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PASSED AUD UCSB > ENGAGEMENT ACCEPTANCE > Flashcards

ENGAGEMENT ACCEPTANCE Flashcards

1
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The auditor is required to communicate to those charged with governance certain matters related to the conduct of the audit.

The matters to be communicated include:

  • the auditor’s responsibility under generally accepted auditing standards,
  • an overview of the planned scope and timing of the audit, and
  • significant findings from the audit, including:
    • -the auditor’s views about qualitative aspects of the entity’s significant accounting practices,
    • -significant difficulties encountered during the audit,
    • -uncorrected misstatements,
    • -disagreements with management,
    • -management’s consultation with other accountants, and
    • -significant issues discussed, or subject to correspondence, with management.
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4
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AUDIT COMMITTEE

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Part of the Board of Directors

  • Corporate Officers Not Allowed
  • Responsible for Hiring Auditor
  • Oversees Internal Control
  • Must Agree with Auditor on
    • Responsibility of the Parties
    • Audit Fee
    • Timing of the Audit
    • Audit Plan
  • Acts as Liaison Between Auditor and the Board
  • Auditor Communicates Concerns about
    • Internal Control Deficiencies
    • Errors
    • Fraud
    • Illegal Activities
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5
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Audit Engagement Agreement

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Must be writting and Cover

  • Objectives of Enagement
  • Limitations of Engagement
  • Responsibilites of Management
  • Responsibilities of Auditor
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6
Q

Auditor Independence Communication

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  • Per paragraphs A37-39 and A45 of ISA 260, all matters of auditor independence must be communicated in writing.
  • While most matters can be communicated orally, any matter of independence must be communicated in writing
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7
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Auditor Responsibility

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Auditor responsibility to determine:

  • the overall audit strategy
  • the audit plan, including:
    • the nature
    • timing
    • extent of procedures
  • necessary to obtain sufficient appropriate audit evidence.
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8
Q

Client Acceptance and Continuance

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  • At the beginning of the current audit engagement, the auditor should perform procedures regarding the continuance of the client relationship and the specific audit engagement
  • The firm should establish policies and procedures for the acceptance and continuance of client relationships and
    specific engagements, designed to provide the firm with reasonable assurance that it will undertake or continue relationships and engagements only where the firm:
    • has considered the integrity of the principal owners, key management, and those charged with governance of the
      entity
    • is competent to perform the engagement and has the capabilities and resources to do so;
    • can comply with legal and ethical requirements (including independence)
    • has significant findings or issues that have arisen during the current or previous audit engagement and their
      implications for continuing the relationship
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9
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Communicating with the Predecessor Auditor

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The successor auditor must communicate with the predecessor auditor before accepting an engagement, because the predecessor may provide information regarding disagreements about important accounting and auditing matters that will bear on the decision of whether or not to accept the engagement.

The successor auditor should bear in mind that,
among other things, the predecessor auditor and the client may have disagreed about accounting principles, auditing procedures, or similarly significant matters.

  • Before accepting an engagement, a successor auditor is required, with client permission, to make inquiries of the predecessor auditor.
  • The auditor may make a proposal before contacting the predecessor auditor.
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10
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Component Auditor

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  • Audits one “Component” of the entity
  • o Significant Component

Significant Component

  • Significant due to Financial Materiality
    • Audit the Financial Information
  • Significant due to Risk of Material Misstatement?
    • Audit Procedures performed
  • Documentation showing list of Significant Components and work performed required

Non-Significant Component

  • Analytical Procedures performed at the Group Level
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11
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Considerations Prior to Engagement Acceptance

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  • knowledge of relevant industries or subject matters or the ability to effectively gain the necessary knowledge
  • experience with relevant regulatory or reporting requirements, or the ability to effectively gain the necessary competencies
  • technical expertise, including expertise with relevant IT and specialized areas of accounting or auditing; relevant industry knowledge
  • the ability to apply professional judgment; and
    an understanding of the firm’s quality control policies and procedures
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12
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Considerations that Affect the Scope of the Audit

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  • a. Materiality
  • b. Audit areas where there is a higher risk of material misstatement
  • c. The effect of the assessed risk of material misstatement at the overall financial statement level on direction,
  • supervision, and review
  • d. The manner in which the auditor emphasizes to engagement team members the need to maintain a questioning
  • mind and exercise professional skepticism in gathering and evaluating audit evidence
  • e. Results of previous audits that involved evaluating the operating effectiveness of internal control, including
  • identified deficiencies and action taken to address them
  • f. The discussion of matters that may affect the audit with firm personnel responsible for performing other services to
  • the entity
  • g. Management’s commitment to the design, implementation, and maintenance of sound internal control
  • h. Volume of transactions, which may be a factor in determining whether it is more effective for the auditor to rely on
  • internal control
  • i. Importance attached to internal control throughout the entity to the successful operation of the business
  • j. Significant business developments affecting the entity, including changes in information technology and business
  • processes; changes in key management; and acquisitions, mergers, and divestments
  • k. Significant industry developments, such as changes in industry regulations and new reporting requirements
  • I. Significant changes in the financial reporting framework, such as changes in accounting standards
  • m. Other significant relevant developments, such as changes in the legal environment affecting the entity
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13
Q

