Engagement Acceptance & Planning

Question 1

How do you assess a client’s auditability

Answer 1

Determine whether the framework they use is accpetable (follows GAAP)
Whether they accept responsibility for preperating of financial statements and IFCR
Whether they will provide auditor with support
Integrity of management

Question 2

What should an auditor consider before accepting an engagement

Answer 2

1. Independence
2. AICPA code of conduct
3. Time
4. Employees
5. Resources

Question 3

When do you begin the audit

Answer 3

At the end of the last audit

Question 4

What are some benefits of planning

Answer 4

Identify key areas of the audit
Help select appropriate resource
Have an efficient and effective audit
Figure out the requirements of component auditors

Question 5

What are component auditors and group auditors

Answer 5

Group auditor is the firm auditing the main firm (Apple Inc)
Component auditors are the ones auditing subsidiaries (Apple Japan. Apple UK. Apple China)

Question 6

What are factors that influence nature and extent

Answer 6

Size and complexity
Prior experience with entity
Changes in circumstance

Question 7

What is the timeline of planning

Answer 7

A continous effort throughout the audit engagement, but the majority (high-level) planning happens art the beginning of the audit. February-April after issuing the last opinion

Question 8

What should you not reveal to management

Answer 8

The nature, timing, extent of the audit, and matierality. Making the audit predictable may compromise its effectiveness

Question 9

What is materiality based on?

Answer 9

Professional judgement. Generally calculated as a % Revenue, Gross Profit, Net Assets etc.

Question 10

What is performance materiality

Answer 10

Determines the risk of material mistatement and sets a limit on individual transactions to be materially mistated

Question 11

What are unclean opinions

Answer 11

Qualified and Adverse opinions

Question 12

What is a qualified opinion

Answer 12

A material mistatement resolved by the auditors

Question 13

What is an unqualified opinion

Answer 13

Immaterial mistatements

Question 14

What is an adverse opinion

Answer 14

Material mistatement and it is pervasisive to the financial statements

Question 15

What are used when deciding audit statement objectives

Answer 15

Financial statement assertions like completeness accuracy and existence

Question 16

What is audit risk

Answer 16

Risk that the auditor will express the wrong opinion on financial statements. Auditor uses professional judgement to decide the reasonable risk they are willing to take

Question 17

What reduces audit risk

Answer 17

Higher quality or amounts of evidence. Reduces audit risk by achieving reasonable assurance

Question 18

What is inherent risk

Answer 18

Inherent risk of a mistatement because of the nature of an account balance or an audit area (more complex or susceptible to fraud = higher inherent risk).

Auditors/Management can assess risk but not change it

Question 19

What is control risk

Answer 19

Risk that the controls fail to operate as desired.

Auditor can assess it, Management can change it

Question 20

Detection Risk

Answer 20

Risk that audit procedures will not detect material mistatements (because of sampling/non sampling risk).

Fuction of audit procedure and can be controlled by the auditor

Question 21

What is the audit risk model

Answer 21

Question 22

What makes up risk of material mistatement

Answer 22

Inherent Risk multiplied by Control Risk

Question 23

What makes up Detection Risk

Answer 23

Sampling Risk multiplied by Non Sampling Risk

Question 24

What is the difference between Errors and Fraud

Answer 24

Errors: Unintentional MIstakes
Fraud: Intentional acts, use of deception

Types of Fraud:
1. Financial Reporting Fraud: Cooking the books
2. MIssapropriation of Assets: Stealing
3. Illegal Acts: Violation of law or corruption like bribery