Engagement Planning

Question 1

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

Answer 1

Engagement Planning

Question 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.

Answer 2

Engagement Planning

Question 3

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

Answer 3

Engagement Planning

Question 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.

Answer 4

Engagement Planning

Question 5

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

Answer 5

Engagement Planning

Question 6

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

Answer 6

Engagement Planning

Question 7

The auditor can compare actual versus forecasted numbers.

Answer 7

Engagement Planning

Question 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.

Answer 8

Engagement Planning

Question 9

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

Answer 9

Engagement Planning

Question 10

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

Answer 10

Engagement Planning

Question 11

Materiality and Audit Risk

Answer 11

Engagement Planning

Question 12

Training and Proficiency (Education and Audit Experience) Independence Due Professional Care (TIP)

Answer 12

Engagement Planning

Question 13

Auditor must be independent in fact and appearance Honesty No direct financial interest No indirect material financial interest

Answer 13

Engagement Planning

Question 14

Technical abilities mirror those held by peers in the profession Follow GAAS Standards Obtain a Reasonable Level of Assurance Maintain Reasonable Level of Skepticism Supervise Audit Staff Review judgment at every level

Answer 14

Engagement Planning

Question 15

Planning and Supervision Internal Control Evidence (PIE)

Answer 15

Engagement Planning

Question 16

Consistency Disclosures Opinion GAAP (CDOG)

Answer 16

Engagement Planning

Question 17

Review the previous financial statements Speak to third parties Contact predecessor auditor to evaluate whether engagement should be accepted (must have client permission)

Answer 17

Engagement Planning

Question 18

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 Learn Consider Scope Limitation - Limited evidence available = no engagement

Answer 18

Engagement Planning

Question 19

Note: must be written Objectives of Engagement Limitations of Engagement Responsibilities of Management - Provide written assertions Responsibilities of Auditor - Limited error/fraud responsibility Expectations of Access to Records Financial Statements (and Disclosures) are Management’s Responsibility Compliance with Laws Internal Control

Answer 19

Engagement Planning

Question 20

Management is responsible for financial statements and adequacy of disclosures. Presentation & Disclosure Existence (Tests Overstatements) Rights & Obligations Completeness (Tests Understatements) Valuation & Allocation

Answer 20

Engagement Planning

Question 21

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

Answer 21

Engagement Planning

Question 22

Inherent Risk x Control Risk x Detection Risk Risk that material mistakes- errors- omissions- or fraud will result in an inaccurate audit report Based on Auditor Judgment Measured in both Qualitative and Quantitative

Answer 22

Engagement Planning

Question 23

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

Answer 23

Engagement Planning

Question 24

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

Answer 24

Engagement Planning

Question 25

Will the auditor fail to detect a material misstatement? Auditor CAN control Do testing at year-end Increase substantive testing Run more effective tests

Answer 25

Engagement Planning

Question 26

Less Acceptable DR = Run More Substantive Tests More Acceptable DR = Run Less Substantive Tests More 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)

Answer 26

Engagement Planning

Question 27

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

Answer 27

Engagement Planning

Question 28

It is Management’s responsibility.

Answer 28

Engagement Planning

Question 29

Assess the RISK that such things will lead to material misstatements Design 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)

Answer 29

Engagement Planning

Question 30

Fraud is born out of: Rationalization Incentive Opportunity (RIO)

Answer 30

Engagement Planning

Question 31

Errors are unintentional- fraud is intentional.

Answer 31

Engagement Planning

Question 32

Management compensation tied to stock Aggressive financial forecasting Former auditor disagreed with Management Records not available for audit Current audit procedures may need to be reconsidered if red flags exist.

Answer 32

Engagement Planning

Question 33

Has been observed in similar situations Does NOT necessarily mean that there is a material weakness in internal control Leads to an auditor taking action

Answer 33

Engagement Planning

Question 34

Internal control analysis can result in the conclusion that IC is weak- but probably won’t identify illegal acts

Answer 34

Engagement Planning

Question 35

Strives to make audit engagement procedures less patterned and predictable Re-evaluates management’s application of accounting procedures Finds and assigns audit personnel with relevant skills in this area

Answer 35

Engagement Planning

Question 36

Any fraud risks identified that could lead to material misstatement Audit procedures performed to assess risks Nature of communication made to audit committee and company management Disclosure to third parties regarding fraud not normally the auditor’s responsibility Fraud by management should normally be reported to the audit committee- NOT the SEC.

Answer 36

Engagement Planning

Question 37

Created PCAOB Designates Officer responsibility for internal control Must disclose significant internal control weaknesses to auditor and audit committee Must disclose any level of fraud discovered by employees with internal control responsibilities

Answer 37

Engagement Planning

Question 38

1. Statements on Auditing Standards (SAS) 2. Auditing Interpretations- AICPA Guides & SOPs 3. Industry Articles (no authority)

Answer 38

Engagement Planning

Question 39

Firm Leadership exhibits quality and leads by example and sets the tone for the organization Firm should Monitor and document that its policies and procedures are being followed Firm should have Relevant Ethical Requirements Acceptance and continuance of client engagements should continue to be evaluated for client integrity- auditor competency- and legality Firm should have competent and ethical personnel Firm engagements are performed- supervised- and reviewed in accordance with professional standards and regulations.

Answer 39

Engagement Planning

Question 40

SSARS - Statements on Standards for Accounting and Review Services These govern reporting for non-public entities only

Answer 40

Engagement Planning

Question 41

Independence NOT required for Compilations No Internal Control work allowed No assurance given

Answer 41

Engagement Planning

Question 42

Compilations are not an assurance service. No assurance is provided.

Answer 42

Engagement Planning

Question 43

Reviews provide NEGATIVE assurance.

Answer 43

Engagement Planning

Question 44

Reviews require independence. No Internal Control work allowed Performs analytical procedures No material indirect financial interest allowed No immaterial direct financial interest allowed

Answer 44

Engagement Planning

Question 45

Must have an understanding of the client industry.

Answer 45

Engagement Planning

Question 46

CPA expresses a conclusion about an assertion - Compliance with laws NOT considered a Consulting engagement Independence Required

Answer 46

Engagement Planning

Question 47

Independence is not required for consulting services.

Answer 47

Engagement Planning

Question 48

Report is restricted to specified users. Agreed-upon procedures are implemented.

Answer 48

Engagement Planning