Contact Predessor Auditor

A

Must have Client Permission

No Permission No Engagement

Questions to ask:

  • Why Change
  • Serious Discussions with Audit Committee
  • Mgmt Integrity - Any Disagreements
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14
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Documenting an Understanding with the Client

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The auditor should establish an understanding with the client regarding the services to be performed for each engagement. The understanding should include the objectives of the engagement, management’s responsibilities, the auditor’s responsibilities, and limitations of the engagement

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15
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Documenting Required Communications

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  • The auditor is required to communicate certain information to those charged with governance in the engagement letter or in another form of communication.
  • The term “those charged with governance” usually refers to the person(s) or organization(s) (for example, a corporate trustee) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity.
  • This includes overseeing the financial reporting process. Those charged with governance may include management personnel; for example, executive members of a governance board

or an owner-manager

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16
Q

Engagement Letter

A
  • The engagement letter is a contract between the CPA and the client, and a copy of it signed by the client should be requested and retained by the CPA.
  • The engagement letter should be addressed to the client and dated as soon as an understanding of the engagement is reached
17
Q

Government Auditing Standards

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Under government auditing standards, financial and compliance audits determine whether:

  • financial operations are properly conducted,
  • the financial reports of an audited entity are presented fairly, and
  • the entity has complied with applicable laws and regulations .

In order to comply with applicable laws and regulations, management must identify the laws and regulations; therefore the auditor should determine that management has identified the applicable laws and regulations.

18
Q

Group Engagement Partner

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  • Responsible for
    • Group Audit Engagement
    • Direction
    • Supervision
    • Performance
    • Audit Report
19
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Group Engagement Team

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  • Develop Audit Strategy
  • Communicate with Component Auditors
  • Establish Materiality threshold
  • Must be lower than Group Materiality
  • Perform work on Consolidation Process
  • Evaluate Audit Conclusions
  • Must understand work of Component Auditors
    • Includes:
      • Partners
      • Group Engagement Partner
      • Staff
20
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Integrity

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  • Integrity is an element of character that determines if a person can be trusted.
  • Integrity involves honesty and candor.
  • A person with integrity does what is right and just
21
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Materiality

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  • The determination of materiality for components and communication thereof to component auditors
  • The preliminary identification of significant components and material classes of transactions, account balances, and disclosures
22
Q

Predecessor Auditor

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The auditor from a different audit firm who has reported on the most recent audited financial
statements or was engaged to perform but did not complete an audit of the financial statements

23
Q

Prior to Audit Engement Acceptance

A
  • Review F/s
  • Confirm Appriate Financial Reporting Framework ( ie GAAP or IFRS) used
  • Speak to Third Parties
  • Contact Predessor Auditor
  • Understand Industry or be willing to learn
  • Consider Scope Limitations
    • ltd evidence availabel - no engagement
      *
24
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Purpose of Engagement Letter

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  • The purpose of an engagement letter is to help avoid misunderstandings with respect to the engagement.
  • The engagement letter serves as the contract between the client and the accountant regarding the terms of the engagement and helps to avoid legal liability for claims that the auditor did not perform the work as promised.
  • While an engagement letter is not required by generally accepted auditing standards, it is strongly recommended that such a letter be obtained for all types of engagements.
25
Q

Quality Control Policies and Procedures

A
  • Quality control policies and procedures should be established for deciding whether to accept a new client to minimize the likelihood of association with clients whose management lacks integrity.
  • A CPA firm attests to the assertions of management, not the reliability of the client, and has no duty to the public concerning the acceptance of new clients. However, prudence suggests that a firm should be selective in determining its professional relationships.
  • The purpose of these policies and procedures is to determine the audit-ability of the client.
26
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Required Communications

A
  • a. The auditor is responsible for forming and expressing an opinion about whether the financial statements that havebeen prepared by management with the oversight of those charged with governance are presented fairly, in all material respects, in conformity with generally accepted accounting principles.
  • b. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities.
  • c. The auditor is responsible for performing the audit in accordance with generally accepted auditing standards and that the audit is designed to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement.
  • d. The auditor should communicate the auditor’s responsibility with respect to other information prepared by management that accompanies the audited financial statements
27
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Responsibilites of Management

A
  • Provide Written Assertions
  • Appropriate Financial Reporting Framework
  • Establishing & Maintaining Internal Control
  • Access to Records
  • Financial Statements
  • Compliance with Laws
28
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Responsibilities of Auditor

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  • Limited Error/Fraud responsibility
  • Document and remind Management annually
    that the terms of the Engagement Agreement
    still apply
    • Reminder can be Written or Ora
29
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Scope and Timing

