

A
  1. Gather additional evidence to determine relevant facts;
  2. Discuss the matter with the appropriate level of management;
  3. Consider consulting with the entity’s attorney and/or relevant specialists;
  4. Consider the implications to other audit areas
48
Q

When might an auditor have a duty to inform others outside of the audited entity of illegal acts known to the auditor?

A
  1. In response to a valid subpoena;
  2. To comply with applicable legal and regulatory requirements;
  3. To respond appropriately to successor auditor’s inquiries when the former client has given permission to the predecessor;
  4. To report illegal acts to the applicable funding agency under the requirements of government auditing standards
49
Q

List some examples of specialists.

A

Actuaries, appraisers, engineers, geologists, etc.

50
Q

What considerations should be made when an auditor is selecting a specialist?

A

The auditor should consider the specialist’s competence, capabilities, and objectivity (including professional credentials, reputation, and any relationship to the client).

51
Q

What reference to a specialist may an auditor make when expressing an unmodified opinion?

A

The auditor should NOT reference the specialist in an unmodified opinion.

52
Q

What reference to a specialist may an auditor make when expressing a modified opinion?

A

The auditor may reference the specialist, if that will facilitate the readers’ understanding of the reason(s) for the modified opinion.

53
Q

Define the term specialist.

A

An individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence.

54
Q

What matters are the auditor required to communicate to those charged with governance?

A
  1. The auditor’s responsibilities under GAAS
  2. The planned scope and timing of the audit
  3. Significant findings from the audit
55
Q

What is the auditor’s basic responsibility regarding communication with those charged with governance?

A

The auditor must communicate those matters that are “significant” and relevant to the responsibilities of those charged with governance in overseeing the financial reporting process.

56
Q

Define what is meant by the term management.

A

The person(s) with executive responsibility for the conduct of the entity’s operations.

57
Q

Define what is meant by the term those charged with governance.

A

The person(s) or organization(s) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity.

CPA Review - AUD (20 decks)

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