Engagement Planning 1

Question 1

What is the primary duty of an auditor?

Answer 1

To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.

Question 2

What is the auditor’s responsibility for detecting theft or fraud?

Answer 2

Auditors are not responsible for detecting theft or fraud.Instead- they are responsible for providing REASONABLE ASSURANCE that the financial statements are not materially misstated.

Question 3

When should an auditor be hired in relation to the balance sheet date for optimum audit planning and efficiency?

Answer 3

The earlier the auditor is hired- the better for audit planning and efficiency.

Question 4

When can audit procedures be performed at interim dates?

Answer 4

If Control Risk for the accounts and/or transactions is low- audit procedures can be performed at interim dates.The auditor then reviews changes in the balances at year-end.

Question 5

When can an auditor accept an engagement offered after the year is already closed?

Answer 5

The auditor can take the engagement if they are able to overcome the limitations of the engagement.

Question 6

For what does an auditor use professional skepticism?

Answer 6

To plan the scope of the auditTo plan the objectives of the audit

Question 7

How can analytical procedures be performed in audit planning?

Answer 7

The auditor can compare actual versus forecasted numbers.

Question 8

What must an auditor have in order to discuss issues relating to a predecessor auditor’s work?

Answer 8

If issues relating to predecessor auditor’s work on previous Financial Statements come up during the current audit- Auditor must have client’s permission to discuss the issue.

Question 9

What questions must an auditor ask with respect to procedures carried out by assistants?

Answer 9

Were they adequately performed? (Review the working papers)Are the results consistent with the audit report?

Question 10

How is audit strategy mapped out?

Answer 10

Auditor determines what the reporting objectives are.Auditor determines the scope of the audit.

Question 11

Describe the key components of maintaining auditor independence.

Answer 11

Auditor must be independent in fact and appearanceHonestyNo direct financial interestNo indirect material financial interest

Question 12

Describe Due Professional Care

Answer 12

Technical abilities mirror those held by peers in the professionFollow GAAS StandardsObtain a Reasonable Level of AssuranceMaintain Reasonable Level of SkepticismSupervise Audit StaffReview judgment at every level

Question 13

What should an auditor do prior to accepting an audit engagement?

Answer 13

Review the previous financial statementsSpeak to third partiesContact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)

Question 14

What questions should be asked by an auditor prior to taking an engagement?

Answer 14

Note: must have permission of client to contact predecessor auditor (no permission = no engagement)Why the Auditor Change?Any Serious Discussions with Audit Committee?How is Management Integrity? Disagreements?How was Internal Control?Understand Industry or Be Willing to LearnConsider Scope Limitation - Limited evidence available = no engagement

Question 15

What should be included in an audit engagement agreement?

Answer 15

Note: must be writtenObjectives of EngagementLimitations of EngagementResponsibilities of Management - Provide written assertions Responsibilities of Auditor - Limited error/fraud responsibilityExpectations of Access to RecordsFinancial Statements (and Disclosures) are Management’s ResponsibilityCompliance with LawsInternal Control

Question 16

What is management’s responsibility with respect to the financial statements?

Answer 16

Management is responsible for financial statements and adequacy of disclosures.Presentation & DisclosureExistence (Tests Overstatements)Rights & ObligationsCompleteness (Tests Understatements)Valuation & Allocation

Question 17

What is the purpose of the Audit Committee?

Answer 17

Responsible for Hiring AuditorOversees Internal ControlMust Agree with Auditor on: Responsibility of the Parties- Audit Fee- Timing of the Audit- Audit PlanActs as Liaison Between Auditor and the BoardAuditor Communicates Concerns about: Internal Control Deficiencies- Errors- Fraud- Illegal Activities

Question 18

How is Audit Risk calculated?

Answer 18

Inherent Risk x Control Risk x Detection RiskRisk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit reportBased on Auditor JudgmentMeasured in both Qualitative and Quantitative

Question 19

Describe Control Risk

Answer 19

Risk that internal control will not detect error or fraudAuditor cannot control this.

Question 20

Describe Inherent Risk.

Answer 20

Which transactions have a higher level of risk?Auditor cannot control

Question 21

Describe Detection Risk.

Answer 21

Will the auditor fail to detect a material misstatement?Auditor CAN controlDo testing at year-endIncrease substantive testingRun more effective tests

Question 22

What responses should an auditor take based on different levels of acceptable detection risk (DR)? What type of tests should be performed?

Answer 22

Less Acceptable DR = Run More Substantive TestsMore Acceptable DR = Run Less Substantive TestsMore Substantive Tests (DR down) = Less Audit Risk; (AR = IR x CR x DR)Less Substantive Tests (DR up) = More Audit Risk; (AR = IR x CR x DR)

Question 23

What are quantitative measurements versus non-quantitative measurements with respect to risk?

Answer 23

Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of percentagesNon-Quantitative Measurements - Inherent- Control- and Detection Risk can all be measured in terms of acceptable ranges

Question 24

Whose responsibility is it to FIND and PREVENT fraud?

Answer 24

It is Management’s responsibility.

Question 25

What is the auditor’s responsibility with respect to fraud and illegal acts?

Answer 25

Assess the RISK that such things will lead to material misstatementsDesign the audit to provide reasonable assurance against fraud- illegal acts that directly and materially affect the financial statements Report ALL management fraud to the audit committee (minor fraud by low-level employees not reported to committee)Perform required inquiries and procedures (management inquiries- analytical procedures- discussions with audit personnel about fraud)

Question 26

What are the three factors that affect/influence fraud?

Answer 26

Fraud is born out of:RationalizationIncentiveOpportunity(RIO)