Engagement Planning 1 Flashcards
What is the primary duty of an auditor?
To provide users of financial information with REASONABLE ASSURANCE that the financial statements are not materially misstated.
What is the auditor’s responsibility for detecting theft or fraud?
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.
When should an auditor be hired in relation to the balance sheet date for optimum audit planning and efficiency?
The earlier the auditor is hired- the better for audit planning and efficiency.
When can audit procedures be performed at interim dates?
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.
When can an auditor accept an engagement offered after the year is already closed?
The auditor can take the engagement if they are able to overcome the limitations of the engagement.
For what does an auditor use professional skepticism?
To plan the scope of the auditTo plan the objectives of the audit
How can analytical procedures be performed in audit planning?
The auditor can compare actual versus forecasted numbers.
What must an auditor have in order to discuss issues relating to a predecessor auditor’s work?
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.
What questions must an auditor ask with respect to procedures carried out by assistants?
Were they adequately performed? (Review the working papers)Are the results consistent with the audit report?
How is audit strategy mapped out?
Auditor determines what the reporting objectives are.Auditor determines the scope of the audit.
Describe the key components of maintaining auditor independence.
Auditor must be independent in fact and appearanceHonestyNo direct financial interestNo indirect material financial interest
Describe Due Professional Care
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
What should an auditor do prior to accepting an audit engagement?
Review the previous financial statementsSpeak to third partiesContact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)
What questions should be asked by an auditor prior to taking an engagement?
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
What should be included in an audit engagement agreement?
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
What is management’s responsibility with respect to the financial statements?
Management is responsible for financial statements and adequacy of disclosures.Presentation & DisclosureExistence (Tests Overstatements)Rights & ObligationsCompleteness (Tests Understatements)Valuation & Allocation
What is the purpose of the Audit Committee?
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
How is Audit Risk calculated?
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
Describe Control Risk
Risk that internal control will not detect error or fraudAuditor cannot control this.
Describe Inherent Risk.
Which transactions have a higher level of risk?Auditor cannot control
Describe Detection Risk.
Will the auditor fail to detect a material misstatement?Auditor CAN controlDo testing at year-endIncrease substantive testingRun more effective tests
What responses should an auditor take based on different levels of acceptable detection risk (DR)? What type of tests should be performed?
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)
What are quantitative measurements versus non-quantitative measurements with respect to risk?
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
Whose responsibility is it to FIND and PREVENT fraud?
It is Management’s responsibility.
What is the auditor’s responsibility with respect to fraud and illegal acts?
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)
What are the three factors that affect/influence fraud?
Fraud is born out of:RationalizationIncentiveOpportunity(RIO)