A
  • a. How the auditor plans to address the significant risks of material misstatement, whether due to error or fraud
  • b. The auditor’s approach to internal control relevant to the audit
  • c. The concept of materiality in planning and executing the audit
  • d. The extent to which the auditor will use the work of the internal auditors, where appropriate
30
Q

Single Audit

A

An entity must have a single audit in any year when:

  • (1) the entity spends more than $750,000 in federal awards, grants, or funds; and
  • (2) the entity spends funds from one or more than one federal program.
    • Percentage of coverage: Under the “percentage-of-coverage rule” that is included in the Single Audit Act Amendments of 2013, the auditor must determine the program type (major and low risk) and testing coverage:
      • (1) Major programs must be audited. These are programs that account for at least 40% of the federal funding spent by that entity.
      • (2) Low-risk programs allow for a percentage-of-coverage exception. When an entity qualifies as low risk, the scope of audits under the “percentage of coverage” rule in the Single Audit Act Amendments of 2013 can be reduced to as low as 20% of the federal funding spent by the entity.
31
Q

SSAE - Stmts on Stds for Attestation Engagements

A

The Statements on Standards for Attestation Engagements (SSAE) state that the practitioner shall express a conclusion about the subject matter and the criteria to which it is being evaluated.

As an example reviewing the MD&A is the subject matter, and the criteria are the rules and regulations adopted by the SEC.

32
Q

Successor Auditor

A

The person or persons conducting the audit, usually the engagement partner or other members of the engagement team, or, as applicable, the firm

33
Q

Successor Auditor Responsibilities

A
  • plan and perform the re-audit in accordance with GAAS,
  • not assume responsibility for the predecessor auditor’s work, and
  • not issue a report that reflects divided responsibility.

The successor auditor should qualify or disclaim an opinion if the auditor is:

  • a. unable to obtain sufficient appropriate audit evidence to express an opinion or
  • b. unable to perform procedures considered necessary in the circumstances
34
Q

Successor Auditor Opinion

A

In reporting on the audit, the successor auditor should not make reference to the report or work of the predecessor auditor as the basis, in part, of the successor’s own opinion

If Re-Audit is accepted - nature, extent, and timing of the audit work performed and conclusions reached in the re-audit are solely the responsibility of the successor auditor performing the re-audit

35
Q

Successor Inquiry of Predecessor

A
  • a. Information that might bear on the integrity of management
  • b. Disagreements with management as to accounting principles, auditing procedures, or other similarly significantmatters
  • c. Communications to those charged with governance regarding fraud and noncompliance with laws or regulations by the entity
  • d. Communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control
  • e. The predecessor’s understanding as to the reasons for the change of auditors
36
Q

Understanding with Client

A

An understanding with the client also may include other matters which should be communicated in the form of an engagement letter:

  • a. Arrangements concerning the involvement of other auditors and specialists
  • b. Arrangements concerning the involvement of internal auditors and other staff of the entity
  • c. Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit
  • d. Any restrictions of the auditor’s liability when not prohibited
  • e. Any obligations of the auditor to provide audit documentation to other parties
  • f. Additional service to be provided, such as those relating to regulatory requirements
  • g. A reference to any further agreements between the auditor and the entity
37
Q

Understanding with the Client

A

An understanding with the client regarding an audit of the financial statements generally includes the following matters:

  • Elaboration of the scope of the audit, including reference to applicable legislation, regulations, GAAS, and ethical and other pronouncements
  • The form of any other communication of results of the audit engagement
  • Arrangements regarding the planning and performance of the audit, including the composition of the audit team
  • The expectation that management will provide written representations
  • The agreement of management to make available to the auditor draft financial statements and any accompanying other information in time to allow the auditor to complete the audit in accordance with the proposed timetable
  • The agreement of management to inform the auditor of events occurring or facts discovered subsequent to the date of the financial statements, of which management may become aware, that may affect the financial statements
  • The basis on which fees are computed and any billing arrangements
  • A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outline therein, as may be evidenced by their signature on the engagement letter
38
Q

Engagement Agreement

A

The agreement of the terms of the engagement should be documented in an audit engagement letter and address the following:

  • The objective and scope of the audit
  • The auditor’s responsibilities
  • Management’s responsibilities
  • A statement about the inherent limitations of an audit
  • A statement identifying the applicable financial reporting framework
  • Reference to the expected content of any reports to be issued
  • Other matters as warranted in the auditor’s judgment.
39
Q

Engagement Letter

A

The agreement of the terms of the engagement should be documented in an audit engagement letter and address the following:

  • The objective and scope of the audit
  • The auditor’s responsibilities
  • Management’s responsibilities
  • A statement about the inherent limitations of an audit
  • A statement identifying the applicable financial reporting framework
  • Reference to the expected content of any reports to be issued
  • Other matters as warranted in the auditor’s judgment.

PASSED AUD UCSB (23 decks)

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